Received a question from commercial loan assistant - Booked business LOC for borrower who is a carpenter/contractor. Personal residence was used as collateral. The purpose of the LOC is for working capital and completion of spec home construction. I opined that this would not be HMDA reportable because spec home construction is intended to be for sale.

However, upon further discussion with the loan assistant her concern was that (in general and potentially) this type of working capital LOC could be used for various projects that would constitute home improvement, by nature of the borrower's business as a carpenter/contractor. We agreed that in this scenario the working line could also be used for a multitude of projects and/or other expenses that would be unrelated (office rent, insurance, salaries, etc.).

She asked if we could confirm that the nature of the borrower's work does not automatically make this HMDA reportable.

I have been unable to find anything that specifically addresses business LOCs to carpenters/contractors that are secured by a dwelling.

Can someone help point me in any kind of direction on this? I have talked myself into and out of whether or not the borrower's line of business should/would be a factor.

Thanks you!

Welcome to BOL.

Only the initial advance for an open-end LOC is subject to reporting. You have no control over how future advances are used and HMDA does not require you to monitor the open-end LOC for future use.

Thanks, Dan! :-)

I agree there is no requirement to monitor the future use, and am comfortable with the spec house scenario and providing guidance to support my conclusion, but the question posed to me is: Would "a" borrower's line of business (contractor/carpenter) be a factor in determining HMDA applicability?

Say a borrower is a carpenter securing a business LOC with his personal residence and he states the purpose is for working capital. His entire business is comprised of home renovation jobs. The carpenter is being paid by his customer to complete the work, but is technically using available proceeds to cause improvements to a dwelling. Would this make it HDMA reportable as home improvement?

The loan assistant is trying to conclude that in this case his line of business would automatically conclude that funds are used for home improvement and therefore is HMDA reportable.

This is where I am unable to find any guidance to support/deny that the line of business would automatically make this HMDA reportable.

Thank you!

Would "a" borrower's line of business (contractor/carpenter) be a factor in determining HMDA applicability?

No. If any of the initial advance is not intended for a home purchase, refinancing or home improvement it would not be reportable.

Review 1003.3(10) and its Official Interpretations for additional information for the business exemption.

Dan, I've been wondering about this in our own similar situation. Since they modified the Flow Chart for HMDA reporting just a couple of years ago..., lines of credit are no longer mentioned. Of course for small numbers of loans, HELOCs are still optional. For business loans like these (typically 12mo LOCs), the loan presentation says, "Purchase rentals, capital, Refi Rentals, Improve Rentals". So, to me that's reportable as a REFI (in our situation they are replacing another loan).

I'm confused by your statement Only the initial advance is reportable. Please define Initial Advance. I'm going round and round with loan officers about this. Second Q... What about a new LOC that's reportable? It's 12 months. Next year, new loan, same purpose.. Is that not also reportable - which is my example above? There's also the question about Temp Financing on these 12 month loans. Is this a can of worms or what!?

6. Covered loan amount—open-end line of credit. For an open-end line of credit, a financial institution reports the entire amount of credit available to the borrower under the terms of the open-end plan, including a purchased open-end line of credit and an assumption of an open-end line of credit, but not for a reverse mortgage open-end line of credit.

5. Action taken date—originations. For covered loan originations, including a preapproval request that leads to an origination by the financial institution, an institution generally reports the closing or account opening date.

Maybe "initial" is the wrong term to be using.

If I get a $50,000 RLOC to do HI then the FI would report $50,000 on their LAR as HI when I open the account, even if my first advance was only $10,000. However none of the subsequent advances are reportable regardless what I use the money for.

So using my "initial" terminology I would have to determine when I open the RLOC if the initial advance, when made, will be for a purchase, refinancing or HI. If I determine the initial advance will be used for one of those purposes then the account is a covered loan at account opening. However if I determine the initial advance will not be for a purchase, refinancing or HI then the RLOC is not a covered loan.

You have to make the determination based on each loan... you can't have a policy statement that says all RLOCs to a contractor/carpenter is a covered transaction.

As for the 12 month RLOCs you will have to make a determination by reviewing your legal obligation to see if they are short term financing or temporary financing.

Official Interpretation
Paragraph 3(c)(3)
1. Temporary financing. Section 1003.3(c)(3) provides that closed-end mortgage loans or open-end lines of credit obtained for temporary financing are excluded transactions. A loan or line of credit is considered temporary financing and excluded under § 1003.3(c)(3) if the loan or line of credit is designed to be replaced by separate permanent financing extended by any financial institution to the same borrower at a later time. For example:

"Purchase rentals, capital, Refi Rentals, Improve Rentals". So, to me that's reportable as a REFI (in our situation they are replacing another loan).

Purchase take precedence over refinancing.