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#482149 - 01/12/06 04:00 PM HMDA Temporary Financing Cave In
Dan Persfull Offline
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Dan Persfull
Joined: Aug 2002
Posts: 47,552
Bloomington, IN
FWIW, it looks like I will have to succumb to the new FFIEC ruling lacking any official guiadance from the FDIC's Washington, DC or Chicago Regional Offices.

You may or may not want to adopt the following, however this will be our stance on temporary financing for now. I apologize for the length.

January 11, 2006
To: Loan Officers and Loan Support Personnel
From: Dan Persfull
RE: Temporary Financing and HMDA Reporting

From the Frequently Asked Question posted by the FFIEC for HMDA related issues.

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).
The above FAQ was posted on November 21, 2005 in response to an interpretive letter released by the Kansas City FDIC Regional Office. This “new” interpretation of temporary financing is in conflict with a bulletin issued by the Chicago FDIC Regional Office in 2002 and it has caused quite a controversy in the Compliance world.

I have been in direct contact with our FDIC examiners since its release voicing my opposition to the interpretation. For what it is worth our Indianapolis examiners agree with me. However, to date there has been no official statement from the FDIC’s Washington, DC or Chicago Regional offices that I am aware of. Through my compliance contacts it appears the OCC, other FDIC Regional Offices and other regulatory authorities are upholding this new interpretation.

Although I do not agree with this interpretation, due to the lack of an official interpretation from the FDIC’s Washington, DC or Chicago Regional Office we will have to abide by this interpretation since it has been posted by the FFIEC.

Effective for all loan applications received on or after January 1, 2006 temporary financing will no longer be what we have considered it to be in the past.

The following guidelines (beginning on page two) will need to be followed. If you have any questions at all concerning these guidelines please call me.


Temporary Financing Guidelines – Revised January 11, 2006


Definitions (as defined for use by The Peoples State Bank)

Bridge Loan (also called Swing Loan) – A loan to a borrower where funds are to purchase, or construct a new dwelling secured by the equity in an existing dwelling owned by the borrower. This type loan may also be secured by the dwelling being purchased or constructed.

Construction Loan – a loan made for the purpose of the initial construction of a dwelling.

Dwelling - Dwelling means any residential structure, whether or not attached to real property. It includes vacation or second homes and rental properties; multifamily as well as one-to-four-family structures; individual condominium and cooperative units; and manufactured and mobile homes. It excludes recreational vehicles such as boats and campers, and transitory residences such as hotels, hospitals, and college dormitories.

Home Purchase Loan - A home purchase loan is any loan secured by and made for the purpose of purchasing a dwelling. See the definition of “dwelling.”

Home Improvement Loan - A home improvement loan is:
(a) any dwelling-secured loan to be used, at least in part, for repairing, rehabilitating, remodeling, or improving a dwelling or the real property on which the dwelling is located, and
(b) any non-dwelling-secured loan (i) that is to be used, at least in part, for one or more of those purposes and (ii) that is classified as a home improvement loan by the institution.

Refinancing - A refinancing is any dwelling-secured loan that replaces and satisfies another dwelling-secured loan to the same borrower. The purpose of the loan being refinanced is not relevant to determining whether the new loan is a refinancing for HMDA purposes. Nor is the borrower’s intended use of any additional cash borrowed relevant to deter-mining whether the loan is a refinancing, though the borrower’s intended use of the funds could make the transaction a home improvement loan or a home purchase loan. See the definitions of “home purchase loan” and “home improvement loan.”

Special Notes:

Home purchase and refinancing – the dwelling securing the loan does not have to be the dwelling being purchased or refinanced.

Home improvement – beginning January 1, 2004 The Peoples State Bank ceased classifying non-dwelling secured loans as home improvement loans. This policy will continue. Only dwelling secured loans for the purposes of home improvement will be reported as a home improvement loan. The dwelling securing the loan does not have to be the dwelling being improved.

Loans qualifying as temporary financing:

1. Loans meeting the definition of a bridge or construction loan.
2. Loans made where the source of repayment will be other long term financing arrangements by PSB or another lender. If the long term financing arrangement is from another lender there must be a take out commitment from the lender in the file.

