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#2114062 - 01/12/17 06:35 PM
Construction-only loan to Builder reportable?
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Member
Joined: May 2011
Posts: 85
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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.â€
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
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10K Club
Joined: Dec 2000
Posts: 21,293
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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
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Power Poster
Joined: Sep 2004
Posts: 5,249
out of the frying pan...
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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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#2114683 - 01/19/17 02:19 PM
Re: Construction-only loan to Builder reportable?
solbrillante
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Member
Joined: May 2011
Posts: 85
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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
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Power Poster
Joined: Sep 2004
Posts: 5,249
out of the frying pan...
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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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You call it ADD. I call it multi-tasking.
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#2114751 - 01/19/17 06:48 PM
Re: Construction-only loan to Builder reportable?
solbrillante
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10K Club
Joined: Dec 2000
Posts: 21,293
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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
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10K Club
Joined: Nov 2000
Posts: 18,763
Central City, NE
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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
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10K Club
Joined: Nov 2002
Posts: 20,656
The Swamp
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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.
Last edited by RR Joker; 01/19/17 07:23 PM.
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My opinion only. Not legal advice. Say you'll haunt me - Stone Sour
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#2114918 - 01/20/17 03:58 PM
Re: Construction-only loan to Builder reportable?
solbrillante
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Power Poster
Joined: Sep 2004
Posts: 5,249
out of the frying pan...
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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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You call it ADD. I call it multi-tasking.
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#2114933 - 01/20/17 04:17 PM
Re: Construction-only loan to Builder reportable?
Kathleen O. Blanchard
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Power Poster
Joined: Sep 2004
Posts: 5,249
out of the frying pan...
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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). 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?
_________________________
You call it ADD. I call it multi-tasking.
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#2114944 - 01/20/17 04:38 PM
Re: Construction-only loan to Builder reportable?
solbrillante
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Power Poster
Joined: Sep 2004
Posts: 5,249
out of the frying pan...
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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?
_________________________
You call it ADD. I call it multi-tasking.
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