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#2153559 - 11/14/17 10:02 PM 18 month loan, temporary financing?
Bec Offline
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Bec
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New term note to construct a single family home. The term is 18 months, consisting of 4 mos interest only and then P&I payments. The intent is to sell the home upon completion. This definitely seems like temporary financing but for the term and the P&I payments.
Does the loan being more than 12 months exempt it from temporary financing? Does the structure of it (4 mos IO with the rest of the term being P&I) exempt it from temporary financing.
If it is exempt from temporary financing, would it be classified as a purchase?
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#2153571 - 11/14/17 10:50 PM Re: 18 month loan, temporary financing? Bec
Norman Paperman Offline
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You have a short-term loan. Unless it is designed to be replaced by permanent financing (emphasis here), then it is not temporary, but rather, it is simply short-term.
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#2153587 - 11/15/17 01:06 PM Re: 18 month loan, temporary financing? Bec
Adam Witmer Offline
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As Norman said, the key to temporary financing is not really the length of the term, but the design of the loan. To be temporary financing, the loan has to be designed to be replaced by another loan.

Under the existing HMDA rules, we look to the FAQ from www.ffiec.gov:

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).


For the new HMDA rules, temporary financing has slightly changed. Here is the applicable commentary:
Paragraph 3(c)(3)

[i]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 separate permanent financing extended by any financial institution to the same borrower at a later time. [i/]
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#2153601 - 11/15/17 02:28 PM Re: 18 month loan, temporary financing? Bec
raitchjay Online
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This sounds like spec home construction though (except for the P&I part).....and spec home construction loans aren't reportable. Bridge loans and construction only loans are explicitly exempted......it's the P&I payments that are throwing me.
Last edited by raitchjay; 11/15/17 02:29 PM.
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#2153607 - 11/15/17 02:44 PM Re: 18 month loan, temporary financing? Bec
RR Joker Offline
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I'm right there with ya, RJ. The set-up is very atypical of a builder spec loan for sure. Never heard of such in all my years of lending.
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#2153629 - 11/15/17 03:19 PM Re: 18 month loan, temporary financing? Bec
David Dickinson Offline
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I agree with RJ and Joker. While this is not the typical spec home structuring, it sounds like a construction loan to me. If this is truly a spec home construction, I would not report.

Adam: There's only 6 weeks left in the current rules, so it's not worth much to go into this. But my reply to you response about looking to the FAQs is:
The reg says "do not report . . . construction and bridge loans" and the FAQs also say construction and bridge loans are illustrative, not exclusive examples of temporary financing. You don't have to have 2 phases to call something temporary in today's rules. If I have a construction or bridge ONLY loan, they are not to be reported.
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#2153640 - 11/15/17 03:33 PM Re: 18 month loan, temporary financing? Bec
raitchjay Online
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Since we're on the subject...i know that the CFPB clarified that spec home construction loans still won't be reportable.....but did they make that clarification in the regulation or commentary? If you just read Adam's excerpt above (final paragraph), you might conclude that spec home loans would be reportable in 2018 (but again, i know they aren't).
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#2153643 - 11/15/17 03:39 PM Re: 18 month loan, temporary financing? David Dickinson
Adam Witmer Offline
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I completely agree with you, David and am very familiar with the construction/bridge loan vs other temporary financing debate. I probably should have expanded my reply a bit but was focusing on the "short term" portion of the prior comments. FWIW, I agree that construction and bridge only loans are exempted by the reg (under the current rules), and therefore a second loan isn't required for those two types of temporary financing.

Again, only 6 weeks left...
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#2153644 - 11/15/17 03:49 PM Re: 18 month loan, temporary financing? raitchjay
Adam Witmer Offline
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Originally Posted By raitchjay
Since we're on the subject...i know that the CFPB clarified that spec home construction loans still won't be reportable.....but did they make that clarification in the regulation or commentary? If you just read Adam's excerpt above (final paragraph), you might conclude that spec home loans would be reportable in 2018 (but again, i know they aren't).


The comment is 3(c)3-2:

2. Loan or line of credit to construct a dwelling for sale. A construction-only loan or line of credit is considered temporary financing and excluded under § 1003.3(c)(3) if the loan or line of credit is extended to a person exclusively to construct a dwelling for sale. See comment 3(c)(3)–1.ii through .iv for examples of the reporting requirement for construction loans that are not extended to a person exclusively to construct a dwelling for sale.
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#2153649 - 11/15/17 04:02 PM Re: 18 month loan, temporary financing? Bec
raitchjay Online
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Thanks Adam....couldn't remember if it made it into the OSC or not and was in the middle of something. Thanks for the citation.
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#2153654 - 11/15/17 04:17 PM Re: 18 month loan, temporary financing? raitchjay
Adam Witmer Offline
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Well, you almost miss it in the commentary because it is item 2, rather than included as a subsection of item 1 which is all of the other commentary on temporary financing.
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#2153742 - 11/15/17 08:13 PM Re: 18 month loan, temporary financing? Bec
RR Joker Offline
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And I don't consider absolutely every construction and more particularly [because it actually happens] Bridge loans to be automatically exempt. If a Bridge is paid in full, I consider it short-term.

