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#2184819 - 07/10/18 08:43 PM Purpose "Other" or not reportable?
Melissa S Offline
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Melissa S
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Okay, I'm getting myself confused.

We have several borrowers - both individual and corporate - who request a commercial loan against residential investment properties. For the purpose of the loan, the borrower usually states they are reimbursing themselves for the cash used in purchasing an investment property, or reimbursing for cash used to improve/repair a property. I have always assumed this cash reimbursement to be a business purpose request and therefore a non-reportable transaction.

Now I'm wondering if this type of request is more appropriately considered a reportable loan under purpose "Other" because there is no specific business purpose stated such as "inventory purchase".

We also occasionally get a cash reimbursement request where the borrower states they will use the funds in the future for additional purchase, but they have nothing in line to purchase. Which of course means the money could be spent any way they like. Is this non-reportable, reportable as Other, or considered a purchase purpose based on what the borrower has stated?

My head is spinning......
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#2184850 - 07/11/18 12:00 PM Re: Purpose "Other" or not reportable? Melissa S
Adam Witmer Offline
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Great question, Melissa. I completely understand the head spinning...

First, remember that commercial/business purpose loans are only HMDA reportable if the purpose is a purchase, refinance, or home improvement loan. Therefore, you will never have an "other" purpose business/commercial loan/application on your HMDA LAR. The "other" purpose is only used for consumer purpose mortgage loans.

That said, if the applicant explains that the funds will be used to purchase another home in the future, I have always considered this to be HMDA reportable. Others may disagree (and want a specific property to be named), but since the rules aren't completely clear (as similar guidance applies to HI purpose and is not clearly for a purchase purpose - see below), I have always held to the argument that their stated intention is to purchase a loan. Therefore, I would report it as a purchase.

6. Statement of borrower. In determining whether a closed-end mortgage loan or an open-end line of credit, or an application for a closed-end mortgage loan or an open-end line of credit, is for home improvement purposes, an institution may rely on the applicant's or borrower's stated purpose(s) for the loan or line of credit at the time the application is received or the credit decision is made. An institution need not confirm that the borrower actually uses any of the funds for the stated purpose(s).
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#2184853 - 07/11/18 12:46 PM Re: Purpose "Other" or not reportable? Adam Witmer
Melissa S Offline
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Thank you, Adam!
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#2184854 - 07/11/18 12:48 PM Re: Purpose "Other" or not reportable? Melissa S
Dan Persfull Offline
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I have always assumed this cash reimbursement to be a business purpose request and therefore a non-reportable transaction.

I would be cautious using a blanket assumption such as this. Are they reimbursing business funds or personal funds?

If the reimbursement is going into a personal account how would you document those funds are for business purposes if the borrower has not earmarked them for such?
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#2184866 - 07/11/18 01:37 PM Re: Purpose "Other" or not reportable? Melissa S
Melissa S Offline
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Dan - many of our commercial borrowers are individuals who have purchased residential properties as investments. Funds received on a cash-out refi would likely go into a personal account in that instance. Once in their hands, we have no idea what they are earmarked for unless they have told us, which is unlikely.

None of the requests - so far - have included a purchase, refinance, or improvement of a residential dwelling. The property is already owned, unencumbered, by the borrower at the time of the cash out loan request.

The cash received through these loans is delivered to the borrower in the form of a check at closing. We are not privy to where the funds are being deposited, although a deposit account in the name of the borrower is required to be established with the lending institution prior to loan closing.
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#2184879 - 07/11/18 02:54 PM Re: Purpose "Other" or not reportable? Melissa S
Dan Persfull Offline
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If the checks are being given to the individual how are you documenting the loan to be for a business purpose?

we have no idea what they are earmarked for unless they have told us, which is unlikely.

That's my point.

You can't just assume the funds are or will be for business purposes. It's the financial institution's responsibility to document the loan's purpose and IMO replenishing someone personal cash flow is not a business purpose.
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#2184886 - 07/11/18 03:01 PM Re: Purpose "Other" or not reportable? Dan Persfull
Melissa S Offline
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If replenishing someone's cash is not a business purpose, and the collateral for the loan is not the personal residence of the individual borrower, and could not be the personal residence of a corporate borrower, then we still have a non-reportable loan, correct?.
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#2184890 - 07/11/18 03:16 PM Re: Purpose "Other" or not reportable? Melissa S
Dan Persfull Offline
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If the loan is dwelling secured and is for a consumer purpose the loan is reportable.

(f) Dwelling means a residential structure, whether or not attached to real property. The term includes but is not limited to a detached home, an individual condominium or cooperative unit, a manufactured home or other factory-built home, or a multifamily residential structure or community.
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#2184898 - 07/11/18 03:52 PM Re: Purpose "Other" or not reportable? Melissa S
Melissa S Offline
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1003.3(c)(10) 2 - If a closed-end mortgage loan or an open-end line of credit is deemed to be primarily for a business, commercial, or organizational purpose under Regulation Z, 12 CFR 1026.3(a) and its related commentary, then the loan or line of credit also is deemed to be primarily for a business or commercial purpose under § 1003.3(c)(10).

