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#2101081 - 09/29/16 07:58 PM Commercial building converted to apartments
KateG Offline
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I am trying to determine the appropriate purpose to report.

Loan 1 - Customer used proceeds of the loan to purchase a commercial (non-residential) building.
Loan 2 - Line of credit customer used proceeds of the loan pay off Loan 1 and to convert the commercial building into a residential apartment building.
Loan 3 - Customer used this loan as the permanent take out of Loan 2.

So, based on my understanding of HMDA, Loans 1 & 2 would not be HMDA reportable. Loan 1 because no dwelling was involved. Loan 2 because we do not report lines of credit and this one was temporary financing, intended to be taken out by Loan 3.

So my question is, should we report Loan 3 as a Home Purchase (construction to perm scenario) or as a Refinance of a dwelling secured home improvement loan?

Thanks in advance for your input!

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#2101103 - 09/29/16 09:25 PM Re: Commercial building converted to apartments KateG
TMatt87 Offline
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In my opinion (and you'll find people on both sides of this argument), it should be reported as a refinance. Loan 3 didn't transfer title, and doesn't pay off a temporary loan for the initial construction of a dwelling. Loan 2 converted a commercial building into a dwelling. Therefore, you are paying off a dwelling secured loan with another dwelling secured loan. Assuming the two loans are to the same borrower, I would say you have a refinance for HMDA.
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#2101154 - 09/30/16 02:22 PM Re: Commercial building converted to apartments KateG
Truffle Royale Offline

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You only construct a building once. After that, you're improving or renovating. Therefore, Loan 3 would be reported as a refinance.

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#2101155 - 09/30/16 02:26 PM Re: Commercial building converted to apartments KateG
raitchjay Offline
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OK
See, i would counter that you can't "improve" a "dwelling" that isn't yet a dwelling.
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#2101168 - 09/30/16 02:48 PM Re: Commercial building converted to apartments KateG
Truffle Royale Offline

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ok, but would you equate what the borrower did with the money from Loan 2 to a regular home construction?
I don't so I say refi but I concede that you could likely support your argument as well as I could mine.

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#2101218 - 09/30/16 03:50 PM Re: Commercial building converted to apartments KateG
Kathleen O. Blanchard Offline

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If the intent from the outset was converting that building to a dwelling, it is a dwelling secured loan. By loan 2 it was dwelling secured. It follows the same concept of purchasing a dwelling that will be converted to an office. The loan is not dwelling secured.

I don't understand the comment about "improve" in this case. Loan 2 was dwelling secured.
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#2101251 - 09/30/16 05:08 PM Re: Commercial building converted to apartments KateG
David Dickinson Offline
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KB said: [iIf the intent from the outset was converting that building to a dwelling, it is a dwelling secured loan.[/i]
That's exactly right. You always look at what the building WILL be once the proceeds are applied. For instance, if I buy a house, but the intent is to turn it into a day care or office, then it's not a house. It's a non-dwelling because that's what it WILL be for this borrower and loan proceeds. That example is specifically given (clarified) in the 2018 rules.

The OP said they bought a commercial building but then tells us loan 2 converted it to a residential structure. If you knew this when loan 1 was made, it was a purchase of a dwelling.

The OP also says a line of credit was used to convert it to residential units. IF that was open-end credit, it's optional reporting (depending on your institution's policy for HMDA). IF it was a multi-advance, closed end loan, it would be a home improvement loan for HMDA.

Loan 3 would then be a refinance for HMDA.
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#2101255 - 09/30/16 05:13 PM Re: Commercial building converted to apartments KateG
raitchjay Offline
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OK
The OP doesn't say whether Loan 1 had the intent to convert to a dwelling or not. If it did, i agree, but it doesn't appear that Loan 1 had anything to do with converting it to a dwelling.
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#2101256 - 09/30/16 05:15 PM Re: Commercial building converted to apartments KateG
raitchjay Offline
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OK
I think what the argument might be here is whether "converting a commercial building into a residential" structure is "purchasing" a dwelling or "improving" a dwelling. I would argue it's purchasing a dwelling, but hey, i can see the other argument too.
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#2101270 - 09/30/16 05:47 PM Re: Commercial building converted to apartments KateG
TMatt87 Offline
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But loan 2 would be the improvements, converting the building to a dwelling. It is reportable as the OP doesn't report lines of credit. The question is regarding the third loan, so whether the second loan would be considered a purchase or improvement doesn't matter, IMO. Loan 3 is a dwelling secured loan that pays of a dwelling secured LOC. So either way, loan 3 would be a refinance.
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#2101273 - 09/30/16 05:56 PM Re: Commercial building converted to apartments KateG
raitchjay Offline
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OK
Yes, i agree with that.
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#2101342 - 09/30/16 10:47 PM Re: Commercial building converted to apartments KateG
Colorado Girl Offline
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I haven't found guidance from regulators that directs us how to view/report an existing non-dwelling structure that becomes a dwelling. In the grey areas, or even silent areas, I try to view the situation in a manner that serves the essence of the regulation. For HMDA, the purchase of a home is most important based on the purpose hierarchy, as well as the additional rule to report the refinance of an initial-build construction loan as a Purchase. Following that same thought pattern, I believe regulators are telling us it's important to capture purchase funds that we've extended (or refused) in our communities - even when masked by construction.
In loan 1 above, you help your borrowers purchase a structure that isn't habitable.
In loan 2, the proceeds create a dwelling that should finally have a certificate of occupancy. This is when it becomes a dwelling, and you helped finance this for your borrower.
I believe that if loan 2 was intended to be replaced by loan 3 (financing of a longer term) you could argue that loan 3 is the permanent financing of the construction of the dwelling, and thus a Purchase transaction. Otherwise, the banks financing of this home becoming a home is lost in translation. (In the end, the borrowers through three extensions of credit are now in a home).
Of course, reporting the above as a Refinance is also supported by the reg.
I just thought I would put two cents in, as the devil's advocate. It seems I like to take the road less traveled.

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#2101383 - 10/03/16 12:52 PM Re: Commercial building converted to apartments KateG
KateG Offline
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Thank you for all your feedback!

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