We made a $2.2MM "3+2 bridge to term" loan to renovate a 6-unit apartment building. The borrower purchased the property outright for $3.2MM.

1. The write-up indicates that the loan proceeds will be used for renovations to the apartments and to reimburse the borrower for cash purchase.

2. The write-up also indicates that certain criteria must be met for the Bank to transition the loan to a mini-perm loan. The DSCR must be 1.25x.

I've never seen a loan with the criteria in #2.

Is this loan reportable? Is yes, how do we report it?

Bumping this. So I've learned a little more. We make these 2+3 or 3+2 bridge to term loans to allow for the property to be stabilized. If we commit to the mini-perm loan after the bridge term, the loan is reportable, right?

I was getting hung up on the borrower having to meet the DSCR.

I have no idea what a 2+3 or 3+2 loan is but from your description these loans appear to be designed to be replaced by longer term financing (either through your FI or another FI). That would make these loans temporary financing and not reportable.

One would think that for sure. I spoke to the CO that handled our reporting in the past. (he is no longer with our bank). I learned that he reported these as the "+2 or +3" was a mini-perm and it was committed to when the loan was approved. I then checked our previous year submissions and I do see that what he said is true.

It has been my understanding that if we commit to permanent financing the loan is reportable. In these cases the permanent financing is very short term. I agree that these are unusual loans.

What do you mean by "commit to permanent financing?" Is there a legal obligation signed at the initial closing for permanent financing, or is it just if they qualify at the end of the temp financing, you'll lend. I don't know how you would report these unless you have a note laying out the terms of the permanent financing.

Well base on what you are saying I can't agree with the previous CO.

There is no such thing as a "mini-perm". You either have a construction-permanent loan or you don't. As Inherent_Risk states if there is no legal obligation for the permanent phase of the loan signed at inception then it is not a construction-permanent loan.

Absent more detailed information I will have stay with my original opinion that these are temporary loans and are not subject to reporting.

These are not construction loans. They are to purchase the property. During the bridge period the property is being stabilized and there may be some renovations. Then they convert to a short term loan.

I would love to call them all temporary financing. But I am concerned as we have been reporting them. We expect to be examined in 2Q2022. And they will be looking at three years of data. I don't want a bunch of questions about why we reported them for two of the three years and not the third.

They are to purchase the property. During the bridge period the property is being stabilized and there may be some renovations. Then they convert to a short term loan.

I'm not sure how you would classify these other than temporary financing unless the conversion to permanent financing is built into the original legal obligation.

But I am concerned as we have been reporting them. We expect to be examined in 2Q2022. And they will be looking at three years of data. I don't want a bunch of questions about why we reported them for two of the three years and not the third.

Continuing to report these loans incorrectly will do more harm than good in the long run.

So, I have a conversation with our loan services department to understand how this works. I was told that the note for a 2+3 loan is for two years. Prior to the maturity, the RM must demonstrate that the borrower met the conditions for the conversion to the 3 year term loan. If the terms are met, a Change in Terms Agreement is used to change the rate, term etc. in accordance with the approved credit memorandum.

So, are you saying that because the original note does not include the terms for the permanent loan that I can consider these temp financing?

I agree with your last statement and that is why I am researching this. I don't want to keep doing it wrong just because we did it that way in the past. If it turns out that we made a mistake by reporting them then I will deal with that.

I consulted with the law firm we use for compliance issues:

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. (Emphasis added.)

We are modifying the existing loan using a Change in Terms Agreement, so the loans are not reportable.

That would mean that your original loan is not going to be replaced by separate permanent financing (a new note) and so does not qualify as temporary. From the definition of temporary financing under HMDA's exclusions:

"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."

The only other exclusion in this category are builder construction loans of dwellings for sale, with repayment from sale of the dwellings.

The later modification is not of course reportable.

I also wanted to add that, regarding mini-perms, a common term used in business purpose/commercial lending, if there will never be a longer term note, then the "mini-perm" (done for interest rate risk management purposes) is as permanent as it is going to get. Either the mini-perm is the reportable loan or the original loan must be reported. The entire series of notes cannot be made non-reportable. the length of the mini-perm varies on perceived risk.

