I'm on the fence with this one and would appreciate some input.

I have a commercial customer who is refinancing 3 free and clear properties and the funds will be to reimburse himself for renovation costs and to acquire additional investment properties.

Should I just ignore the reimbursement part of the loan and focus on the funds to be used to purchase future investment properties?

Thanks.

The reimbursement part doesn't represent a HMDA reportable purpose, so yes, in that sense it can be ignored. You are looking at a HMDA reportable purchase, assuming the "future investment properties" means "dwellings". ETA: and assuming the "properties" you reference being secured by are dwellings as well.

Thanks. Yes, the future investment properties are dwellings and the properties being secured are dwellings as well. I appreciate you help.

You bet.

Is it safe to assume that there was not actually a dwelling secured debt to refi? When you say he wanted to refi to reimburse himself, it wasn't really a refi if all he was doing was pulling out equity based on his prior expenditures.

I don't like the word "refinancing" when talking about free and clear properties, but since the purchase aspect would trump everything else anyway, i didn't address the refinance possibility here.

I see quite a few transactions like this one: borrower pulls out equity from RE owned free-and-clear in part for future investments even though there's no dwelling picked out - yet. I know it's the intent that matters, but what seems to happen is double-reporting. You report the part that is intended to be used in the future to acquire dwellings (as a purchase). Then, when the borrower finds a dwelling to acquire - say, 6 or 9 months from now - that transaction more often than not is reported again as a purchase. You don't want to leave a loan unreported.

What do you mean by "that transaction more often than not is reported again as a purchase"? What transaction? You mean they didn't use the money from the first loan to purchase the dwelling?

Likely they used it for a down payment.

That sounds likely.....just don't see how that leads to "double reporting". If it takes 2 loans to purchase a property, naturally both loans are reportable, and reporting them as such isn't "double reporting".

Bringing this up again (sorry!). We are starting to have these situations come up more and wondering if anyone has procedures as whether to report as a "purchase" or not report at all.

My hang-up is addressed by "football" above...the customer says they are getting this loan to reimburse themselves when they paid cash for an investment property.
1. Do we need to ask the customer more details (i.e. "what do you plan to do with this cash?").
2. If so, and they say in general for "future investments" (meaning buying more dwelling investment properties) do we report these as "purchase"? Many times, this money is just held by the customer until the next time they find a property they want to buy (could be tomorrow, but could be next year).

Thanks for re-hashing this with me.

1. IMO, yes. I've never understood how "replenish checking account" in and of itself is a valid loan purpose. I think the bank should always inquire WHY the borrower feels the need to have that large chunk of cash in their account (because as you imply, it usually IS for some future endeavor).

2. If you inquire and find out indeed that they intend to purchase more 1-4's, then yes, you should code as a purchase.

Just want to add a point of clarity to 1.

If we take the RE out of the equation....if someone came into a bank and asked for a $50,000 loan and the bank asked the purpose and the answer was "i just like to have a lot of money in my checking account"....i don't think we would just stop there and say "well, that sounds valid". To me, that's always how i feel when i see a loan purpose stated as something like "replenish funds after real estate purchase".....replenish funds WHY? For WHAT?

Generally in these situations the borrower has taken the money out of their business operating fund and they are replenishing their working capital. And yes that capital may be used in the future to purchase additional dwellings but the immediate purpose is to replenish their operating funds.

In these situation we do not treat them as covered loans.

I believe the question must be asked. And yes of course, if they say "it's to replenish our working capital"...i wouldn't report that either.

We operate in a unique market here...a lot of our rent home buyers aren't LLC's....they're individuals. So i'm coming at it from that perspective......their account isn't a business account...it's just an account...an account that they conduct personal and business transactions from.

A lot of our customers are also individuals and that cash reserve is used to pay for expenses they may incur associated with the rentals. The cash reserves prevents them from having to get a loan each time a window needs replaced, an AC unit goes out, getting the rental ready for the next tenant, etc.

It is definitely your choice if you feel the need to get that detailed and report those loans but if I have a legitimate reason to exempt the loan I'm going to exempt it.

Well Dan.....i do think this is a nuanced area....but after reading your reply....i do see your point. It gets tricky sometimes here because at times, the applicant will simply volunteer that they want funds on hand to purchase new rentals as they become available...and it can also be tricky here because we have a lot of jack-of-all-trades types....that account here may exist for far more than rent home maintenance (personal transactions, other business transactions) But again.....after thinking about it some more....i see your point, moreso than i did before.

I do think the point remains though that the applicant's loan purpose must be asked....the bank can't assume it knows what the applicant wants the money for.

I'll end with this (quoting from Banker K's post:

"My hang-up is addressed by "football" above...the customer says they are getting this loan to reimburse themselves when they paid cash for an investment property." IMO, "reimburse themselves" in and of itself is not a valid loan purpose....so yes, i am of the opinion that you must ask at least one more question after the applicant tells you that they want a loan to "reimburse themselves" for a previous purchase.

Thanks everyone. "Typing out loud" here, but thinking something like this

1. The LO will ask the customer the purpose of the cash/loan proceeds (as they would any loan) since no refinancing will take place.

2.a. If the customer simply replies it's to reimburse themselves for the prior purchase of the home = don't report for HMDA (unless it's consumer purpose, then report "Other" for HMDA).
2.b. If the customer replies that the it's so they have cash on hand for future dwelling purchases = report for HMDA as a "purchase".

Again, i don't believe that "reimburse themselves for the prior purchase of the home" is a valid reason to get a loan....that equates to the "i like having large chunks of money in my checking account" answer i referenced above. I would simply ask "what do you intend to do with these loan proceeds?" If they answer "buy more rent homes (now or in the future)", i'd report as a purchase. If they reply "operating capital" or the like, i wouldn't. That's my opinion.

Thank you all!

Just a quick question - I think I saw something on this recently but can't seem to find it.

If the reason is to pay down debt and possibly downpayment on house, would you still call it purchase? I am thinking yes, even if they aren't sure what the excess funds (if any after paying down debt) would be used for. But I am thinking I saw something recently that argued the other way.

If any of the loan funds will go towards the purchase of a dwelling, and if not otherwise exempt, yes it's reportable as a purchase. The loan doesn't have to entirely cover the purchase price of a dwelling in order to be reportable.

Just to clarify...you say "possibly".......there needs to be more than "possibly" for my post above to be the case.

ETA: They don't know pretty darned close how much debt they are going to pay off? And they may or may not have enough left over to make a down payment on a house? That sounds like they wildly don't know much about their own personal finances to me.