Page 1 of 4 1 2 3 4
Thread Options
#437751 - 10/08/05 04:18 PM Another Temporary Financing Question
Anonymous
Unregistered

New to HMDA, have a hypothetical.

If an interest only loan is made for, lets say 6 months, with a new home as collateral, and will be paid at maturaty with an inheiritance the the customer is expecting to recieve in the near future, is this temporary financing because it's not regular income that will be the source of repayment?

Thanks.

Return to Top
Lending Compliance
#437752 - 10/10/05 12:26 AM Re: Another Temporary Financing Question
SMQ, CRCM Offline
Power Poster
SMQ, CRCM
Joined: Apr 2001
Posts: 4,828
Between the lines
Do a search using "temporary financing" (with the "") and Dan Persfull in the username field and you will find a lot of discussion on temporary financing.

Remember it is not the term of the loan that determines it but rather the source of repayment.
_________________________
NOLA is my Beach!

Return to Top
#437753 - 10/10/05 12:06 PM Re: Another Temporary Financing Question
Anonymous
Unregistered

I'd say it was temporary financing because of the source of repayment. I remember Dan saying that if it's not regular income paying it back but like from the sale of your home, or a bonus of some kind it was temporary- an inheritance would be considered not regular income so I say its temporary financing.

Return to Top
#437754 - 10/10/05 02:09 PM Re: Another Temporary Financing Question
Dan Persfull Offline
10K Club
Dan Persfull
Joined: Aug 2002
Posts: 46,769
Bloomington, IN
Original Anon - there has been a lot a discussion concerning temporary financing in the threads with David Dickinson and myself leading the majority of them. HOWEVER, I am suggesting you contact your primary regulator for their current guidance on temporary financing. Another poster recently shared a letter with me that came out of the FDIC KC Regional Office which totally contradicts a bulletin that came out of the FDIC Chicago Regional Office. I have contacted my lead examiner and have asked them to contact DC and see if they can get a consensus of opinion. When, or if, I get a response I will share it.

Now in the meantime (until I get a contradiction from my examiner) - to try to make the decision whether the loan is temporary financing or not as easy as possible - if the loan will be paid from the sale of an asset or from another financing arrangement (loan) then the loan is temporary financing. If it will be paid from any other source it is "permanent" financing.

However, I will stress again that you should contact your primary regulator for their interpretation because there does appear that the regulators cannot even agree among themselves.
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.

Return to Top
#437755 - 10/10/05 02:23 PM Re: Another Temporary Financing Question
Dan Persfull Offline
10K Club
Dan Persfull
Joined: Aug 2002
Posts: 46,769
Bloomington, IN
Here'e a portion of my letter:

There appears to be a lot of confusion in the banking world on what constitutes temporary financing and what does not when it comes to HMDA reporting.

I have always based temporary financing on the primary source of the repayment. In other words, if the loan is to be repaid by another loan, or by the sale of an asset then the loan was temporary financing. However if it was to be paid from an income source such as regular salary, a year end bonus or cashing in a CD or stock certificate then the loan would be reportable. The attached SCANS bulletin appears to support that position as well as the attached email response from XXXXXXX (see below). However, the attached bulletin from the KC FDIC Regional Office appears to take another approach.

The following paragraph in the letter from the KC Regional Office is particularly disturbing to me.

At the outset, we note that Regulation C uses the phrase “such as bridge or construction loans,” in its definitions of temporary financing. The inclusion of this phrase would seem to suggest that other types of temporary financing besides bridge and construction loans may qualify for the exclusion; however, we have found no authority for such a conclusion. Moreover, our discussion with staff attorneys for the Board of Governors of the Federal Reserve System confirmed that their interpretation of this provision exclusively limits this “temporary financing” exclusion to actual bridge or construction loans.