I was told that the note for a 2+3 loan is for two years. Prior to the maturity, the RM must demonstrate that the borrower met the conditions for the conversion to the 3 year term loan. If the terms are met, a Change in Terms Agreement is used to change the rate, term etc. in accordance with the approved credit memorandum.

So, are you saying that because the original note does not include the terms for the permanent loan that I can consider these temp financing?[/i]

In the beginning I referenced I had no idea what a 2+3 or 3+2 loan was. This new piece of information totally changes the terms and intended repayment source of the loan. In this case follow Kathleen's above guidance.

I don't know how you would report these unless you have a note laying out the terms of the permanent financing.

Appreciate the responses, I am hung up on this. We use a Change in Terms at the and of the bridge period to convert to the mini-perm.

I looked at the note for one of these loans and it is only for the bridge term. It indicates the principal is due in 2 years or 3 years. It does not include a provision to convert to permanent financing.

The credit memorandum states at the end of the 2 (or 3) year period if P&I DSCR is below 1.25x (testing based on rent roll and leases in place, trailing 6 months operating expenses, and P&I based on 30-year amortization), principal paydown to support P&I DSCR 1.25x is required or the loan is to be paid off.

So, to be clear, if the note only covers the bridge portion of the loan, then we should not report these loans and the commitment to covert to a mini-perm does not matter?

I am not really going to offer much but the two things that I know and I will leave the rest to the HMDA experts.

A change of terms or modification is no longer reportable under HMDA.

Some comment on an internal credit memorandum is not a commitment to anything at the maturity of the original loan.

Right. I'm thinking the commitment in the credit memorandum may not be important.

The attorney I spoke to emphasized the "separate permanent financing" in 1003.3(c)(3). Seems that because these loans are originally booked as a bridge loan (temporary financing) and there is no separate permanent financing arranged for (we use a CIT to convert the bridge loan to the mini-perm) that is why he does not believe they are reportable.

So, I have a conversation with our loan services department to understand how this works. I was told that the note for a 2+3 loan is for two years. Prior to the maturity, the RM must demonstrate that the borrower met the conditions for the conversion to the 3 year term loan. If the terms are met, a Change in Terms Agreement is used to change the rate, term etc. in accordance with the approved credit memorandum.

So, are you or are you not legally obligated to convert the loan if the borrower meets the conversion conditions?

Correct. The borrower has to meet the DSCR. If they don't, then they are required to pay off the loan or pay down the principal enough to meet the DSCR.

Also, Kathleen mentioned in one of her responses that there is a series of notes. There is not. There is one note that may be modified using a Change in Terms IF the borrower meets the conditions.

I think Dan's question was one of a "yes we are" or "no we are not" answer rather than "correct", since he was asking about your "legal obligation"..

My error. There is nothing in the note to indicate this. Might this be in the Business Loan Agreement? I guess I should get all of the documents related to the loan and take a look at them.

What I am trying to determine is does the bank have a legal obligation to convert the loan to the permanent stage if the loan covenants are met. If they do then I go along with what Kathleen said. If they do not then the loan is basically designed to be repaid by longer term separate financing. In that case I will revert back to my original answer that the loans are temporary and not reportable.

Thanks for clarifying Dan.

All of the requirements for conversion to the permanent stage are included in the Business Loan Agreement.

We will be reporting the loans. I appreciate everyone's feedback on this issue!!

I am very late on this, but a "conversion" via change in terms is NOT separate permanent financing. It does not matter that it is laid out in an agreement.

If the intent is NOT to have a separate longer term loan (a separate note) replacing your original loan, that initial loan is not temporary for HMDA. The change in terms is a modification and not reported for HMDA even if it is a mod to a 20 year term.

For that initial loan to be temporary, you need note 1 and note 2 replacing note 1, not a document that amends terms of note 1 to provide for long term repayment. Change in terms is a fancy name for a modification.