We have an application from a builder for a refinance of a spec construction loan for 4 duplexes. The units are 80-90% complete and the borrower is requesting a small amount of additional funds to finish the units. The loan is a two year, interest only term. They loan will be paid off by the sale of the units.

I think this should be exempt from reporting, as a construction loan to a builder, assuming the four duplexes are not yet "dwellings" since they aren't finished. Otherwise, if we were refinancing a loan secured by 8 dwellings, and plan to be paid off by the sale, then this is more like a "flip" and would be reportable.

Am I thinking about this correctly?

I agree. These are loans to a builder. The construction is not complete, so I they are still constructing the dwellings. The Commentary to 1003.3(c)(3)#2 tells us not to report loans to builders. Additionally, a renewal of a construction loan is still excluded by the Commentary to 1003.3(c)(3)#1(iii).

Additional thoughts:
It's not that these aren't yet dwellings that gets them excluded from reporting. It's the fact that they are spec houses. HMDA excluded loans to builders "exclusively to construct a dwelling for sale."

If these were completed homes but hadn't sold, you still might be able to exclude them. As I mentioned in my previous post, renewals of construction loans are still excluded. [Commentary to 1003.3(c)(3)#1(iii)]

Flipping isn't excluded (as you said). But flipping is when someone purchases an existing home, fixes it up and sales it. [Commentary to 1003.3(c)(3)#1(v)]

Thanks so much David, appreciate the clarification!

David: I'm confused on construction loans being renewed/extended/termed out. In the CFPB FAQ from 8/28/19 it states 2 Q&A's that I'm confused on:

QUESTION 2: My financial institution originated a construction only loan to a builder exclusively to construct a dwelling for sale. My financial institution determined this loan was not HMDA reportable, as it was considered temporary financing under comment 3(c)(3)-2. After origination of the loan and construction of the house, the builder has not been able to find a buyer for the home, and would like to replace the first loan with a permanent loan and rent out the house. Is either the first or the second loan HMDA reportable?

ANSWER (UPDATED 11/14/2018): In regard to the first loan, the fact that the house was not sold after construction, and permanent financing was unexpectedly obtained, does not render the construction-only loan reportable. However, the financial institution must report the second loan as a home purchase loan because it is permanent financing that replaces a construction-only loan under comment 2(j)-3.

My question on this one is if the builder didn't sell it and wants to change the terms and we do a modification to the deed to extend the maturity date and a change-in-terms agreement to extend it for 20 years, is it then not reportable?


QUESTION 3:My financial institution originated a construction only loan to a consumer to construct a dwelling. My financial institution determined this loan was not HMDA reportable under 12 CFR § 1003.3(c)(3), because it was designed to be replaced by permanent financing. Later, the consumer unexpectedly decided to modify this loan into permanent financing, without any new funds provided and without the construction loan being satisfied and replaced by a new obligation. Should my financial institution report the modified loan?

ANSWER (UPDATED 11/14/2018): No. Because the original construction loan was later modified into permanent financing, without a new extension of credit occurring, the modification is not reportable, under comment 2(d)-2. Further, the original construction loan was designed to be replaced by separate permanent financing, and so it remains excluded from reporting under 12 CFR § 1003.3(c)(3).

I always thought these were reportable if it was termed out, but now they are saying they are not? Is this different from last year or the year before; or has it always been that way?

Not David, but here are my thoughts:


It would not be reportable because 1) the modification isn't reportable and 2) the original loan was designed to be replaced, rendering it temporary financing (at the time of origination).


It has always been that way. Some debated this, but I don't see this clarification as a change as that is how I have always done it as the language has always been "designed to be replaced", implying that it didn't necessarily have to end of the way it was intended.

Thank you.

One more question. What if a customer had a construction only loan secured by 1-4 family property and then we did a new loan for the permanent financing but did not do a new deed, but instead did a modification to the original deed to extend the maturity date? Would this be reportable? If it is reportable what is the loan purpose - Purchase or refinance?

Did you do a new note or modify the note. The security instrument is not the deciding factor.

We did a new note.

Then it is a purchase.

Yeah, the difference in these scenarios is whether a HMDA transaction takes place or not. "Modifications" and "Renewals" as those terms are often used, would generally not be a HMDA transaction.

@David - I agree with you regarding the scenario presented because the funds are still needed to complete the initial construction of the Spec homes and such transactions are not reportable. But, in the additional thoughts post, you said even if the homes were finished they may not be reportable. I would agree, and use your same evidence, or even just the general aspect of "renewals" not being a HMDA transaction. However, the initial poster described this transaction as a "refinance." If you had completed spec homes and a "refinance" was taking place with the payoff expected from sale of the spec homes, would you consider that reportable?

I have a question about "builders" and what is considered temp financing / perm financing, We made a loan to a builder, the terms are 12 months interest only, then 23 monthly interest plus principal, then balloon. The builder intends to keep the house for rental property. Is this a hmda reportable transaction since it is not perm financing? At the balloon pmt the builder will either 1. go back with us or 2. seek other financing depending on the rates.

then 23 monthly interest plus principal, then balloon

Sounds like short term permanent financing to me.

This string has a lot of different things going on, so let me step back and spell out some logic:

Spec houses are exempt.
If there's a modification into anything, it's not reported because modification aren't reported.
If a Spec house is refinanced into payments, it's reported as a purchase.
If you refinance a spec house and the payoff is expected from the sale of the home (like this last question is stating), I think it's not reported.

The FAQ's state:
QUESTION 2: My financial institution originated a construction only loan to a builder exclusively to construct a dwelling for sale. My financial institution determined this loan was not HMDA reportable, as it was considered temporary financing under comment 3(c)(3)-2. After origination of the loan and construction of the house, the builder has not been able to find a buyer for the home, and would like to replace the first loan with a permanent loan and rent out the house. Is either the first or the second loan HMDA reportable?

ANSWER (UPDATED 11/14/2018): In regard to the first loan, the fact that the house was not sold after construction, and permanent financing was unexpectedly obtained, does not render the construction-only loan reportable. However, the financial institution must report the second loan as a home purchase loan because it is permanent financing that replaces a construction-only loan under comment 2(j)-3.

The refinance of the Spec house is not being replaced with permanent financing. Therefore, it's still exempt. I'll hang on my hat on this:

A construction loan designed to be replaced by permanent financing …may be, renewed one or more times before the separate permanent financing is obtained. The initial construction loan, including any renewal thereof, is excluded as temporary financing… [Commentary to §1003.3(c)(3) #1(iii)]

Appreciate the response. Yeah, I just don't think that reference is intended for such a scenario. It's not really a "renewal" of the construction loan in the situation I discussed. Maybe they do even set it up on (reduced) payments, maybe they do a one-year bullet. The thing is at that point, with regards to the reference, there is not necessarily going to be separate perm financing. They just want to sell the home, not make ongoing payments on it. So, again, you are providing financing on a completed home with the expectation of getting paid off from a sale. It's not an in-construction spec home at that point, nor is it intended to be taken out by perm financing.