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#2238319 - 06/18/20 07:00 PM Investment Prop on Sec. Market
TMatt87 Offline
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TMatt87
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Investment properties financed on the secondary market are treated exactly as consumer loans. All the TRID and other disclosures are given, timing requirements, including rescission apply, etc. For HMDA reporting, do you code these as consumer or business?

You have a TRID closing disclosure, so you have the origination costs, discount points, total loan costs, and lender credits like a consumer loan. You also run the loan through Fannie/Freddie AUS systems. It would be odd to have a business purpose loan with a DU Approve/Accept AUS code.

I'm leaning towards reporting as consumer because its being treated as a consumer loan, but want some input.
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#2238323 - 06/18/20 07:28 PM Re: Investment Prop on Sec. Market TMatt87
Dan Persfull Offline
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Business purpose loans are exempt from Reg. Z under 1026.3 therefore they are exempt from all of Reg. Z, other than some credit card provisions.

Before we became partially exempt we reported these as business purpose loans.
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#2238329 - 06/18/20 08:04 PM Re: Investment Prop on Sec. Market TMatt87
David Dickinson Offline
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I agree with Dan. Let me explain why:

Just because your secondary market investor wants you to provide consumer disclosures does not mean the loan is a consumer purpose. I frequently see 2nd market require lenders to provide a RofR on a construction to permanent loan, although this is clearly a RMT and exempt from RofR. They can overkill all they want, but that doesn't make it a requirement.

So, you have an investment property loan. That's a non-consumer purpose. Providing consumer disclosure doesn't make it a consumer purpose for HMDA. If you code it that way, I believe you have a violation of Reg C. Treat it as a consumer loan for your secondary market requirements (disclosures) but don't make it turn into a violation.
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#2238336 - 06/18/20 08:31 PM Re: Investment Prop on Sec. Market TMatt87
Inherent_Risk Offline
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Quote
So, you have an investment property loan. That's a non-consumer purpose.

That's not always true, is it? We have a decent amount of these, and some are almost certainly consumer purpose under Reg Z. Figuring out whether Reg Z technically applies is headache. I'd love to just call these all business purpose if that's allowable.

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#2238337 - 06/18/20 08:34 PM Re: Investment Prop on Sec. Market TMatt87
David Dickinson Offline
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I should have been more clear. We seem to debate this from time to time. I think of an "investment property" as a rental house or apartment building. I believe those are non-consumer purpose 100% of the time. Can you give me an example of when you think an investment property is a consumer purpose?
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#2238338 - 06/18/20 08:41 PM Re: Investment Prop on Sec. Market TMatt87
raitchjay Offline
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A loan secured by a non-owner occupied rent home (or flip home, or apartment building) for the purpose of taking a vacation to Hawaii.

Or, someone buying a home to let a relative live in it rent-free.
Last edited by raitchjay; 06/18/20 08:46 PM.
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#2238340 - 06/18/20 08:48 PM Re: Investment Prop on Sec. Market TMatt87
Dan Persfull Offline
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That would be a consumer purpose loan subject to TRID disclosures and reporting the HMDA data points, unless you are a partially exempt filer.
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#2238341 - 06/18/20 08:48 PM Re: Investment Prop on Sec. Market TMatt87
raitchjay Offline
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Agreed.
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#2238343 - 06/18/20 08:53 PM Re: Investment Prop on Sec. Market TMatt87
Inherent_Risk Offline
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A lot of folks pull equity out of their rental properties to take care of personal things. Refinances are always tricky.

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#2238344 - 06/18/20 08:55 PM Re: Investment Prop on Sec. Market TMatt87
raitchjay Offline
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Yeah, i was responding to David's post above mine, in case it wasn't clear.
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#2238345 - 06/18/20 09:10 PM Re: Investment Prop on Sec. Market TMatt87
David Dickinson Offline
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Of course, if the purpose is personal, it doesn't matter that the collateral is a rental. I was referring to the purchase, refinance or improvement of a rental.
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#2238346 - 06/18/20 10:25 PM Re: Investment Prop on Sec. Market TMatt87
TMatt87 Offline
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My qualm about it is that we have the information to report the pricing (origination fees, discount, credits, total costs) that come from the closing disclosure. Business loans are exempt from these fields because the information isn't readily available. It seems against the spirit of the law to not report this information if we have it available.

I generally don't ask for more work or more chances to get something wrong, but it just seems that this is a situation not considered by the regulation.
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#2238347 - 06/19/20 11:14 AM Re: Investment Prop on Sec. Market TMatt87
rlcarey Offline
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You guys are much better than I am at HMDA, but for all the data points that would be missing on a transaction that is exempt from Regulation Z, the regulation reads as follows (for example):

1. Origination charges—scope of requirement. Section 1003.4(a)(18) does not require financial institutions to report the total borrower-paid origination charges for applications, or for transactions not subject to Regulation Z, 12 CFR 1026.19(f), such as open-end lines of credit, reverse mortgages, or loans or lines of credit made primarily for business or commercial purposes.

