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#2121620 - 03/11/17 06:22 PM Bridge loan or short term
Bec Offline
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I think that this note is a short term note and should be reportable but just wanted to run it through the forum to ensure that I am not missing that this may be a bridge note.

Borrowers are purchasing a home. They are using the $360,000 note with a one year term to purchase secured by the home being purchased and it will be paid off with the sale of two other homes.

My thought for short term is because the whole loan is intended to be paid off with the sale of an asset. But this is technically bridging the gap between the purchase and the sale of the other two homes.
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#2121627 - 03/13/17 12:43 AM Re: Bridge loan or short term Bec
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Bec, wouldn't that be considered temporary financing, and not reportable, because it will be paid off with the sale of property rather than through payments?
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#2121634 - 03/13/17 12:20 PM Re: Bridge loan or short term Bec
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It is a short term loan. It is not designed to be replaced by long term financing, which is a requirement for temporary financing.

Temporary Financing. When is a loan "temporary financing" such that it is exempt from reporting?

Answer: The regulation lists as examples of temporary financing construction loans and bridge loans. See 203.4(d)(3). Construction and bridge loans are illustrative, not exclusive, examples of temporary financing. The examples indicate that financing is temporary if it is designed to be replaced by permanent financing of a much longer term. A loan is not temporary financing merely because its term is short. For example, a lender may make a loan with a 1-year term to enable an investor to purchase a home, renovate it, and re-sell it before the term expires. Such a loan must be reported as a home purchase loan. See 203.2(h).
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#2121699 - 03/13/17 05:00 PM Re: Bridge loan or short term rlcarey
RR Joker Offline
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Quote:
My thought for short term is because the whole loan is intended to be paid off with the sale of an asset. But this is technically bridging the gap between the purchase and the sale of the other two homes.


For a 'bridge loan' you are looking for the gap between the purchase and sale to obtain the long-term financing...the "gap" is in financing...temp to long term. wink
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#2121712 - 03/13/17 05:18 PM Re: Bridge loan or short term Bec
Dan Persfull Offline
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FWIW I'll add my opinion which agrees with Randy & RRJ - short term.
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#2121761 - 03/13/17 07:37 PM Re: Bridge loan or short term Bec
David Dickinson Offline
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What you describe is a bridge loan and it is not reportable. Why? Because §1003.4(d)(3) states (emphasis added):
"A financial institution shall not report… Temporary financing (such as bridge or construction loans)…"
This is a command, not a suggestion.

The FAQ Randy quoted can't override the regulation. The FAQ is followed when you have other situations (other than a construction or bridge loan). For instance, if I was going to remodel my house and asked for a home improvement loan. It's not construction (initial) or a bridge loan. Thus, I look to the FAQ to determine what temporary means. If I was:
1) doing 1 phase financing and paying you off when it was done, that would be short term)and reported.
2) doing 2 phases (short term followed by an amortized, longer term loan), the first phase would be temporary and not reported. That's what the FAQ is referring to.

If you disagree, explain to me how you are not disobeying the regulation.

P.S. This is for 2017. In 2018, the definition of temporary financing is changing. It requires 2 phases for the first phase to be exempt. But that's next year. IOW, construction or bridge only loans are reportable in 2018, but not today.
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#2121762 - 03/13/17 07:40 PM Re: Bridge loan or short term Bec
David Dickinson Offline
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We describe this scenario, as well as many others, in the article entitled "HMDA Temporary Financing" which can be downloaded for free from our website:
http://www.bankerscompliance.com/compliance-resources/free-downloads.htm

It's been ready by hundreds of bankers and examiners and followed since 2004 (when the regulation was rewritten) and updated when the FAQs came out in 2009 - and caused some confusion, like discussed in this thread.

Here's an excerpt from it:
Two Phase Financing
The examples indicate that financing is temporary if it is designed to be replaced by permanent financing of a much longer term. This statement is the one that has caused the most confusion. Normally, temporary financing is replaced by permanent financing. The typical bridge loan will not be fully repaid by the sale of the old home. The temporary loan will be replaced by permanent financing of a much longer term when the old home is sold. Likewise, most construction loans are replaced by a permanent loan. It is the permanent financing from these scenarios that is reported for HMDA. The general rule is, banks should not double report a borrower’s transactions.

But what if the bridge loan will not be replaced with permanent financing? For instance, assume your borrower bought a home in California for $40,000 back in 1970. Today the home is worth $500,000. Now this person wants to purchase a home in the Midwest for $250,000 but needs bridge financing until their California home sells. There is enough equity to pay off the temporary financed amount once the sale is complete. No permanent financing is intended.

