What is the reportable purpose for a construction loan on an already-owned dwelling for the purpose of "rehabbing" it? Assume it is not temporary.

The way those words are typically used, home improvement would be the HMDA purpose...but since it falls last (well...last for business purpose; next to last for consumer purpose) in the hierarchy, without knowing all the facts about any competing purposes, we really can't say. So long as none of the funds are also for the purchase or refinance of a dwelling, then home improvement.

Answer could also vary depending on whether "rehabbing" means repairing, remodeling etc. or if it means a total raze and rebuild.

Thank you for your responses. We had a consulting firm say it should be reported as a Purchase because the owners are purchasing materials for the rehab. I don't know if their advice was only for repairs and remodeling or if they also meant it for a total raze and rebuild. Sounded like it was an across-the-board statement. I'll be looking into it further.

Any home improvement project typically buys material--that doesn't make them purchases for HMDA.

I agree with you. I hope to get clarification from the consulting firm on this.

I don't believe they define construction anywhere, so report back with what they have for you. I think you can make an argument that if you have a construction loan product, then you can report it as a purchase regardless of rehab, new build, or raze and replace. Not a great argument, but certainly an argument when terms aren't defined.

Commentary says "Construction and permanent financing. A home purchase loan includes both a combined construction/permanent loan or line of credit, and the separate permanent financing that replaces a construction-only loan or line of credit for the same borrower at a later time."

I think you can make an argument that if you have a construction loan product,


A loan classified as a construction loan product does not make the loan a construction loan.

I'm not sure how you can support a loan for the rehabilitation of an existing dwelling is a loan to construct that dwelling.

We had a consulting firm say it should be reported as a Purchase because the owners are purchasing materials for the rehab.

Get a new consulting firm.

Why not? If your Bank has a separate product for cash-out refis it gets its own code. Under the old HMDA rules, a Bank's classification of a loan as home improvement made it reportable. I'm not saying it's the only way to interpret this, but if your bank classifies a mortgage as a construction/permanent loan, and the guidance says a construction/permanent loan is a purchase without otherwise defining the term, then I think it's reasonable to code them as such unless there is some guidance out there saying otherwise.

It also doesn't say "loan to construct a dwelling," which it does use elsewhere. It just says "A home purchase loan includes both a combined construction/permanent loan or line of credit, and the separate permanent financing that replaces a construction-only loan or line of credit for the same borrower at a later time."

So, you are saying that if I call a loan a construction loan to add on another bedroom to my house, it is a purchase? I am really not sure where you are going with this line of thinking.

If you are making a loan to rehab a dwelling that is already owned, it is not a purchase loan.

I'm saying if you have a construction/perm product, then there is support to consistently call them purchases for HMDA for ease of scrubbing and consistency, even if it is not the initial construction of the dwelling. The terms of these loans would be the same as a "purchase" product. I think if a bank is doing that, then an examiner is going to be hard pressed to find support for saying they're wrong.

I don't think I'm grasping at straws here either. The reg says "initial construction" and "to construct a dwelling" in several places and this isn't one of them. Commenters asked them to clarify (albeit in a different section), but they did not, and they used the same language in the purchase commentary (construction-permanent), when describing these rehab situations.

From the 2015 Final Rule: Two commenters requested that the Bureau clarify whether a loan’s purpose is “construction” or “home improvement” when improvements to an existing dwelling are so extensive that they fundamentally change the nature of the dwelling. The commenters suggested that, if a loan’s purpose was “construction,” then the loan would be excluded from coverage, whereas if its purpose was “home improvement,” it would be included. Under the final rule, the temporary financing exclusion depends on whether the loan is or is not designed to be replaced by longer-term financing at a later time. Thus, for example, if a financial institution originates a short-term loan to a borrower to add a second floor to a dwelling or to complete extensive renovations, the loan is temporary financing if it is designed to be replaced by longer-term financing at a later time (e.g., financing completed through a separate closing that will pay off the short-term loan). If the loan is, for example, a traditional home-equity loan that is not designed to be replaced by longer-term financing, or if it is a construction-to-permanent loan that automatically will convert to permanent financing without a separate closing, then it is not temporary financing and is not excluded under § 1003.3(c).

From what I can see, the only places where "construction-permanent" are used in the final rule, including the commentary, are the above, to define purchase, and to note what action taken date should be used (which I think we'd agree would be relevant to rehab or initial constructions).

"For a construction/permanent covered loan, the institution reports either the closing or account opening date, or the date the covered loan converts to the permanent financing."

Construction/perm = purchase predates the recent rule makings where they explain things, so I'm not honestly sure what they were going for when they wrote the rule, but I believe it's from the same rule as home improvement = classification as home improvement. If there is some earlier guidance out there from the previous rule that would clarify, I'd love to see it, but I haven't found anything.

You are using a discussion regarding what constitutes a temporary loan and trying to jam that into what the purpose of the loan might be. The determination of whether or not a loan is a temporary loan and would be excluded from reporting is a totally separate issue than determining the loan purpose.

These are the only other places I can find anything addressing construction to perm loan programs. I don't think they are a totally separate issue, as the previous temp construction exemption and the construction-perm is purchase sections used to go hand in hand. I believe they were written together. Also found this:

2000 CRA/HMDA Reporter (https://www.ffiec.gov/hmda/pdf/00news.pdf)

Q. Are construction-to-permanent loans reportable under HMDA?
A. Yes, a combined construction/permanent loan and the permanent financing that replaces a construction-only loan are HMDA-reportable. When reporting these types of loans, [the purpose should be for home purchase of a one-to four-family dwelling or of a multifamily dwelling. Construction-only loans, which are considered “temporary financing” under Regulation C, are not HMDA-reportable.

