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#2266087 - 02/09/22 07:03 PM Commercial property convert to comm'l/residential
Melissa S Offline
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Melissa S
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Maine
Hi all.

I have a loan that was closed where the collateral property currently contains a restaurant utilizing the 1st floor and basement space, the second floor is a banquet facility and the third floor is unfinished and not used.

The stated INTENT of the borrower is to retain the 1st floor and basement for the same purpose, but renovate the 2nd and third floors into 5 residential apartments.

I know we can rely on the statement of the borrower, but does the fact that the property as purchased has no residential units in it come into play?

To go along with this, a second loan was granted against other residential collateral to provide funds to the borrower to use in making the renovations.
Last edited by Melissa S; 02/09/22 07:08 PM.
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#2266161 - 02/10/22 08:26 PM Re: Commercial property convert to comm'l/residential Melissa S
CloudShape Offline
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There have been a few discussions in the threads about how the CFPB now seems to look at the property now, as opposed to what it will be after the loan funds are applied.

Based on that, I would say not HMDA - a commercial property is being purchased and used as collateral, not a residential property.

Anyone else care to chime in?
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#2266170 - 02/10/22 10:01 PM Re: Commercial property convert to comm'l/residential Melissa S
Adam Witmer Online
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I agree with Cloudshape. The CFPB has seemed to move to a hard, "bright line" test for determining whether or not you have a dwelling. In other words, we need to be looking at what the structure is at the time of closing the loan and determine if it is currently a dwelling or not?. In your case, you don't currently have a dwelling, so this is not going to be a HMDA loan.

As far as citations, they aren't quite as clear as any of us would like, but some of us (including me) have gotten responses from the CFPB explaining this. Also, we can look at CFPB HMDA FAQ 1 in the "Construction and Construction/Permanent Transactions" section, which talks about reporting a structure based on what it is at the time of closing:

"1. My financial institution originated a loan to a builder to construct a dwelling for sale. The proceeds of the loan will be used to buy a house, demolish it, and rebuild a house for sale immediately after closing. Is this transaction excluded from HMDA reporting?

No. In the scenario described, part of the loan will be used for purchasing a dwelling in addition to constructing a dwelling for sale. Therefore, the transaction described above is not excluded from HMDA and should be reported as a home purchase loan. A construction-only loan or line of credit is considered temporary financing and excluded from collection and reporting requirements under comment 3(c)(3)-2 if the loan or line of credit is extended to a person exclusively to construct a dwelling for sale. Comment 3(c)(3)-2 to Regulation C, 12 CFR ยง 1003.3(c)(3). Updated Nov. 14, 2018


Furthermore, Footnote 82 in the 2017 HMDA Final Rule also supports the "bright line" test:

"Examples of commercial-purpose loans that currently are reported are: (1) A loan to an entity to purchase or improve an apartment building (or to refinance a loan secured thereby); and (2) a loan to an individual to purchase or improve a single-family home to be used either as a professional office or as a rental property (or to refinance a loan secured thereby)."
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#2266172 - 02/10/22 10:08 PM Re: Commercial property convert to comm'l/residential Melissa S
Melissa S Offline
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thank you!

That takes care of the initial loan to purchase the building with no current residences as NOT HMDA.


However, the second loan is collateralized by residential real estate and the proceeds were/are to be used to perform the updates to the non-residential property to add the residential apartments.

In this instance, is the second loan reportable? They aren't improving as dwelling, as no dwelling exists yet.
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#2266175 - 02/11/22 02:15 AM Re: Commercial property convert to comm'l/residential Melissa S
Inherent_Risk Offline
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Any chance it is designed to be replaced by permanent financing after the renovations are complete, so you can avoid trying to determining if a loan to turn a commercial building into a residential one is a construction loan (purchase), home improvement loan, or neither and not reportable. I could argue all of them without the "dwelling secured" piece to worry about.

Going back to the implications of the first question though. It's blowing my mind a little that (assuming the property discussed is the collateral and proceeds are used for the conversion) a loan to turn a non-dwelling building into a dwelling is not reportable when turning unimproved land into a dwelling is, and turning a dwelling into a non-dwelling building is reportable. Do I have that right?

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#2266181 - 02/11/22 02:19 PM Re: Commercial property convert to comm'l/residential Inherent_Risk
Melissa S Offline
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Hi Inherent. No, I just verified and the second loan was strictly a cash out loan against residential properties (junior position) to provide funds to convert the current commercial purpose building from one restaurant space to two, and from unused space to residential rentals.
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#2266183 - 02/11/22 02:39 PM Re: Commercial property convert to comm'l/residential Inherent_Risk
raitchjay Offline
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Originally Posted by Inherent_Risk
Any chance it is designed to be replaced by permanent financing after the renovations are complete, so you can avoid trying to determining if a loan to turn a commercial building into a residential one is a construction loan (purchase), home improvement loan, or neither and not reportable. I could argue all of them without the "dwelling secured" piece to worry about.

Going back to the implications of the first question though. It's blowing my mind a little that (assuming the property discussed is the collateral and proceeds are used for the conversion) a loan to turn a non-dwelling building into a dwelling is not reportable when turning unimproved land into a dwelling is, and turning a dwelling into a non-dwelling building is reportable. Do I have that right?

My mind is blown by this whole concept too.
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#2266237 - 02/11/22 08:13 PM Re: Commercial property convert to comm'l/residential Melissa S
CloudShape Offline
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You say it is secured by residential property (dwellings), which would seem to fall under HMDA, but then I think you need to look at if it is a commercial loan or a retail loan. All dwelling secured retail loans are HMDA because they added that 'other' category, but for commercial loans, the purpose still has to be purchase, refinance, or home improvement. Not a purchase and probably not a refinance if you are doing junior liens, but that is something you would have to determine. And not HI because you are not improving a dwelling. So for a commercial loan, it sounds like the second one might not be HMDA reportable either.

Again, I would ask any others to chime in with their thoughts.
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