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#2114062 - 01/12/17 06:35 PM Construction-only loan to Builder reportable?
solbrillante Offline
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solbrillante
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Under the existing HMDA rule, bridge and construction loans are not reportable, unless permanent financing. There is nothing in the law that defines bridge or construction. Only the FAQs mentions 2 phase financing, but the FAQ can't trump the regulation as David Dickinson once stated. Therefore, we never reported construction-only loans.

Under the new rule, they do incorporate the 2-phase financing into the law. It says “A loan or line of credit is considered temporary financing and excluded under § 1003.3(c)(3) if the loan or line of credit is designed to be replaced by permanent financing at a later time.”

A- My first question is related to loan to builders. Is a loan (12-month or shorter) to a builder to do the initial construction of a house to be put up for sale, reportable under the new rule? The builder is expecting to pay-off the loan with the sale of the house. There is no permanent financing for the builder afterwards. Under the new HMDA rule, it seems this would be reportable.

B- My second question is related to a spec/model home. All the same information as above, but this time the house built will be a model home and no one will actually live in it for a while. Once, HMDA help told me that if the ultimate purpose was for someone to live in it, then it meets the definition of a dwelling. So it would be reportable.

I am trying to count how many closed-end mortgage transactions I have. It seems under the new rule, a construction loan to a builder would count as a closed-end mortgage loan, because it’s secured by a dwelling and it will not be replaced by permanent financing.

The only example the law provides and it’s closed to what I am asking is about the investor who takes a short term loan to fix it and re-sell it, and that would be reportable. Very close definitions, but not quite. I feel like reporting these builder loans would be double-counting, because the person buying the house would also be reportable by the lender who does the permanent financing.

Any thoughts/guidance on my two questions would be appreciated.

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#2114528 - 01/18/17 02:48 PM Re: Construction-only loan to Builder reportable? solbrillante
Kathleen O. Blanchard Offline

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Unless the builder is obtaining permanent financing from you, those construction only loans are not HMDA reportable. The loan and any refinances intended as extensions of the construction phase remain temporary loans and not reportable.

If the builder cannot sell the home and the loan becomes permanent fnancing, it will be reportable at that time.

Commentary (Revised):

ii. Lender A extends credit to finance construction of a dwelling. A new extension of credit for permanent financing for the dwelling will be obtained, either from Lender A or from another lender, and either through a refinancing of the initial construction loan or a separate loan. The initial construction loan is excluded as temporary financing under § 1003.3(c)(3).

iii. Assume the same scenario as in comment 3(c)(3)-1.ii, except that the initial construction loan is, or may be, renewed one or more times before the permanent financing is made. The initial construction loan, including any renewal thereof, is excluded as temporary financing under § 1003.3(c)(3).
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#2114549 - 01/18/17 03:41 PM Re: Construction-only loan to Builder reportable? solbrillante
RR Becca Offline
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out of the frying pan...
Kathleen, question for you:

We do a lot of 12 month construction notes for builders to put up spec houses. Sometimes those houses don't sell before that original 12 month note matures, so the LO will make them another 12 month, I/O note to 'kick the can' a little bit further. And again. And again. And sometimes again. (All of these 'renewal' notes are replacements for the original, not extensions thereof.) Would you call those 'again' notes refinances or keep on considering them temporary since the intention is still to sell the house?
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#2114551 - 01/18/17 03:58 PM Re: Construction-only loan to Builder reportable? RR Becca
Kathleen O. Blanchard Offline

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The revised rule says that they are temporary until converted to permanent. This essentially ties to the Call Report methodology, which leaves them in "construction" until they begin to amortize. Then they move out of construction.

iii. Assume the same scenario as in comment 3(c)(3)-1.ii, except that the initial construction loan is, or may be, renewed one or more times before the permanent financing is made. The initial construction loan, including any renewal thereof, is excluded as temporary financing under § 1003.3(c)(3).
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#2114683 - 01/19/17 02:19 PM Re: Construction-only loan to Builder reportable? solbrillante
solbrillante Offline
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Kathleen thank you for your response.

I went ahead and submitted the same question to the CFPB HMDA help, and they did provide me with an answer yesterday late afternoon.

The attorney at the CFPB called me, because they do not want to provide answers in writing. She did state this was informal guidance, no legal advice. A few attorneys reviewed my question and they had an answer for me. Under the new rule, the commentary says the loan is temporary only if designed to be replaced by permanent financing. Therefore, my example would be reportable.