When some read the FFIEC Q&A, they believe it says to report the bridge loan described above because it is not “designed to be replaced by permanent financing”. However, this understanding is incorrect as Regulation C clearly states “A financial institution shall not report: Temporary financing (such as bridge or construction loans).” The Q&A may appear to be inconsistent with the regulation; however, the Q&A (or for that matter any guidance: commentary, staff interpretation, etc.) can never contradict the law or regulation. Further guidance is used to fill in the blanks and answer questions, not contradict what has been stated by the law. Therefore, reporting a bridge or construction loan because it is not followed by permanent financing is not accurate.

So what does this sentence in the Q&A mean? We believe it provides guidance to those situations where you don’t have a bridge or construction loan, yet you’re not sure if it is temporary or short term. In fact, more clarification is provided in the next few sentences of the Q&A.
Last edited by David Dickinson; 03/13/17 07:42 PM.
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#2121765 - 03/13/17 07:47 PM Re: Bridge loan or short term Bec
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I base it on the words 'such as' and the fact that they didn't consider anyone would actually payoff the short-term purchase in full by the sale... typically they only payoff the current mortgage and pay down with the left over equity to make their down payment.

My state actually defines bridge loans [something the regulations failed to do on all counts:

(C) A bridge loan made to a borrower pending the sale of the borrower's principal dwelling or a temporary loan made to a borrower and secured by the borrower's principal dwelling pending the borrower's obtaining permanent financing for such principal dwelling;

And I realize we've beaten this horse slap to death in the past...but I've yet to meet an examiner that thought otherwise either, including not exempting one for other disclosure purposes if being paid in full, rather than bridging the financing gap.
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#2121767 - 03/13/17 07:51 PM Re: Bridge loan or short term Bec
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Joker: Let me clarify - are you agreeing this IS a bridge loan and that it's not reportable?
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#2121773 - 03/13/17 08:00 PM Re: Bridge loan or short term Bec
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No...quite the opposite. If it's not intended to bridge a gap in financing, then we do and have always reported it as a short-term loan, rather than temporary financing.
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#2121784 - 03/13/17 08:18 PM Re: Bridge loan or short term Bec
Dan Persfull Offline
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This is something David and I have disagreed on for several years now.

When I first started in this business a bridge/swing loan was referred to as Gap financing. IOWs it bridged the gap (money needed - generally the down payment) to purchase the new home and obtain permanent financing for the new home. The Gap (bridge) loan would be paid from the sale of the home.

Loans that are designed to be paid off with the proceed of the sale of the asset where long term financing is not anticipated is not IMO a bridge loan. The loan is not bridging any gap for needed financing.

RRJ's state has seem fit to define a bridge loan which so happens coincides with our opinions. IN also defines a bridge loan but its definition only applies to Indiana's high cost loans. I've never figured that one out, oh well.

Also the Reg. refers to temporary financing such as a bridge loan. But it does not define a bridge loan. A bridge loan would be temporary financing if it is meant to be paid with long term financing but if it's meant to be paid at maturity from proceeds other than long term financing then I would not consider that loan to be a bridge loan therefore it would be short term financing because it is not, IMO, bridging any gap between the purchase of the home and obtaining long term financing for the home.

Because the Reg. does not define a bridge loan we could have this debate until the cows came home. So, unless your state actually defines a bridge loan you will have to make a decision on what you want to classify as bridge loans.

explain to me how you are not disobeying the regulation.

How can I disobey the regulation when it doesn't give a definition for a bridge loan but in its Q&A it defines temporary financing as financing intended to be paid with longer term financing?

Based on the information presented in the OP and because there is no long term financing involved it is my opinion I'm dealing with a short term loan and not a bridge loan. Short term loans are reportable.
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#2121798 - 03/13/17 08:44 PM Re: Bridge loan or short term Bec
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An FRB examiner finally beat it in my head back when they were in charge of most all regs, and it ALL boiled down to the 'bridging the gap in financing', no end-financing, no bridge... not, for instance, being secured by both new and old homes. It finally clicked with me once and for all smile
Last edited by RR Joker; 03/13/17 08:45 PM.
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#2121815 - 03/13/17 09:28 PM Re: Bridge loan or short term Bec
Bec Offline
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Thank you all for your input. My thought is that had there been a permanent loan in place and this loan was just for the downpayment, that it would be temporary financing and thus not reportable. Because it is a one time deal in that the loan is responsible for the entire purchase price of the new home, and the sale of the asset will pay it off entirely that this would fit more into the spirit of a short term loan. There is no longer any financing involved.
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#2121946 - 03/14/17 07:30 PM Re: Bridge loan or short term Bec
David Dickinson Offline
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Since "Bridge Loan" isn't defined in HMDA, you have the right to say this is or isn't a "bridge loan". As Dan posted, he doesn't think it is and I do. I've written a position paper (posted link above) that supports my position and most (but not all) of our clients use this definition. I think you're okay to go either way, with HMDA.