So my question is, is there any additional guidance that suggests that the words "does not require financial institutions to report" really instructs financial institutions that "you are not allowed to report"?
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#2238352 - 06/19/20 02:10 PM Re: Investment Prop on Sec. Market TMatt87
Dan Persfull Offline
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Randy, I'm not sure why a FI would want to report this data when not required and increase their risk for reporting errors but as far as I know they can voluntarily report the information as long as is it accurate, they report all data points and they don't pick and choose which accounts to report. In other words all loans that fall into that category must be reported with all data points even if the regulation exempts those data points.

I would have to opine though they could not use code 2 under the Business or Commercial Purpose category and they could not code the HOEPA status as a code 1 or 2. It would have to be coded a code 3.

I haven't checked, I'll leave that up to those that want to report, but the loan is not consumer purpose so they have to use code 1 and the loan is not subject to HOEPA so they have to report code 3. Reporting these codes while reporting the other data points could possibly cause validity errors.
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#2238353 - 06/19/20 02:24 PM Re: Investment Prop on Sec. Market TMatt87
Dan Persfull Offline
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Bloomington, IN
Examples from the FIG (2018 ver). Based on this I think I will have to reverse my opinion on voluntarily reporting the information.

(2-60) Paragraph 4(a)(13)—HOEPA Status.
Indicate whether the covered loan is a high-cost mortgage under Regulation Z, 12 CFR 1026.32(a) by entering the applicable Code from the following:
Code 1—High-cost mortgage
Code 2—Not a high-cost mortgage
Code 3—Not applicable
a. Use Code 3 if the requirement to report HOEPA status does not apply to the covered loan that your institution is reporting.

(2-110) Paragraph 4(a)(38)— Business or Commercial Purpose.
Indicate whether the covered loan is, or the application is for a covered loan that will be made, primarily for a business or commercial purpose by entering the applicable Code from the following:
Code 1—Primarily for a business or commercial purpose
Code 2—Not primarily for a business or commercial purpose

(2-75) Paragraph 4(a)(18)—Origination Charges.
Enter, in dollars, the total of all itemized amounts that are designated borrower-paid at or before closing. If the total is zero, enter 0.
Example: If the origination charges are $2,399.04, enter 2399.04.
a. Enter “NA” if the requirement to report origination charges does not apply to the covered loan or application that your institution is reporting.

(2-80) Paragraph 4(a)(23)—Debt-to-Income Ratio.
Enter, as a percentage, the ratio of the applicant’s or borrower’s total monthly debt to the total monthly income relied on in making the credit decision. Use decimal places only if the ratio relied upon uses decimal places.
Example: If the relied upon debt-to-income ratio is 42.95, enter 42.95, and not 43.
If, however, your institution rounded the ratio up to 43% and relied on the rounded-up number, enter 43.
a. Enter “NA” if the requirement to report debt-to-income ratio does not apply to the covered loan or application that your institution is reporting.
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#2238355 - 06/19/20 02:37 PM Re: Investment Prop on Sec. Market TMatt87
rlcarey Offline
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Galveston, TX
Yeah - after reading the preamble to the final rule - I am reaching the same conclusion. You have to make the call as to whether the loan is actually subject to Regulation Z .19(f) and not whether or not you know that it is not subject to .19(f) but still choose to disclose using a Closing Disclosure for secondary market purposes.
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#2238357 - 06/19/20 03:07 PM Re: Investment Prop on Sec. Market TMatt87
Truffle Royale Offline

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Haven't the time to search for it but didn't you guys toss around the notion that simply because a property is an investment doesn't necessarily mean it's a business purpose loan? I thought it was something about the rent payment equaling a significant portion of the borrower's income.

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#2238359 - 06/19/20 03:10 PM Re: Investment Prop on Sec. Market TMatt87
raitchjay Offline
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OK
Loans to acquire, improve, or maintain non-owner occupied rent homes are automatically exempt. Otherwise, the business purpose test of 1026.3 must be employed. I think part of the confusion lies with the term "investment", which we all use to some degree and evidently, the secondary market uses to a large degree. It has no real regulatory meaning and means different things to different people, and definitely means different things in regards to consumer investment versus business investment.
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#2238382 - 06/19/20 06:12 PM Re: Investment Prop on Sec. Market TMatt87
Inherent_Risk Offline
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Investment is not defined (or relevant) in Reg Z, but it is defined in Reg C.

Quote
Of course, if the purpose is personal, it doesn't matter that the collateral is a rental. I was referring to the purchase, refinance or improvement of a rental.


I've always struggled with this. If you have a refi on a rental, can you assume business purpose. I don't feel like a refi is really going to purchase/maintain/improve even if the initial funds were (and you rarely know what the debt being paid off was for), so I've always fallen back on the regular clear as mud Reg Z rules. Is there any guidance on refinances and business purpose?

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