Going to revive this one more time. Thought I had this straight but after reading more in detail...maybe not.

The question I have pertains to in-house loans. We may identify an in-house refinance as cash-out on the application and use an internal purpose code that also states cash-out refinance. However, there is no difference in pricing, underwriting, terms, etc for an in-house cash-out refinance vs a no cash-out refi.

As I read the interpretation to 1003.4(a)(3) - comment 2(iii) it states 3 things. The first - assume a financial institution does not distinguish between a cash-out refinancing and a refinancing under its own guidelines. Does distinguish mean in the pricing, terms, underwriting or simply in the classification of the purpose on the application and/or core system(as we are doing)? The second - and sets the terms of all refinancings without regard to the amount of cash received by the borrower at closing or account opening. All our in-house refi's are treated the same regardless of cash-out or not. The third point - AND does not offer loan products under investor guidelines. It seems to me in reading this all 3 conditions must be met to call all our in-house refi's as code 31 for HMDA, but we do offer Freddie Mac loans (although we do not keep those in-house). Does the fact we offer Freddie Mac products cause us to have to differentiate between cash-out refi's and no cash-out refi's for our in-house loans? Or, does the fact that we may call a loan a cash-out refi on the application require us to differentiate between code 31/32 for in-house loans? The regulation seems to focus only on the fact that the products are treated no differently and not necessarily what the purpose on the application says.

@JoeM86, my understanding is that you would NOT code any of your in-house loans as a "cash out refi" - you would just use "refi".

I'm looking at the first part of 3.4(a)(3) OI-2 where it says if you considered it as a cash-out refi "in processing the application or setting the terms (such as the interest rate or origination charges) under its guidelines...". Then it goes in to the examples you cited above.

So the debatable aspect as to what "guidelines" mean...I agree with. But I think you could easily defend to an auditor/examiner that this is in regard to the terms offered to the customer, and that your guidelines don't differentiate such between refi or c/o refi, so you would just report refi regardless of any c/o.

My thoughts would mean nothing to your examiner though, so if you have a way to reach out to your regional examiner, your state banking association's compliance team, and/or your external auditor...then that would be even better (and please share any guidance you receive with us!).

So is the consensus that you can have a refinance with $0 cash to the borrower that is reported as a 32 (provided the investor considers it a limited cash-out)? The reg seems to allow for this but the example (i) in the commentary is a bit different.

FNMA shop here. no/limited cash out is $0 - $2,000 cash back to borrower at closing.
Cash out is anything above $2,000 cash back to borrower at closing.
no cash out and limited cash out are run the same through FNMA DU.

Well, if people are not familiar with the FNMA cash-out classification, it does not have to result in actual cash back to the borrower if they are also refinancing non-purchase money liens.

Thank you! So, to make sure we are all on the same page, there could be an instance of a "32" when there is $0 cash to borrower?

A Financial Institution reports a Covered Loan or an Application as a cash-out Refinancing if it is a Refinancing and the Financial Institution considered it to be a cash-out Refinancing when processing the Application or setting the terms under its or an investor’s guidelines.

So - if the transaction is going to be priced under a FNMA Cash-Out - whether the customer actually gets cash back or not is not really relevant.

The reason I'm questioning this is the regulation doesn't reference a requirement for the borrower to walk away with cash (although maybe common sense would?) -- but the commentary does seem to use it in the example when it states "because of the amount of cash received by the borrower at closing." The scenario of an investor considering a loan a cash-out when it's paying off other loans and the borrower receives $0 at closing doesn't' really fit into that example.

2. Purpose - refinancing and cash-out refinancing. Section 1003.4(a)(3) requires a financial institution to report whether a covered loan is, or an application is for, a refinancing or a cash-out refinancing. A financial institution reports a covered loan or an application as a cash-out refinancing if it is a refinancing as defined by § 1003.2(p) and the institution considered it to be a cash-out refinancing in processing the application or setting the terms (such as the interest rate or origination charges) under its guidelines or an investor's guidelines. For example:
i. Assume a financial institution considers an application for a loan product to be a cash-out refinancing under an investor's guidelines because of the amount of cash received by the borrower at closing or account opening. Assume also that under the investor's guidelines, the applicant qualifies for the loan product and the financial institution approves the application, originates the covered loan, and sets the terms of the covered loan consistent with the loan product. In this example, the financial institution would report the covered loan as a cash-out refinancing for purposes of § 1003.4(a)(3).
ii. Assume a financial institution does not consider an application for a covered loan to be a cash-out refinancing under its own guidelines because the amount of cash received by the borrower does not exceed a certain threshold. Assume also that the institution approves the application, originates the covered loan, and sets the terms of the covered loan consistent with its own guidelines applicable to refinancings other than cash-out refinancings. In this example, the financial institution would report the covered loan as a refinancing for purposes of § 1003.4(a)(3).
iii. Assume a financial institution does not distinguish between a cash-out refinancing and a refinancing under its own guidelines, and sets the terms of all refinancings without regard to the amount of cash received by the borrower at closing or account opening, and does not offer loan products under investor guidelines. In this example, the financial institution reports all covered loans and applications for covered loans that are defined by § 1003.2(p) as refinancings for purposes of § 1003.4(a)(3).

That is because the yahoos that write the regulations really have no idea how things work in the real world. That is just not how FNMA classifies a cash-out versus a limited cash-out refinance. It all comes down to if the terms are different. The reason for that is then you analyze like loans for discrimination and outliers.

It's an example. An example never creates the boundaries of a definition. They are illustrative. It also doesn't make common sense to me that a borrower needs to get cash in hand to be a cash out refi. The borrower is taking "cash out" of their home to pay off other debts in most of these situations.

As Randy's noted multiple times though, it all comes down to terms/pricing.