We have a cash-out refinance on an unencumbered investment property. The collateral in a multi-unit residential property, the cash-out will be used for future property investments, but the properties have not been identified yet (so do not know if it will be to purchase a dwelling or not).

I'm trying to figure out if this could be HMDA reportable. It is for business purpose so it would have to be for home improvement, home purchase, or refinance. I don't think it is a true refinance as the building is already owned free and clear. So there is no existing loan that is satisfied and replaced.

The Reg commentary (below) states that if the borrower provides no statement as to the proposed use of the loan proceeds, the loan purpose would be "other". And "other" is not an option for business purpose loans.

I feel pretty safe that this is not HMDA reportable based on this, but wanted to get some feedback. Thank you!

Commentary 4(a)(3)-1 to Regulation C states: Purpose - statement of applicant. A financial institution may rely on the oral or written statement of an applicant regarding the proposed use of covered loan proceeds. For example, a lender could use a check-box or a purpose line on a loan application to determine whether the applicant intends to use covered loan proceeds for home improvement purposes. If an applicant provides no statement as to the proposed use of covered loan proceeds and the covered loan is not a home purchase loan, cash-out refinancing, or refinancing, a financial institution reports the covered loan as for a purpose other than home purchase, home improvement, refinancing, or cash-out refinancing for purposes of § 1003.4(a)(3)."

If you've asked and they've been vague as to their desire to purchase dwellings or other types of real estate, then i would not report. It's not that you have to have properties identified as of closing, but you are right that you do need to know the borrower's intent (which you can rely on).

It is for business purpose

If you do not know what type of future investments are going to be made then how are you documenting this as a business purpose loan?

Hi Dan
The borrower is an investment property entity and the applicant stated that the cash-out will be for for future investment property opportunities but no new properties have been identified yet for purchase. We just don't know if they are looking to buy a residential or commercial property to add to their real estate portfolio with the cash-out.

They could have lied and use the money for something personal, but "A financial institution may rely on the oral or written statement of an applicant regarding the proposed use of covered loan proceeds"

If I have misunderstood what a business purpose loan is under HMDA, I would appreciate your input as it is possible that I have it mixed up. Thank you!

What you are stating is what i assumed in my answer. I would suggest stressing to your LOs that you need more than vague descriptions of what they might do with the funds--if "properties" are to be bought, your LOs should be asking what kind.

the borrower is an investment property entity

My my question was based on the loan being made to an individual and not an entity. If made to an individual you have to determine if the "investment" property was for business or personal investment. Personal investments are not business purpose loans, and since you did not know specifically what the future investments were I was wondering how you determined them to be business related.

If they were personal investments then the "other" purpose category would be applicable.