§ 1026.3 - Exempt transactions.

The following transactions are not subject to this part or, if the exemption is limited to specified provisions of this part, are not subject to those provisions:

(a) Business, commercial, agricultural, or organizational credit. (1) An extension of credit primarily for a business, commercial or agricultural purpose.

(2) An extension of credit to other than a natural person, including credit to government agencies or instrumentalities.


The above would man, to me, that if we have a loan to a corporate borrower, than that loan is for business purposes and a cash out transaction is not reportable unless it also involves a home purchase, a home refinance or home improvement, correct?
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#2184911 - 07/11/18 04:55 PM Re: Purpose "Other" or not reportable? Melissa S
Adam Witmer Offline
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Originally Posted By Melissa S
The above would man, to me, that if we have a loan to a corporate borrower, than that loan is for business purposes and a cash out transaction is not reportable unless it also involves a home purchase, a home refinance or home improvement, correct?

From the commentary: "2. Primary purpose. An institution must determine in each case if a closed-end mortgage loan or an open-end line of credit primarily is for a business or commercial purpose. If a closed-end mortgage loan or an open-end line of credit is deemed to be primarily for a business, commercial, or organizational purpose under Regulation Z, 12 CFR 1026.3(a) and its related commentary, then the loan or line of credit also is deemedto be primarily for a business or commercial purpose under § 1003.3(c)(10)."
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Adam Witmer, CRCM

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#2185071 - 07/12/18 12:26 PM Re: Purpose "Other" or not reportable? Melissa S
Dan Persfull Offline
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The above would man, to me, that if we have a loan to a corporate borrower

A corporate borrower would be a corp., LLC, partnership, in other words a business entity. Loans to non-natural persons are exempt under 1026.3.

Loans to individuals are not as cut and dried. You have to determine and document for each loan the individual obtains if the purpose of the proceeds of that loan are primarily for a business or consumer purpose.
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#2185075 - 07/12/18 12:57 PM Re: Purpose "Other" or not reportable? Melissa S
Adam Witmer Offline
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I agree with Dan. I had also quoted how organizational credit was exempt under 1026.3, but seem to have lost that portion in the edit.

"2. Primary purpose. An institution must determine in each case if a closed-end mortgage loan or an open-end line of credit primarily is for a business or commercial purpose. If a closed-end mortgage loan or an open-end line of credit is deemed to be primarily for a business, commercial, or organizational purpose under Regulation Z, 12 CFR 1026.3(a) and its related commentary, then the loan or line of credit also is deemedto be primarily for a business or commercial purpose under § 1003.3(c)(10)."

From the commentary to part 1026.3(a) of Regulation Z:
"9. Organizational credit. The exemption for transactions in which the borrower is not a natural person applies, for example, to loans to corporations, partnerships, associations, churches, unions, and fraternal organizations. The exemption applies regardless of the purpose of the credit extension and regardless of the fact that a natural person may guarantee or provide security for the credit. But see comment 3(a)-10 concerning credit extended to trusts."

Said another way, legal entities would only have reportable cash-out loans if they are for a purchase, refi, or HI loan. An application from a sole proprietor or individual, however, would be dependent upon the purpose - meaning that institutions must determine in each case whether the application is primarily for business or commercial purposes - and this is why you have to look at where the funds are going, as Dan previously explained.
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Adam Witmer, CRCM

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#2197064 - 11/01/18 04:33 PM Re: Purpose "Other" or not reportable? Melissa S
George Offline
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Need to re-hash this as I have a similar loan. The customer (individuals) purchased and investment residential property with cash, and obtained a loan to replenish said cash.

From my understanding of the above, irregardless the fact that the initial funds were used to purchase an investment (which would be primarily for business/commercial purpose), if the funds are getting disbursed back in the name of the individual customers and/or the funds are getting deposited into a personal account, then the loan would be NOT primarily for business purpose?

If so, then the purpose of the loan would be purchase or other?

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#2197070 - 11/01/18 04:54 PM Re: Purpose "Other" or not reportable? Melissa S
Dan Persfull Offline
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"investment residential property "

I am going to assume this investment property is non-owner occupied rental property. Reg. Z does not exempt investment property. It exempts non-owner occupied rental property, certain owner-occupied rental property, loan to non natural persons and business purpose loans. So assuming it was the purchase of a non-owner occupied rental property then it would be a business purpose loan.

If the new loan proceeds are replenishing the borrower's personal funds then IMO it would not be a business purpose loan and since the loan proceeds are not being used for a home purchase, refinancing or home improvement the purpose would be other.
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#2197073 - 11/01/18 05:18 PM Re: Purpose "Other" or not reportable? Melissa S
George Offline
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Dan, yes sir, non-owner occupied rental property (I will work on my terms). I will verify with the loan officer to confirm the personal funds.

Thank you very much for your clarification and help, it is much appreciated sir!

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