Please forgive me for the following statement, but what were these people on when they made this determination? No where in Regulation C or in the A Guide to HMDA Reporting Getting It Right does it define the term “temporary financing”. It only refers to “temporary financing such as construction loans” or “temporary financing such as bridge or construction loans”. They could just as easily have said such as a 90-day term. Furthermore on page 9 of the A Guide to HMDA Reporting Getting It Right under Transactions Not to be Reported it states:

The following transactions are excluded from reporting under HMDA:

Construction loans and other temporary financing (but construction-permanent loans must be reported).


In my humble opinion this makes it clear that other temporary financing loans qualify for the exemption.

When different regions of the same regulatory authority are taking different stances on a regulatory issue it is an indication that there is also possible confusion among the examiners and there should be further clarifications for the appropriate requirements issued by the D.C. office.

Obviously I feel that the SCANS, XXXXXX and my interpretations are the correct ones, however I would appreciate you forwarding this to the appropriate people, or if you prefer, advise me of the person you feel I should send this to and I will contact them to see if we can possibly get a consensus of opinion. Until that time, or until instructed by you, I will continue to operate under my current interpretation.
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.

Return to Top
#437756 - 10/10/05 07:44 PM Re: Another Temporary Financing Question
Anonymous
Unregistered

Dan,

I must respond Anon. because of fear of the many Midwest bankers in the the FDIC-KC District wanting to criticize the June, 2005 opinion letter regarding HMDA-reporting for both temporary loans and refi's.
First of all, for the KC-FDIC to send out the interpretation in the middle of a reporting year was ridiculous. Some local banks have already scrubbed their 2005 data back to January, 2005 and added temporary-type loans/denials and deleted some loans that they thought met the refi-test.
On the other hand, some banks have decided to ignore the KC FDIC's letter and not add these temporary-type loans and also they haven't deleted any loans because of the interpretation of refi's. They are basing this on the existing interpretation/guidance for both issues; temporary financing and refi's. They believe the regulation and Commentary will be on their side when KC FDIC office wants to pick a fight about why the loans were not included/excluded on the 2005-LAR (although it may cost some money to fight the FDIC!). Some bankers say they will use the ombundsman in the event KC-FDIC plays hardball, but I'm not sure that is the purpose of that person(?)

It is really a mess.

For those FDIC-regulated banks out there, just be thankful you are not in the Kansas City district. But be forewarned, the interpretations may spread to an FDIC district near you and you will have decisions regarding what you will do with your 2005 HMDA-data.
But how ludicrous is it that one district office interpretation isn't shared by any other FDIC office (or any other regulatory agency) in the country? Everyone is hoping that FDIC-Washington will step in fairly soon to straighten this out. The March 1st reporting date will be here before we know it, but some are saying KC FDIC will not want to publically admit to its' mistake.

Should be interesting..........

Return to Top
#437757 - 10/10/05 07:58 PM Re: Another Temporary Financing Question
Dan Persfull Offline
10K Club
Dan Persfull
Joined: Aug 2002
Posts: 46,769
Bloomington, IN
Quote:

Should be interesting..........




I think that's the understatement of the day.
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.

Return to Top
#437758 - 10/10/05 11:12 PM Re: Another Temporary Financing Question
rlcarey Offline
10K Club
rlcarey
Joined: Jul 2001
Posts: 79,352
Galveston, TX
I guess I have to fall on the conservative side here as I have never heard of basing the determination on whether a loan is temporary solely based on the source of repayment, specifically on the premise of a possible sale of the asset. If you finance a piece of property for two-years and the borrower says they are planning to sell the property to pay off the loan, I have a hard time buying that would qualify as temporary. A bridge loan or construction loan is really a different animal - everything is in the works for an actual pay-off of the loan. In the other scenario - how can you say what is going to happen - do you require the borrower to continually list the property, etc. I have seen this before and had these "temporary loans" renewed two and three times without the property ever even being listed or sale.
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com

Return to Top
#437759 - 10/10/05 11:49 PM Re: Another Temporary Financing Question
Princess Romeo Offline

Power Poster
Princess Romeo
Joined: Jun 2001
Posts: 8,272
Where the heart is
Randy - It's doubtful a bank would book a 2 year real estate loan with no interim payments or principal reduction.