The example I provided, a 12-month construction only loan to a builder is not designed to be replaced by permanent financing. The builder is expecting to pay off the loan with the sale of the house. Because permanent financing is not expected at any time at all, then this type of loan is NOT temporary financing and it would be reportable under the new rule. Yes the person purchasing the house would most likely obtain permanent financing, but that's something separate, not related to the builder.

She did say that they are aware of this scenario and they are looking to see if further clarification is needed. She told me to keep my eyes peeled for any updates, if they do decide to send something. But as of right now, she said this type of loan would be reportable under the new rule.

This is not the answer I was looking for. We do a lot of these loans, and it will definitely put as above the 25 threshold for closed-end mortgages. But as of right now, I can only go by what CFPB currently states.

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#2114699 - 01/19/17 03:45 PM Re: Construction-only loan to Builder reportable? solbrillante
RR Becca Offline
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out of the frying pan...
So does the question become whether or not the permanent financing (i.e. sale of the spec house) will come from the original borrower in order to call something temporary?
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#2114751 - 01/19/17 06:48 PM Re: Construction-only loan to Builder reportable? solbrillante
Kathleen O. Blanchard Offline

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If the permanent financing paying off the construction loan to the builder does not count because it will be permanent financing to another party (the buyer of the home), then every loan to every developer in the country will be on the LAR. Imagine the banks financing major home developers...the LAR will increase greatly.

Here is the full commentary for 2018 on this topic:

Paragraph 3(c)(3)
1. Temporary financing. Section 1003.3(c)(3) provides that closed-end mortgage loans or open-end lines of credit obtained for temporary financing are excluded transactions. A loan or line of credit is considered temporary financing and excluded under § 1003.3(c)(3) if the loan or line of credit is designed to be replaced by permanent financing at a later time. For example:

i. Lender A extends credit in the form of a bridge or swing loan to finance a borrower's down payment on a home purchase. The borrower pays off the bridge or swing loan with funds from the sale of his or her existing home and obtains permanent financing for his or her new home from Lender A. The bridge or swing loan is excluded as temporary financing under § 1003.3(c)(3).

ii. Lender A extends credit to finance construction of a dwelling. A new extension of credit for permanent financing for the dwelling will be obtained, either from Lender A or from another lender, and either through a refinancing of the initial construction loan or a separate loan. The initial construction loan is excluded as temporary financing under § 1003.3(c)(3).

iii. Assume the same scenario as in comment 3(c)(3)-1.ii, except that the initial construction loan is, or may be, renewed one or more times before the permanent financing is made. The initial construction loan, including any renewal thereof, is excluded as temporary financing under § 1003.3(c)(3).

iv. Lender A extends credit to finance construction of a dwelling. The loan automatically will convert to permanent financing with Lender A once the construction phase is complete. Under § 1003.3(c)(3), the loan is not designed to be replaced by permanent financing and therefore the temporary financing exclusion does not apply. See also comment 2(j)-3.

v. Lender A originates a loan with a nine-month term to enable an investor to purchase a home, renovate it, and re-sell it before the term expires. Under § 1003.3(c)(3), the loan is not designed to be replaced by permanent financing and therefore the temporary financing exclusion does not apply. Such a transaction is not temporary financing under § 1003.3(c)(3) merely because its term is short.
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#2114753 - 01/19/17 07:00 PM Re: Construction-only loan to Builder reportable? solbrillante
David Dickinson Offline
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Central City, NE

A- My first question is related to loan to builders. Is a loan (12-month or shorter) to a builder to do the initial construction of a house to be put up for sale, reportable under the new rule? The builder is expecting to pay-off the loan with the sale of the house. There is no permanent financing for the builder afterwards. Under the new HMDA rule, it seems this would be reportable.
I agree with the response you received from the CFPB. The new 2018 HMDA rules require 2 phases for loans to be exempt as temporary financing. Construction only is therefore, no longer exempt.

I think the example that KB gives from the Commentary is in reference to a single borrower, not two different borrowers (the builder and then another purchaser. This may not be what the CFPB intended, but it's what the new rule states (or no longer exempts).

B- My second question is related to a spec/model home. All the same information as above, but this time the house built will be a model home and no one will actually live in it for a while. Once, HMDA help told me that if the ultimate purpose was for someone to live in it, then it meets the definition of a dwelling. So it would be reportable.
I agree that a model home is not a dwelling. It is a model of what someone could have. I like to think of it as inventory.
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#2114763 - 01/19/17 07:21 PM Re: Construction-only loan to Builder reportable? solbrillante
RR Joker Offline
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Oh this could get ugly.