I happen to agree that "construction" isn't very well defined in the regulation...but i don't see a convincing argument to classify HI/rehab loans as purchases because the bank happens to call a product "construction-permanent". But i'm a big believer that we all have to make the best choices for our own shops.

I appreciate that, and I would not say someone calling construction-perm rehabs HI loans is necessarily wrong. I will note that "happens to call" is a little different than having an actual construction-perm program. The structure of these loans is SIGNIFICANTLY different than other products. Terms are over 30 years, interest-only payments, draws on a closed end product. There is good reason regulators might want to differentiate these from a home equity loan that happens to be for home improvement.

(j) Home purchase loan means a closed-end mortgage loan or an open-end line of credit that is for the purpose, in whole or in part, of purchasing a dwelling.

Personally, i wouldn't want to argue that a $20,000 HI loan done as 2-phase temp-perm loan on a home worth $800,000 was "purchasing" the home, since it was buying $20,000 worth of materials and labor, when it's pretty universally accepted across the industry that these are HI loans. And i don't mean that to sound short...i just mean that i think we would all agree that the industry has and does seem to agree that these are and should be classified as HI.

ETA: If not, the HI designation might as well dry up and blow away right? Temporary HI loans aren't reported. Perm outs are reported as refinancings.

Well, somehow i managed to delete my other post and didn't mean to...oh well.

Just to throw another possibility out there, many of our rehab loans are reported as cash out refinances instead of home improvement because there is an existing mortgage to be paid off.

I think most c/p rehab loans would be refis if they're not purchases. Nobody is going to be taking on the risk of a C/P loan in 2nd position. I also don't know of any C/P loans that are $20K or close to that. There's generally at least a 6 month draw period, which would be pointless for a small HI project. Adding (or purchasing ;)) a room as in randy's example or full renovations is more in line with what actually happens.

What about if you are stripping to the bones and rebuilding, building an accessory unit, building a house on land that was already owned, raising an existing structure and rebuilding, turning a non-dwelling into a dwelling. Some of these I think everyone would agree on, but I think relying on product makes as much sense, and has as much backing from existing guidance, as deciding it on a case by case basis.

but I think relying on product makes as much sense

So if I book your home purchase loan under my car loan product, I can call it a car loan?

That is basically what you are saying. The bank's loan product dictates the type of loan.

I'll go where the others haven't, namely I would not want to argue your product = loan type for HMDA with an examiner. I don't think you've a gnat's chance of winning that one.

It has long been stated and supported in exams that you can only build a home once therefore the construction = purchase only applies that first time. After that, you're looking at home improvement or cash out refi.

If the commentary said "car loans" are purchases, didn't define "car loan," and we had a product that was standard for what people would call "car loans," then I would classify it as a purchase, even if it was also a refi and/or HI loan.

Bank product DOES dictate purpose for cash-out refi v. refi, and bank classification used to control reportability for non-dwelling secured HI loans, which I believe was part of the same rulemaking as C/P is a purchase.

2(g) Home improvement loan.
1. Classification requirement for loans not secured by a lien on a dwelling. An institution has “classified” a loan that is not secured by a lien on a dwelling as a home improvement loan if it has entered the loan on its books as a home improvement loan, or has otherwise coded or identified the loan as a home improvement loan.

2. Purpose - refinancing and cash-out refinancing. Section 1003.4(a)(3) requires a financial institution to report whether a covered loan is, or an application is for, a refinancing or a cash-out refinancing. A financial institution reports a covered loan or an application as a cash-out refinancing if it is a refinancing as defined by § 1003.2(p) and the institution considered it to be a cash-out refinancing in processing the application or setting the terms (such as the interest rate or origination charges) under its guidelines or an investor's guidelines.

1) I obviously think I do, and it's nicer having the argument here than with an examiner .
2) I am NOT saying that loan product drives loan purpose as a general matter. A "refi" product that doesn't pay off an existing mortgage isn't a refi, a "home improvement" product that does isn't an HI loan. However, refi and home improvement are clearly defined.
3) I also don't want to argue with management that a line of business has to change processes that have been in place for decades through several exams with no comment if I can't find something concrete to point to why they should. It was determined that nothing in the rules changed in 2015 that would affect this, and so we've continued to do it. If someone can point me something concrete on this, then I'd be pretty happy to argue the other side of this.
4) I believe (but can't really pin down) "you can only build a home once" is based on Reg Z. As I've said before, the regs say initial construction and similar things in other places, but do not here. Notably, in Reg Z it is for an exemption when it talks about initial construction, so it is likely purposefully limiting. Elsewhere in Reg Z it also says this "2. Construction loans. Section 1026.17(c)(6)(ii) provides a flexible rule for disclosure of construction loans that may be permanently financed. These transactions have 2 distinct phases, similar to 2 separate transactions. The construction loan may be for initial construction or subsequent construction, such as rehabilitation or remodeling."

2(g) Home improvement loan.
1. Classification requirement for loans not secured by a lien on a dwelling. An institution has “classified” a loan that is not secured by a lien on a dwelling as a home improvement loan if it has entered the loan on its books as a home improvement loan, or has otherwise coded or identified the loan as a home improvement loan.

This definition has not been in existence for several years. If the loan is not dwelling secured then it is not a covered loan regardless of its purpose. And that definition addressed non-dwelling secured loans.

1003.2(g) currently defines a financial institution and 1003.2(i) currently defines a HI loan.

control reportability for non-dwelling secured HI loans,

I sure as heck hope you have not been reporting non-dwelling secured HI loans.

used to control reportability for non-dwelling

My apologies I missed the word "used" earlier.

More info to be obtained next week.