Where the road gets sticky is when we have these 6 month deals with regular payments being made from income or revenue. These loans would not be considered temporary.

However, a 6 month loan that is made on the anticipation of being paid off with another loan or sale of the property would (to a normal and resonable person) be a temporary loan.

However, it is not a simple matter of saying "All loans iwth less than X months term will be considered temporary loans, and all loans in excess of X months will NOT be considered temporary."

That would be a nice easy definition that would leave little doubt, but may also lead to some bizarre situations being reported on HMDA and subject to RESPA.
_________________________
CRCM,CAMS
Regulations are a poor substitute for ethics.
Just sayin'

Return to Top
#437760 - 10/11/05 01:22 AM Re: Another Temporary Financing Question
rlcarey Offline
10K Club
rlcarey
Joined: Jul 2001
Posts: 79,352
Galveston, TX
Well there seems to have been a lot of discussion about this lately and some the conclusions have left me with an uncomfortable feeling.

This one for example

I just think that looking at the disposal of an asset for payment is not a good acid test for temporary financing.

P.S. - You would be surprised how many interest only two-year notes I have seen lately. Everyone is trying to play the real estate bubble - unfortunately, when the bubble pops, the banks that are doing this are going to take it in the shorts
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com

Return to Top
#437761 - 10/11/05 01:24 PM Re: Another Temporary Financing Question
Anonymous
Unregistered

Randy,

The guidance from the KC FDIC office specifically discusses what is called "splash and dash" loans. I had never heard the term until they used it. Someone buys a property that needs some "splash and dash" ----fix-up, new paint, new carpeting, etc. The owner then sells (flips) the property in 3-6 months after it has been all "dolled-up" and makes a quick profit on the sale. The loans will be taken-out by purchase mortgages.The KC Office is telling their midwestern banks to report these short-term "splash and dash" loans on their HMDA-LAR!
Most bankers (and the FED- Jane Gell Managing Counsel of the Federal Reserve Board) believe that this interpretation is ABSOLUTELY incorrect. What no one can understand is what is the KC FDIC doing interpreting the FED's regulation and more importantly, why isn't the FDIC's interpretation required for all FDIC-regulated banks????????

This is the kind of stuff that makes a compliance officer's job more complex and tougher than it already is.......
FDIC supposedly wants to be a "partner" with their banks. If this is what they are bringing to the relationship, I want a divorce and have suggested to management that it might be time to look at a possible charter change.......

Return to Top
#437762 - 10/11/05 03:10 PM Re: Another Temporary Financing Question
Dan Persfull Offline
10K Club
Dan Persfull
Joined: Aug 2002
Posts: 46,769
Bloomington, IN
I just received an email from my examiner and apparently I'm not the first to contact them concerning the KC ruling.

They are attending a session in Nov in the Chicago RO and this topic is supposedly to be discussed. So I will have to wait until then to see if we get any further clarifications.

FWIW, I was not instructed by my examiner to change my reporting procedures.
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.

Return to Top
#437763 - 10/12/05 02:14 AM Re: Another Temporary Financing Question
rlcarey Offline
10K Club
rlcarey
Joined: Jul 2001
Posts: 79,352
Galveston, TX
IMHO - Even a splash and dash loan would not be temporary financing. There are two many variables and no actual plan in place to make this a temporary loan. A drop in real estate values and you and the borrower are going to be stuck with this loan for a long time. I my opinion, a temporary loan is one where there is already an established out - such as construction financing and you have a take-out commitment in your hand. I see as it more similar to the definitions found in RESPA. If you don't have a commitment in your hand - you have to be considering it as permanent financing.
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com

Return to Top
#437764 - 10/12/05 01:18 PM Re: Another Temporary Financing Question
Anonymous
Unregistered

Quote:

IMHO - Even a splash and dash loan would not be temporary financing. There are two many variables and no actual plan in place to make this a temporary loan. A drop in real estate values and you and the borrower are going to be stuck with this loan for a long time. I my opinion, a temporary loan is one where there is already an established out - such as construction financing and you have a take-out commitment in your hand. I see as it more similar to the definitions found in RESPA. If you don't have a commitment in your hand - you have to be considering it as permanent financing.