I've honestly never seen that happen with a construction loan. I've seen the reverse where a customer paid cash for construction then borrowed back their equity.
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#2153744 - 11/15/17 08:27 PM Re: 18 month loan, temporary financing? RR Joker
Adam Witmer Offline
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Originally Posted By RR Joker
And I don't consider absolutely every construction and more particularly [because it actually happens] Bridge loans to be automatically exempt. If a Bridge is paid in full, I consider it short-term.


Joker, just to clarify: are you referencing the old rules or the new rules? Or both?
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#2153752 - 11/15/17 08:31 PM Re: 18 month loan, temporary financing? Bec
RR Joker Offline
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Either one.
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#2153754 - 11/15/17 08:34 PM Re: 18 month loan, temporary financing? Bec
RR Joker Offline
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To clarify, construction and bridge loans are illustrative. But not all are created equally. Although 99% of the time, a bridge loan is intended to be paid by other longer term financing, and therefore a great example of a temporary loan, the rare one that is to be paid in full I have never believed to have a carte blanch exclusion from reporting...and this was drilled in my head, too, by a very knowledgeable FRB compliance liaison of mine.
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#2153764 - 11/15/17 08:58 PM Re: 18 month loan, temporary financing? Bec
Adam Witmer Offline
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Thanks for the clarification, Joker. I'm curious now; did you change camps at some point as I thought you were previously in the camp that said construction and bridge loans were automatically excluded from Reg C?

Not that it really matters at this point (6 weeks left with existing rules), but I am just trying to learn and value your opinion.
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#2153772 - 11/15/17 09:11 PM Re: 18 month loan, temporary financing? Bec
RR Joker Offline
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Oh heck no...not this Swamp critter!

Now, with the new rules, even if, say, a down payment "bridge" technically paid in full thanks to the sale of the home, but long term financing is in the big picture, the little down payment loan would be exempt.

ETA: I've never made a loan such as the above. Our bridge's have always been temp financing for the actual purchase.

a) if the temp loan is to be paid off by sale of home, down payment applied and remainder amortized - exempt as temporary financing
b) if the temp loan is to be paid off by the sale of home - short term, not temporary and reportable.
Last edited by RR Joker; 11/15/17 09:16 PM.
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#2153833 - 11/16/17 12:38 PM Re: 18 month loan, temporary financing? Bec
Adam Witmer Offline
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Thanks for the clarification, Joker. I actually enjoy these nitty gritty gray area debates. ;-)
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#2157687 - 12/19/17 03:30 PM Re: 18 month loan, temporary financing? Bec
brunck Offline
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Client is taking out a 12 month loan for home improvements before putting home up for sale. Would you consider this temp financing? The source of repayment would be the sell of home.

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#2157688 - 12/19/17 03:40 PM Re: 18 month loan, temporary financing? Bec
Dan Persfull Online
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Client is taking out a 12 month loan for home improvements before putting home up for sale. Would you consider this temp financing? The source of repayment would be the sell of home.

No. It's a short term loan that is not designed to be paid by longer term financing.
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#2157705 - 12/19/17 04:18 PM Re: 18 month loan, temporary financing? Dan Persfull
brunck Offline
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another question, if a client is refinancing a loan for 12 months just allow more time to sell their home, do you consider this temp financing, because the anticipate source of repayment is making the determination.

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#2157706 - 12/19/17 04:28 PM Re: 18 month loan, temporary financing? Bec
Adam Witmer Offline
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If the source of repayment is proceeds from selling their home, it is not temporary financing. Under current HMDA rules, temporary financing is defined as a loan that is designed to be replaced by permanent financing of a much longer term.

From the FFIEC FAQs:
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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#2158283 - 12/22/17 07:52 PM Re: 18 month loan, temporary financing? Bec
Ben Thompson Offline
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I have a similar situation, which I thought I had a handle on, now I’m much less certain. I would really appreciate any thoughts.

My Bank does multifamily commercial construction loans (either condos or apartment buildings) and this year started separating these into two loans. A property loan and a construction loan. Other than loan purpose there is no difference in the loans. They are both 12-month interest only loans, intended to be repaid either by the borrower refinancing to a perm loan (apartment buildings) or sale of the units (condos). The perm loan is not part of the transaction. The purpose of the property loan is either the purchase, refinance or equity recapture from the property's acquisition and the construction loan is for construction of the dwelling, or in some cases renovations to an existing apartment building.

Main question-Are the condo loans excluded as temporary financing in 2017? I thought the CFPB’s clarification that spec home construction loans still won't be reportable answered this question, but based on this thread, perhaps it doesn’t?
-Does the fact that there are two loans make a difference? Is there any reason both loans can’t be temporary financing?
- Does it make a difference if the property has an existing dwelling when the loan is made? The dwelling is generally demolished for a new construction but in some instances it is being renovated. This seems straight forward to me, the point of an exemption is that otherwise reportable loans don't get reported. I’m getting push back on this, so want to be sure.

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