But what would you call it, keeping in mind it's commercial. It's not a purchase, nor a refinance and it would be a far stretch to call it HI.

crazy
Last edited by RR Joker; 01/19/17 07:23 PM.
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#2114766 - 01/19/17 07:28 PM Re: Construction-only loan to Builder reportable? solbrillante
RR Joker Offline
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The more I think about it...the more I think the attorney's are misinterpreting what 'designed to be replaced' really means. It IS designed to be replaced with someone's permanent loan. Very few would be paid off with cash. smirk
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#2114774 - 01/19/17 07:57 PM Re: Construction-only loan to Builder reportable? solbrillante
Kathleen O. Blanchard Offline

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The attorneys need to work on their response quickly. I have worked at banks where we financed large developers...thousands and thousands of homes being built.

A model home will ultimately be sold. It is one of the homes built and held back for demonstration purposes.

I see another email in my future.
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#2114796 - 01/19/17 09:13 PM Re: Construction-only loan to Builder reportable? solbrillante
RR Joker Offline
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posthaste! smile
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#2114876 - 01/20/17 03:02 PM Re: Construction-only loan to Builder reportable? solbrillante
solbrillante Offline
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Thank you everyone. I am glad I am not the only one with this particular question. We do a lot of loans to builders, so that alone would put us over the 25 limit. I do hope they get some clarification quickly, because this is crazy.

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#2114879 - 01/20/17 03:09 PM Re: Construction-only loan to Builder reportable? solbrillante
David Dickinson Offline
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I have been talking to the Mark Kruhm about these scenarios (long before this post started). The ABA is aware of this and appears to be seeking clarification. When you think through this new logic, there's 3 related twists from today's rules:
1. Spec houses. Construction only loans used to be exempt. They are not in 2018.
2. Manufactured home plants. Are these to be seen the same way as a spec house builder? They are constructing dwellings. Are their operating loans now a "construction loan"?
3. MH dealers. Are the MH's on their lots "inventory" or are they "dwellings".

I liken this to the 2004 changes when the FRB redefined "refinance". If you were around at that time, you know how this twisted things from our old way of thinking. The FRB acknowledged that's not what they intended, but it is what the new regulation stated. Hence, we started reporting ag & commercial purpose loans when they were refinance. It only took 14 years to get the ag purpose loans out (beginning in 2018) and we still have the commercial purpose refinancing issue in 2018.
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#2114912 - 01/20/17 03:51 PM Re: Construction-only loan to Builder reportable? solbrillante
Kathleen O. Blanchard Offline

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So lets say that loans to builders/developers are reportable. There is actually only one loan in most circumstances, secured by the land and improvements (the homes to be built), plus any additional collateral.

Thinking of a large project: You will only report one address and at the start, many of these developments have not had addresses for plots assigned yet. Would you report the overall location of the development? What would the number of units be...the planned number of homes to be built?

I have submitted a question for the overall issue and these subsidiary questions.
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#2114918 - 01/20/17 03:58 PM Re: Construction-only loan to Builder reportable? solbrillante
RR Becca Offline
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out of the frying pan...
As a community bank, the builder loans we see tend to be one-at-a-time projects instead of the one big loan scenario Kathleen describes. Under current rules, those initial builder spec construction-only loans are exempt. Where my headache lies is in figuring out what to do with all of the notes that come after the initial construction is complete but the house has not sold. For our bank, these 'kick-the-can' loans are new notes, not extensions or renewals that do not extinguish the original note. We've been reporting them as either purchases (for the first such loan that replaces construction) or refinances (for later incarnations). No problems or questions from examiners so far.

Now, with the added confusion of builder loans appearing to be reportable under the 2018 rule, I am taking another hard look at how we handle these and it is, admittedly, making my head spin.
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#2114926 - 01/20/17 04:07 PM Re: Construction-only loan to Builder reportable? RR Becca
Kathleen O. Blanchard Offline

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RR Becca, the commentary addresses the "kick the can" situations and it corresponds with Call Report treatment:

i. Lender A extends credit in the form of a bridge or swing loan to finance a borrower's down payment on a home purchase. The borrower pays off the bridge or swing loan with funds from the sale of his or her existing home and obtains permanent financing for his or her new home from Lender A. The bridge or swing loan is excluded as temporary financing under § 1003.3(c)(3).