All other loans that meet the definition of a home purchase, home improvement or refinancing are now reportable for HMDA purposes. The purchase/renovation of a dwelling where the loan is to be repaid by the sale of the dwelling (or another asset) is no longer eligible for the temporary financing exemption.

Also remember that HMDA applies to all applicable loan requests (applications) whether for business or consumer purposes.
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The opinions expressed are mine and they are not to be taken as legal advice.

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#482150 - 01/12/06 04:40 PM Re: HMDA Temporary Financing Cave In
Reed Offline
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Reed
Joined: Sep 2005
Posts: 1,251
West Coast
Thanks for posting that.

Question for you, what about construction loans where there is no guarantee of perm. financing, it's assumed that the customer will apply for a traditional 30 year mortgage upon completion, but nothing official? Do you think it's going to be important to have a procedure in place to document that the customer intends to take out permenant financing?

I actually have an example right now of a customer who took out a construction loan to build a cabin on a lake for the purpose of selling it upon completion and paying off the loan from the proceeds of the sale. So, is THAT a reportable loan now? Would it be a purchase? I'm so confused

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#482151 - 01/12/06 05:21 PM Re: HMDA Temporary Financing Cave In
SMQ, CRCM Offline
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Between the lines
From what I have read, yours is a reportable loan. Some of their logic (??) here is "what if you had a cash sale, this property would never have been reported" (I didn't say it had to make sense.)

If you have another loan committed to pay this one off, this can be temporary financing, no loan commitment--then report this one.
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#482152 - 01/12/06 05:26 PM Re: HMDA Temporary Financing Cave In
Reed Offline
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Reed
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West Coast
I agree, but then you have a reportable CONSTRUCTION loan, isn't that contradicting Reg C?

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#482153 - 01/12/06 05:51 PM Re: HMDA Temporary Financing Cave In
Dan Persfull Offline
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Dan Persfull
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Posts: 47,552
Bloomington, IN
Exert from the Q&A:

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

Therefore I agree with SoccerMomQueen that if the loan is not designed to be paid from long term financing, but rather designed to be paid from the sale of the property then it is a reportable loan.

Does this contradict Reg. C, absolutely but the FFIEC has put their opinions in writing. No matter how ludicrous they may be.
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The opinions expressed are mine and they are not to be taken as legal advice.

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#482154 - 01/12/06 06:02 PM Re: HMDA Temporary Financing Cave In
SMQ, CRCM Offline
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Between the lines
Dan, In regard to your original post/memo ---- you da man!!
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#482155 - 01/12/06 09:10 PM Re: HMDA Temporary Financing Cave In
COMPLIcated Offline
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Posts: 1,035
OK
I am looking at a loan for home remodeling and the borrowers are doing the work themselves and it states they will pay the loan off with permanent financing through our mortgage dept. and there is approval for that as well. Sounds like it is reportable as per FFIEC now...the only concern is that it has taken a very long time because they are doing the work themselves and we keep refinancing the loan for another 6 months to allow them time to complete the project. I know there is not a time limitation stated in the regulation but would this be questioned by the examiners...the file documents it has already been a year and a half since our mortgage dept. issued approval for the permanent financing.

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#482156 - 01/12/06 09:15 PM Re: HMDA Temporary Financing Cave In
Dan Persfull Offline
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Dan Persfull
Joined: Aug 2002
Posts: 47,552
Bloomington, IN
Quote:

. . . it states they will pay the loan off with permanent financing through our mortgage dept. and there is approval for that as well. . . . it has already been a year and a half since our mortgage dept. issued approval for the permanent financing.




As long as your permanent financing commitment is still valid I would consider this temporary financing.
Last edited by Dan Persfull; 01/12/06 09:15 PM.
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.

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#482157 - 01/12/06 09:17 PM Re: HMDA Temporary Financing Cave In
Princess Romeo Offline

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Quote:

Exert from the Q&A:

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

Therefore I agree with SoccerMomQueen that if the loan is not designed to be paid from long term financing, but rather designed to be paid from the sale of the property then it is a reportable loan.






Do you realize the implications of this? This means that banks that do housing tract construction financing will have to report those loans for HMDA.

Why?

Because a builder does not build houses with an intent to refinance them. A builder builds houses with an intent to SELL them!

If you take the latest brain-f*rt from the regulators to its conclusion, then banks will be filling HMDA LARS on all that Centex Homes does. And Griffin. And S&S. And Benchmark. And so on!