Very interesting, but your thoughts still conflict with the CHIRRO(?) from the Chicago FDIC that Dan was referring to in the post above.

Hopefully, this will get straightened out one way or another in the upcoming meeting in Chicago that Dan also referred to.

And as to the issue of the banks that already changing their 2005 data based on the letter, (i.e.adding the splash and dash loans, deleting some loans that they thought met the refi test) they did it because they read that it was required per the letter. In other words "your 2005 data better reflect our (the FDIC-KC Office) opinion or else........

Return to Top
#437765 - 10/12/05 01:39 PM Re: Another Temporary Financing Question
Dan Persfull Offline
10K Club
Dan Persfull
Joined: Aug 2002
Posts: 46,769
Bloomington, IN
Quote:

A drop in real estate values and you and the borrower are going to be stuck with this loan for a long time. I my opinion, a temporary loan is one where there is already an established out - such as construction financing and you have a take-out commitment in your hand.




Based on this comment Randy, then in your opinion a bridge loan would not be temporary financing because as you said a drop in the real estate market could have an effect on the sale of the residence. However bridge loans are mentioned as temporary financing in HMDA.

I don't totally disagree with the analogy as the intended temporary loan could become permanent financing dependent on the market. However, the loan would not be reported until the intended temporary loan was flipped to a permanent loan.

At this time I have the support of the Chicago Regional Office and my lead examiner, therefore until Chicago or D.C. issues a different opinion I will continue reporting as I have.
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.

Return to Top
#437766 - 10/12/05 01:59 PM Re: Another Temporary Financing Question
Anonymous
Unregistered

Quote:

A two year loan for the purpose of converting from a construction to a perm. It is an investment property and the owner wants a loan until the house is sold. The construction portion was financed by us.




Including this situation as you opined in a previous post - since I have not seen the Chicago letter - how can you justify calling this temporary financing - where do you draw the line??

Return to Top
#437767 - 10/12/05 02:27 PM Re: Another Temporary Financing Question
Anonymous
Unregistered

Dan,

Even though you are in the Chicago region, those of us in the KC region appreciate your involvement (and David D) in trying to get this issue resolved.

Thank you.

Return to Top
#437768 - 11/15/05 09:16 PM Re: Another Temporary Financing Question
Dan Persfull Offline
10K Club
Dan Persfull
Joined: Aug 2002
Posts: 46,769
Bloomington, IN
I just received the following email:

Hi Dan,

We had the training last week where I brought up this issue. Nobody there was able to answer it, so it is going to personnel in the FDIC Washington, DC office. I’ll let you know when I hear something.
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.

Return to Top
#437769 - 11/23/05 03:42 PM Re: Another Temporary Financing Question
Laketime Offline
Platinum Poster
Joined: Aug 2002
Posts: 554
Last week someone told me that they thought the FDIC also sent the "splash and dash loans as 2005 HMDA-reportable" letter to banks in their Dallas region/ and/or Denver field office(?). Not sure when the letter was supposedly sent (I know in the FDIC KC Region the letter was dated June 8, 2005).
Can anyone verify that the letter was also sent to FDIC-regulated banks in the FDIC Dallas region/Denver Field office?

Thank you.

Return to Top
#437770 - 11/30/05 01:27 PM Re: Another Temporary Financing Question
Ben Hicks Offline
New Poster
Joined: Nov 2004
Posts: 9
Part of the temporary financing issue has been handled by a recent HMDA FAQ update 11/21/05. We have always treated loan to be paid by the sale of an asset as temporary financing so this one coming at the end of the year is disconcerting. Rather than handle this issue piece meal I wish they would go through 10 examples or more on this subject.