iii. Assume the same scenario as in comment 3(c)(3)-1.ii, except that the initial construction loan is, or may be, renewed one or more times before the permanent financing is made. The initial construction loan, including any renewal thereof, is excluded as temporary financing under § 1003.3(c)(3).
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#2114927 - 01/20/17 04:08 PM Re: Construction-only loan to Builder reportable? solbrillante
Kathleen O. Blanchard Offline

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In my email to the CFPB, I did point out that a builder loan (to any size builder) goes to permanent financing generally only in a problem loan situation...the house (or houses) did not sell.
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#2114933 - 01/20/17 04:17 PM Re: Construction-only loan to Builder reportable? Kathleen O. Blanchard
RR Becca Offline
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out of the frying pan...
Originally Posted By Kathleen B
RR Becca, the commentary addresses the "kick the can" situations and it corresponds with Call Report treatment:

i. Lender A extends credit in the form of a bridge or swing loan to finance a borrower's down payment on a home purchase. The borrower pays off the bridge or swing loan with funds from the sale of his or her existing home and obtains permanent financing for his or her new home from Lender A. The bridge or swing loan is excluded as temporary financing under § 1003.3(c)(3).

iii. Assume the same scenario as in comment 3(c)(3)-1.ii, except that the initial construction loan is, or may be, renewed one or more times before the permanent financing is made. The initial construction loan, including any renewal thereof, is excluded as temporary financing under § 1003.3(c)(3).


Am I getting too hung up on the word 'renewal?' We do these on new, stand-alone, extinguish-the-construction-loan notes. Is a 'renewal' that satisfies and replaces the old note no longer a 'refinance' instead?
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#2114934 - 01/20/17 04:20 PM Re: Construction-only loan to Builder reportable? solbrillante
Kathleen O. Blanchard Offline

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In my opinion, as long as each successive note is simply an extension of the first loan on its way to completion, still in the construction phase, it fits this scenario.

But if the final answer from the CFPB is that the initial intent has to be to convert to permanent financing at some future point, a builder loan still won't qualify. Builder loans are not supposed to convert to permanent financing to the builder, that would be a workout because the home did not sell.
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#2114944 - 01/20/17 04:38 PM Re: Construction-only loan to Builder reportable? solbrillante
RR Becca Offline
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out of the frying pan...
Maybe I'm just being dense, here, Kathleen, but I really can't get my head around this. Construction is complete. The house has a CO. The construction loan has matured and been replaced by a new note or notes that let the builder carry the house as inventory until it (hopefully) finally sells. How are these loans an extension of the construction phase?
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#2114969 - 01/20/17 05:43 PM Re: Construction-only loan to Builder reportable? solbrillante
Kathleen O. Blanchard Offline

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Because it is pending sale and is still a construction loan until it sells, or until it converts to an amortizing loan TO THE BUILDER because it is now a problem loan. That is how commercial construction loans work.
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#2114971 - 01/20/17 05:46 PM Re: Construction-only loan to Builder reportable? solbrillante
Kathleen O. Blanchard Offline

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If your financial institution is leaving homes too long in construction, that is a lending problem. Talk to lending and finance and find out how they handle this. There is not a one to one match to the Call Report but it is important to know how the loan is on the bank's books.
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#2114972 - 01/20/17 05:47 PM Re: Construction-only loan to Builder reportable? solbrillante
Kathleen O. Blanchard Offline

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Take a look at the Call Report instructions and check into how your bank operates.

https://www.fdic.gov/regulations/resources/call/crinst/2016-09/916RC-C1_093016.pdf
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#2114988 - 01/20/17 06:24 PM Re: Construction-only loan to Builder reportable? solbrillante
Kathleen O. Blanchard Offline

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Not to beat an almost dead horse, RR Becca, but I would sit down with lending and the HMDA rules and the Call Report. There is not necessarily a one to one alignment but it is important for both lending and compliance to understand what is going on and the reporting requirement.

Now, if all home construction loans to builders will be reportable for HMDA, this will be a moot point, but if you can set up a process that works for lending and makes regulatory reporting easier, do so. I have worked at banks where we changed how we documented loans to smooth the process (wasting time in compliance is as expensive as wasting time in lending) and to work to our advantage. For example, when the small business/small farm reporting was introduced in CRA, we changed how we documented the loans (started using notes rather than modification agreements for extensions and increases) so that our system picked up the information and we could automate reporting.
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