That is utter insanity, and I think a brave soul (Dan) needs to ask THAT question of the regulators - using the above quoted Q&A "reasoning".

I think keeping the "temporary" definition at any initial constrution is the better way to go.

FWIW - I think Splash and Dashes are simply a variation on initial construction, but apparently I'm not putting the right mushrooms in my salad.
Last edited by Bonnie M; 01/12/06 09:33 PM.
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#482158 - 01/12/06 09:30 PM Re: HMDA Temporary Financing Cave In
COMPLIcated Offline
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Joined: Mar 2003
Posts: 1,035
OK
But these would not be reportable because they are not secured by a dwelling - only a lot for residential construction.

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#482159 - 01/12/06 09:34 PM Re: HMDA Temporary Financing Cave In
Princess Romeo Offline

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Where the heart is
Shannon - take a look at the reasoning behind having Bliss report the cabin construction loan.
_________________________
CRCM,CAMS
Regulations are a poor substitute for ethics.
Just sayin'

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#482160 - 01/12/06 09:36 PM Re: HMDA Temporary Financing Cave In
Dan Persfull Offline
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Dan Persfull
Joined: Aug 2002
Posts: 47,552
Bloomington, IN
Bonnie, I totally agree. And there are a couple of "contradictions" in their Q&A IMO.

Construction and bridge loans are illustrative, not exclusive, examples of temporary financing.

Yet, the very next statement:

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

Implies unless there is a permanent financing arrangement to repay the loan then the loan is not temporary. So, if a construction or bridge loan is not going to be paid off by other financing arrangements how do they qualify as a temporary loan.

The regulation does say temporary financing such as construction loans or bridge loans. Therefore if they are not going to be paid off by other financing arrangements then they are not construction or bridge loans because according to the FFIEC a construction or bridge loan indicates they are to be repaid by long term financing arrangements.

I really don't think they understand what they have done.

It would have been so much easier for them to issue a temporary financing definition that does not leave room for speculation.

Also, how many bridge loans are made where the bridge loan will be paid by refinancing it? The majority of bridge loans (or at least how bridge loans are generally structured in our area) are paid form the proceeds of the sale of the existing dwelling. The permanent financing for the purchased dwelling is rarely affected.
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The opinions expressed are mine and they are not to be taken as legal advice.

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#482161 - 01/12/06 09:40 PM Re: HMDA Temporary Financing Cave In
Princess Romeo Offline

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Dan - while eating my mushroom salad, I am thinking about refinancing my house to pull equity out to build a bridge. I hear Brooklyn would be a nice location.

Would this be a bridge loan?
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CRCM,CAMS
Regulations are a poor substitute for ethics.
Just sayin'

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#482162 - 01/12/06 09:40 PM Re: HMDA Temporary Financing Cave In
GreatBlue Offline
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GreatBlue
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Colorado
Dan,
Based on your response to Bliss (your post 493608), am I right that you see construction loans as being reportable if they will be paid off by something other than permanent financing? The same would be true of bridge loans? If the loan is to be paid off when the current home sells (in my experience this is the most common type of bridge loan), then it is reportable?
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#482163 - 01/12/06 09:51 PM Re: HMDA Temporary Financing Cave In
Dan Persfull Offline
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Dan Persfull
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Posts: 47,552
Bloomington, IN
Jill, I think by post #493923 which appears to have crossed yours answers your question.

The problem with exempting "construction loans" and "bridge loans", is to the best of my knowledge there is no regulatory definitions for these terms. Therefore, following the Q&A logic a loan, regardless how you classify it does not qualify for the temporary exemption if it is not to be repaid from long term/permanent financing.

Maybe some one should ask them to define a construction and bridge loan to see how much more controversy and confusion they can generate.


And yes Bonnie, I would classify that as a bridge loan and give you a temporary financing exemption.
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.

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#482164 - 01/12/06 09:59 PM Re: HMDA Temporary Financing Cave In
COMPLIcated Offline
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OK
Okay guys, I am stuck here on this construction question. Construction loans are included in the reg under home purchase loans. It states that to meet the definition of a home purchase for HMDA it must be secured by a dwelling. How can a construction loan show up on the LAR when for this loan application there is not a dwelling? As far as I see it the question as to whether or not it is temporary doesn't even come in to play because it does not meet the definition of a HMDA loan.