HMDA FAQ
". A loan is not temporary financing merely because its term is short. For example, a lender may make a loan with a 1-year term to enable an investor to purchase a home, renovate it, and re-sell it before the term expires. Such a loan must be reported as a home purchase loan. "

Return to Top
#437771 - 11/30/05 02:47 PM Re: Another Temporary Financing Question
Dan Persfull Offline
10K Club
Dan Persfull
Joined: Aug 2002
Posts: 46,769
Bloomington, IN
Here's the full text of the Q&A:

Temporary Financing. When is a loan "temporary financing" such that it is exempt from reporting?

Answer: The regulation lists as examples of temporary financing construction loans and bridge loans. See 203.4(d)(3). Construction and bridge loans are illustrative, not exclusive, examples of temporary financing. The examples indicate that financing is temporary if it is designed to be replaced by permanent financing of a much longer term. A loan is not temporary financing merely because its term is short. For example, a lender may make a loan with a 1-year term to enable an investor to purchase a home, renovate it, and re-sell it before the term expires. Such a loan must be reported as a home purchase loan. See 203.2(h).

I'm not going to let this die until I hear something "concrete" from my regulator.
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.

Return to Top
#437772 - 11/30/05 03:01 PM Re: Another Temporary Financing Question
rlcarey Offline
10K Club
rlcarey
Joined: Jul 2001
Posts: 79,352
Galveston, TX
Quote:

The examples indicate that financing is temporary if it is designed to be replaced by permanent financing of a much longer term.




I don't know how much more concrete you are going to get out of them. This would indicate that these short-term "splash and dash" based on the sale of the asset are not temporary.
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com

Return to Top
#437773 - 11/30/05 03:30 PM Re: Another Temporary Financing Question
Dan Persfull Offline
10K Club
Dan Persfull
Joined: Aug 2002
Posts: 46,769
Bloomington, IN
I've sent them, HMDA Help, an email for further clarification on the FAQ along with exerts from my email to my regulator outlining my position and a copy of the bulletin from the Chicago Regional Office.

The FDIC bulletin was clear, or at least in my opinion, that the sale of as asset was a determining factor.

. . . At the time the construction or bridge loan is extended the bank knows that it will be paid from another loan or an asset sale. . . .

Until I have a reply from the FDIC, I will continue reporting as I am.
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.

Return to Top
#437774 - 11/30/05 08:29 PM Re: Another Temporary Financing Question
Dan Persfull Offline
10K Club
Dan Persfull
Joined: Aug 2002
Posts: 46,769
Bloomington, IN
Can anyone decipher the following response from HMDA Help?

Construction loans or other temporary financing is not HMDA reportable, however, construction-permanent loans are HMDA reportable.

There is no definition of temporary financing provided by the Regulation. Rather, the Regulation only offers examples of temporary financing - - construction loans and bridge loans. HMDAHELP cannot define temporary financing in terms of time nor create a temporary financing definition. Rather, each institution must establish criteria to be used to evaluate whether a loan is temporary financing. This temporary financing criteria/litmus test should then be used by that institution consistently.

An institution that is questioning whether an application/loan is 'temporary' needs to look at all the factors closely. Each loan in question should be looked at on a case-by-case basis. Because the maturity is short-term does not necessarily mean it is 'temporary'. Temporary financing is not intended to be a permanent arrangement; it's a stop gap. Or it's a 'patch' (like a bridge loan) that gets you to the next loan, which is usually permanent financing. Any applications/loans that function like construction loans or bridge loans should be treated as temporary. If an institution originates a loan to the applicant and the institution and applicant know/expect the loan has to be replaced by permanent financing, then the initial, originated loan is temporary.
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.

Return to Top
#437775 - 11/30/05 09:06 PM Re: Another Temporary Financing Question
Reed Offline
Diamond Poster
Reed
Joined: Sep 2005
Posts: 1,251
West Coast
What about a short term loan that is to be paid when the customer gets his tax return? Is that regular income? Is that bridgeing the "gap"?

Return to Top
Page 1 of 4 1 2 3 4

Moderator:  Andy_Z