Loan term 12 months, single pay, to purchase dwelling to be renovated, then termed out by the borrower once renovations are complete. The temporary loan would be exempt and the permanent financing would be a refinance, correct?

The first loan is temporary, correct. However, I would report the permanent phase as a purchase.

This sounds like 2 phase financing to me. The first phase would be exempt. However, I would call the permanent phase a "purchase". That's what they are doing now (purchasing the home) and you're not reporting it until a year from now when you do the second phase. We are told to report both of the following scenarios as "purchases". I don't think your scenario is any different.

A home purchase loan includes both a combined construction/ permanent loan or line of credit, and the separate permanent financing that replaces a construction-only loan or line of credit for the same borrower at a later time. [Commentary to §1003.2(j) #3]

Lender A originates a loan with a nine- month term to enable an investor to purchase a home, renovate it, and re-sell it before the term expires. …the loan is not designed to be replaced by permanent financing and therefore the temporary financing exclusion does not apply. Such a transaction is not temporary financing … merely because its term is short. [Commentary to §1003.3(c)(3) #1(v)]

I see Joker replied while I was preparing my response & that Joker agrees this is a purchase.

Thanks for the quick answers. Very much appreciated.

David and Joker, I don't know that I disagree with you, but I have gone around and around with this scenario in the past. I completely understand the camp that calls this scenario a purchase - the original purchase was never reported so reporting it once with the permanent loan makes since.

That said, I have seen where banks take the other camp and call this a refinance because it is not a new build. The idea is that the provision in the rules to report the permanent loan as a purchase relates to construction loans, which some have interpreted to be a new build and not a renovation of an existing dwelling:

"3. Construction and permanent financing. A home purchase loan includes both a combined construction/permanent loan or line of credit, and the separate permanent financing that replaces a construction-only loan or line of credit for the same borrower at a later time. "

In the past I saw where a bank started to call the permanent loans that replace temporary loans to improve/rennovate an existing dwelling a purchase. The biggest problem they ran into was they found it difficult to be consistent. Basically, a year later the "purchase" part got lost in the mix resulting in some permanent loans that replaced temporary loans to improve/rennovate a dwelling being called purchases and some being called refinancings. As a result, they found it was just easier to report all permanent loans (in the renovation scenario) as a refinancing.

I went through both the 2015 final rule and the 2017 final rule and the CFPB never did define a "construction" loan, meaning we don't really know if they intend for this to be a new build or a renovation of an existing dwelling. They also did not address this particular scenario, though they seemed to come close in the 2015 preambe, but didn't quite get there:

"Two commenters requested that the Bureau clarify whether a loan's purpose is “construction” or “home improvement” when improvements to an existing dwelling are so extensive that they fundamentally change the nature of the dwelling. The commenters suggested that, if a loan's purpose was “construction,” then the loan would be excluded from coverage, whereas if its purpose was “home improvement,” it would be included. Under the final rule, the temporary financing exclusion depends on whether the loan is or is not designed to be replaced by longer-term financing at a later time. Thus, for example, if a financial institution originates a short-term loan to a borrower to add a second floor to a dwelling or to complete extensive renovations, the loan is temporary financing if it is designed to be replaced by longer-term financing at a later time (e.g., financing completed through a separate closing that will pay off the short-term loan). If the loan is, for example, a traditional home-equity loan that is not designed to be replaced by longer-term financing, or if it is a construction-to-permanent loan that automatically will convert to permanent financing without a separate closing, then it is not temporary financing and is not excluded under § 1003.3(c)."

Thoughts?

I have gone both ways over the years. In an extreme effort to be consistent, anything we do where a customer comes in and requests to [I'm going to eliminate the 'improvement/construction' piece here to drive home a point] purchase and for whatever reason we initially set it up short term or temporary I will report:

Short term loan - Report purchase
Temporary loan - Report the permanent phase using an application date of the original request and report it as purchase.

Now granted, this scenario almost always includes an improvement element. But it's possible it would not...such as for some reason, a bridge-type loan may be the first financing.

I think this is key and appreciate the reply, Joker. For logistics sake, how do you ensure that all permanent loans are reported as a purchase rather than a refi (which is what it would look like if you didn't evaluate the temporary loan it was paying off?

Just curious as this can be problematic for some.

Training and scrub

I've gone round and round and round about this issue, and currently am still in the "const/perm is a purchase and everything else is a refi" camp. Why? Because the only time we pull an application forward into the second phase is a const/perm loan. Everything else gets a new application. Also, as Adam pointed out, knowing which applications for refis this would even apply to sometimes requires researching to see *if* there are any prior loans with us. And then there are the ones where we are taking out a different lender. How do we know whether or not their loan was temporary or what the purpose was? For that matter, flip it around and consider the loans in which we make the temp phase loan with the intention of another bank taking it out for the perm phase (especially if that other bank is going secondary market). How are they going to report their perm loan? Unless it's a new const/perm situation, they'll call it a refinance.

Now, could this be a problem in our procedures and require changing in light of the 2018 rules? Possibly. But I'm probably not going to do so until the CFPB comes out and says, "All two-phase financing looks to the original purpose of the temporary phase to determine how the permanent phase is reported." I do not see how their examples do that. Yet.

FWIW, I don't care about those [if they existed] that we take from another lender...I'd call that refi all day long.

and another FWIW, all of our Consumer Purchase/rehaps are two and three phase loans. So the original application stands for all. It seemed appropriate to handle the commercial deals the same way...again..consistency.

But, I can see an appropriate argument either way.

My main reason for doing it the way I do it is spirit and intent. The customer came in for X. We are making the go through Y and Z to get to X. I report X when the time comes.

We would be paying off the temporary loan when we do the permanent and would know the purpose of the temp loan. So 'purchase' would work for us.

I still have heartburn with this. If someone comes to us to do a purchase bridge or purchase/improve with plans to take out the perm loan through a secondary market lender, that other lender is going to run their loan as a refinance. Why, if we end up doing the perm phase instead, should that same perm loan revert to a purchase loan simply because we kept it?

I don't really understand the "spirit and intent" thing either.....as i don't think HMDA really cares whether a purchase or a refinance gets reported, so long as what gets reported is accurate. IMO, reporting a refinance is accurate, so that's all that matters.

If the FRB (now the CFPB) were so concerned that purchases or HI's wouldn't get reported, then they wouldn't make temporary loans exempt (cuz that's the easiest way to make sure that 'purchases' get reported as 'purchases' and 'home improvements' get reported as 'home improvements').

Borrower had a home loan with us that we reported as a purchase in 2017. Now he wants to do some renovations so we are refinancing that loan and adding $50k for 9 mos. At that time, the loan will be refinanced into a new permanent loan in 2020. Is our 2019 renovation loan exempt from HMDA reporting? I'm thinking so by following the construction loan logic but wanted to make sure i wasn't missing something.

Let me summarize to ensure I got this right:
You have an application for a home improvement loan that you're going to break into 2 phases. Phase 1 will be 9 months and phase 2 will replace Phase 1 into a permanent loan.

If so, I think you have a request for temporary and perm financing. I would not report the 9 month phase 1 (exempt as temporary financing). I would report the perm phase.

Your understanding of the loans is correct, David. Thank you for your input!