Construction loan to build primary residence. Customer already owns land.

Home Improvement for HMDA reporting?

Exempt as temporary financing.

Thanks Randy- even if its a 1 time close construction that converts to permanent financing upon completion?

No, if it's a combined construction-perm, it would be reportable as a purchase.

If you ask the correct question you get the correct answer. A one-close construction/perm loan is not exempt under the temporary financing exclusion. It's reported as a home purchase loan. See definition of home purchase loan in 1003.2(j), comment 2(j)-3 and 1003.3(c)(3) and comment 3(c)(3)-1.iv.

Clearly raitchjay didn't get interrupted by a phone call, so he beat me to the punch. But my point about making sure you ask the right question stands.

It also would not be exempt if it will be repaid by means other than longer term financing.

A construction loan that will be paid off in full by the sale of previous home is not exempt? Isn't that the very definition of temporary financing?

No....the definition of temporary financing (for HMDA) is "financing that will be replaced by financing of a much longer term". Walking in at or before maturity with a big wad of cash doesn't fit in that definition.

Isn't that the very definition of temporary financing?

1003.3(c)(3) Temporary financing;


Official Interpretation

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 separate permanent financing extended by any financial institution to the same borrower at a later time. For example:

To say it another way...

Under the old rules, many considered construction and bridge loans used to be automatically exempt, based on how the language read. The new rules, however, are pretty clear that - in order for a construction or bridge loan to be considered temporary financing - there must be an intent to replace the loan with a new loan. Therefore, paying off the loan with proceeds from the sale of the home is not temporary financing because there is not a new loan that satisfies and replaces that loan.

HMDA clarifies there is a difference between short term (which is reportable) and temporary (which is exempt but followed by a reportable loan). Either way, the applicant is reported.

Need some help in clarifying what is a "bridge loan" and what is temporary financing under HMDA. The example in the official interpretation 1003.(c)(3) seems to leave out a step in my opinion. Is the example assuming one note secured by both dwellings, existing and purchased property or does the example involve two separate notes. The one note being a loan of 12mos or less and the two notes being a term of 12 mos. or less. Just leaves us hanging.

My scenario for a bridge loan:

A 12 mo. interest only term, balloon fixed rate note secured by the existing home and home to be purchased.
The existing home sells within the 12 mo. term (maybe a first mortgage or 2nd mtg on existing home). The 12 mo. loan is paid
off by refinancing the balance of the loan after a principal reduction (bridge loan amount) into a permanent loan with us or another lender. Is this a bridge loan as per regulation and OI 1003.3 c 3 ?

TRID: Purpose = Purchase or Refin or HE
Reg. B: DI collected ?
HMDA : Temporary ? or Reportable as Purchase?
Reg. Z: Not an HPML or HPCT

Just trying to get this straight as management wants to lend in this area.

Thanks.

For HMDA: I believe the scenario you provided is a bridge loan. It’s gap financing between the sale of the old and the purchase of the new. It was replaced by a new loan (refinancing the remaining balance after the old home proceeds were applied).

For Reg B & HMDA: You need to collect DI for the permanent financing loan. You’ll report the perm loan, but not the bridge (temporary loan).

I’ll let someone else address TRID and HMPL/HPCT issues.

For TRID Purpose, your scenario would be a Purchase transaction - 1026.37(a)(9)(i).

While not specifically exempt from HPML, it would be exempt from all of the provisions of HPML:
- Escrow - 1026.35(b)(2)(i)(C)
- Appraisal - 1026.35(c)(2)(v)
- Evasion, Open-End Credit - 1026.35(d) - your loan is not open-end
- Repayment Ability, Prepayment Penalties - 1026.35(e)(3)

It would be exempt from HPCT - 1026.43(a)(3)(ii)

One nuance to be aware of:
Change your scenario slightly. Instead of refinancing to a permanent mortgage after the sale of the existing home, there will be enough equity available to pay off your "temporary" loan and that is what is planned. In this situation, that would not be "temporary" financing for HMDA purposes. It may still be considered "temporary" for all of the other purposes, but that is not clearly defined.

I'd like to add a couple points as well...and a question.

Reg B specifically exempts data collection on temporary construction loans...it does not use the term 'such as'. I have always understood collection applied to bridge loans. David, where is your logic coming from?

One clarification on the set-up of a bridge loan. Although they are often tied to both properties, it is not necessary. It could be secured by either of the homes or both and still fall under the definition of a bridge. The 'bridge' speaks to the gap in financing...not a bridge between two homes

First, I agree with Joker's clarification (2nd paragraph). Joker you said:


I agree. My point was a bridge only loan does not qualify as temporary financing for HMDA. It's a short term loan and must be reported. I believe my post above said you'll need to collect demographic information (like you understand). Then I said you'll report the permanent loan (HMDA) but not the bridge loan. I'm not trying to break out Reg B vs. Reg C since this bank is subject to HMDA reporting.

Maybe I'm missing your point or question.

Flyboy, now totally confused about the whole bridge concept. The sample cited in HMDA lacks clarity of the whole transaction.
and leaves us guessing. What happens after the borrower obtains the down payment using the old home? Typically the new home is closed on with either perm financing at that point with down payment from the old home. The old home sells and is paid off is
that what they are describing? How is the perm financing provided after the old home is sold? The new home would be financed
at the time of the closing on the old home with the down payment proceeds. What lag in time are they getting at?

I believe we would be better served to just treat it as a covered loan for HMDA. The rules are too conflicted. Clarity is a rare
jewel in todays compliance world.

I believe we would be better served to just treat it as a covered loan for HMDA.

You would then be reporting non covered loans which could and most likely would result in reporting errors and possible Civil Money Penalties along with a LAR scrub and a refiling of data.

If a bridge loan will be paid off from the sales proceed then it is a short term loan and will be reported.

Example. The bridge loan is for the down payment financed for 6-12 month interest payment only loan secured by the "old" home to be sold. New home is financed by a separate longer term loan. The "old" home sales and the bridge loan is paid off.

If a bridge loan will be refinanced once the "old" home sales then it's temporary financing and exempt from reporting.

Example. The bridge loan is made for 100% of the purchase price of the new home secured by both the new home and the old home on a 6-12 month interest payment only loan. The old home sales and the proceeds are applied to the bridge loan and the remaining balance is refinanced into longer term financing.

That's what I thought I said in my original post.

I will proceed to design a "bridge loan" as Dan outlined that complies.

Thanks to all that replied.

Great examples, Dan.

ccman: Keep in mind that "bridge" loans really don't mean anything for HMDA applicability (under temporary financing) anymore. The new rules only have "temporary financing." The old rules specifically excluded bridge and construction loans (debatable, but my prior stance) so the term "bridge" was important under the old rules. The new rules, however, make it clear that a loan (bridge or not) is only excluded under temporary financing if it is designed to be replaced by separate permanent financing extended (by any financial institution) to the same borrower at a later time. If the design of a bridge loan is to pay off the loan in entirety with the sale proceeds from the old home, then this is not temporary financing and would be reportable (assuming it doesn't meet another exemption).

Again, just remember that the term "bridge" is now basically irrelevant for HMDA purposes - we just need to determine whether or not it is considered temporary financing.

ccman, you did say that in your orignal post. Your lenders may be more disciplined than ours. We have definitely had our lenders call a loan such as I described where the short term loan will be paid off from equity from the existing home sale as a "bridge loan" just as they would if the loan was going to be refinanced once the existing home sold. I wanted to clarify in that instance, if that happened in your shop too, the short term loan would not be "temporary financing" under HMDA and may also not qualify as "temporary financing" for the other regs as well.