Additionally thoughts:
Bridge only loans (with no perm financing) are pretty rare.
Bridge only loans WILL be reported in 2018 (along with construction only loans) so this will be a mute point.
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#2121978 - 03/14/17 09:52 PM Re: Bridge loan or short term Bec
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By "construction only" you mean spec home construction, right? Not construction only loans to a consumer that are later permed out in a new loan....
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#2121979 - 03/14/17 09:52 PM Re: Bridge loan or short term Bec
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Sorry...i was asking you David, in reference to the last sentence in your post.
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#2122014 - 03/15/17 01:54 PM Re: Bridge loan or short term Bec
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Not David, but right...the later permed out ones will meet the temporary exemption.
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#2122058 - 03/15/17 03:42 PM Re: Bridge loan or short term Bec
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I think the confusion for me comes from this: we never do combined construction/perm loans all in one, even if WE will later do the perm financing. So the construction loan that comes first is referred to (by me anyway) as a "construction only" loan--yes, we will do the perm financing, and yes, it will be reportable...but the "construction only" loan that comes first is NOT reportable, and won't be reportable next year either.
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#2122059 - 03/15/17 03:46 PM Re: Bridge loan or short term Bec
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Yes, I agree raitchjay. Saying 'construction only' is a contradiction and potentially misleading. For way too long that's the term we've used for the construction 'only' portion of a two phase loan, or a loan where we are doing the 'construction only' and another bank is taking the perm.

So a 'construction with no-end financing by same borrower', or something, would be a better description for HMDA 2018.
Last edited by RR Joker; 03/15/17 03:51 PM.
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#2122141 - 03/15/17 07:31 PM Re: Bridge loan or short term Bec
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Quote:
By "construction only" you mean spec home construction, right? Not construction only loans to a consumer that are later permed out in a new loan....

It's rare, but sometimes you'll see a loan to construct a dwelling and then the borrower pays it off with cash/savings/investment. No perm loan. That's a "construction only". It could also be a spec house construction.

I was not referring to 2 phase financing. As Joke replied, if I was, the 1st phase would not be reported (temporary) and the 2nd phase would be reported (purchase).
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#2122143 - 03/15/17 07:32 PM Re: Bridge loan or short term Bec
David Dickinson Offline
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Quote:
I think the confusion for me comes from this: we never do combined construction/perm loans all in one, even if WE will later do the perm financing. So the construction loan that comes first is referred to (by me anyway) as a "construction only" loan--yes, we will do the perm financing, and yes, it will be reportable...but the "construction only" loan that comes first is NOT reportable, and won't be reportable next year either.

To clarify this, I would refer to that as "2 phase construction loan" or a "construction / perm" loan - knowing that your institution never does this with 1 loan.
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#2122144 - 03/15/17 07:37 PM Re: Bridge loan or short term Bec
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That's was kinda our point, David. For eons, we have called them 'construction-only' if we have a perm takeout from another bank, or two-phase if we are making the construction loan followed by a separate perm....so that term is already used by many.

For a spec house, it's simply that...a spec.

For the very rare consumer loan where they borrower for construction, but plan to pay off at the end [if that happens, it's usually the reverse, they self-finance the construction, then recoup all or part of their cost later], it may be less confusing to so many of us to call it something other than 'construction only'. Something like, 'construction with no end financing', for instance.
Last edited by RR Joker; 03/15/17 07:38 PM.
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#2122148 - 03/15/17 07:40 PM Re: Bridge loan or short term Bec
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Right......leaving the rare ones aside, "construction only" loans are the loans we do (to consumers) for the construction of the home, followed later by perm financing in a separate loan. The ones that will be reportable for us in 2018.....those are simply "spec home construction" loans........when i see that "construction only" loans will be reportable in 2018, it seems to read as if our consumer, temporary, construction loans will be reportable.

I just know that terminology used in conjunction with the 2018 HMDA changes is confusing to me, and i would guess others as well.
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#2151710 - 10/30/17 08:56 PM Re: Bridge loan or short term Bec
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So now I have myself confused. We are doing a spec home construction. The customer owns the lot free and clear and we are advancing funds for the construction of the home. The home will then be sold. So for 2017 reporting. This is reported as a purchase correct? Ugh ... old HMDA ... new HMDA. My brain can't keep it all straight.

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#2151711 - 10/30/17 09:00 PM Re: Bridge loan or short term Bec
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No, spec home construction loans are not reportable either in 2017 or in 2018 (and beyond). There was some confusion for awhile because the new rule seemed to be changing the rules on them, but they have since clarified that they are (still) not reportable.
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