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#482165 - 01/12/06 10:05 PM Re: HMDA Temporary Financing Cave In
Reed Offline
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Reed
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West Coast
So, if a construction loan could never meet the criteria for HMDA reporting as it is not dwelling secured, why did they even list it as an example in the reg as being exempt by virtue of being temporary financing?

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#482166 - 01/12/06 10:11 PM Re: HMDA Temporary Financing Cave In
COMPLIcated Offline
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OK
I was questioning that myself...the const/perm combo or perm financing loan would be reportable because you either have or end up with a dwelling securing the note depending on the case. It would make more sense to say they are excluded by virtue of not meeting the definition of a HMDA reportable loan...but nothing is making sense these days.

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#482167 - 01/12/06 10:16 PM Re: HMDA Temporary Financing Cave In
Reed Offline
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Reed
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West Coast
Quote:

...but nothing is making sense these days.




Tell me about it!

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#482168 - 01/12/06 10:23 PM Re: HMDA Temporary Financing Cave In
hmdagal Offline
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There used to be a blurb in GIR, I think it was in a discussion of lot loans, that if any of the loan proceeds were used to begin construction of a dwelling, it would be reportable. Of course, I can't find it now, so maybe they took it out of the book.

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#482169 - 01/12/06 10:28 PM Re: HMDA Temporary Financing Cave In
Princess Romeo Offline

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Where the heart is
Okay - BOLers - since the Regulatory agencies seem either unwilling or unable to define "Temporary" financing, why don't WE do it and submit it to the agencies?

How about we start with:

1. Temporary financing includes any loan for the initial construction of a dwelling.

2. Temporary financing is any loan, regardless of purpose, that is secured by a dwelling but where the loan is made on the premise that the repayment will NOT come from the ordinary income or revenue of the borrower, but will come from either the sale of the property or from financing that will be repaid by ordinary income or revenue of the borrower.

Post your comments, additions, revisions, etc, and let's COME UP WITH a solid definition for "Temporary" financing and see if we can get the regulatory agencies to consider it.
Last edited by Bonnie M; 01/12/06 10:29 PM.
_________________________
CRCM,CAMS
Regulations are a poor substitute for ethics.
Just sayin'

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#482170 - 01/12/06 10:40 PM Re: HMDA Temporary Financing Cave In
GreatBlue Offline
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GreatBlue
Joined: Feb 2003
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Colorado
Quote:

Jill, I think by post #493923 which appears to have crossed yours answers your question.




Yes, they did cross. I agree that that's the only reasonable way to read the Q&A, even though it gives an unreasonable result.

I might be reading your memo to your loan personnel wrong, but it sounds like you are saying that a loan can be considered temporary financing if it EITHER meets the definition of bridge or construction OR has as the source of repayment, permanent financing. I think we agree that it has to have permanent financing as its source of repayment, regardless of whether it meets the definition of bridge or construction.

The worst thing about this, is if they come to their senses and realize what all they have pulled into HMDA by this Q&A, and reverse themselves, we get to try to re-train all our lenders. That’s a huge challenge in a shop our size.

Here’s another unintended consequence. A construction loan without permanent financing is considered temporary for RESPA, but with permanent financing, it isn’t considered temporary under RESPA. HMDA will now have exactly the opposite result – with permanent financing, temporary; without permanent, not temporary. Try training lenders on that!
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#482171 - 01/12/06 10:44 PM Re: HMDA Temporary Financing Cave In
hmdagal Offline
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hmdagal
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I like easy - don't ask why I do HMDA. I would say it's any loan up to 24 months (or pick another number) with no principal payments required prior to maturity.

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#482172 - 01/12/06 10:45 PM Re: HMDA Temporary Financing Cave In
Audit Girl Offline
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Audit Girl
Joined: Oct 2005
Posts: 65
Oklahoma
I am slow getting to the party. Would someone be kind enough to direct me to the link to re-read the Q&A and the FAQ that are being addressed by this? I would like to look at this again before I start wondeirng where the bank falls in on this. Thank you for your help on this.

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#482173 - 01/13/06 02:17 AM Re: HMDA Temporary Financing Cave In
Dan Persfull Offline
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Dan Persfull
Joined: Aug 2002
Posts: 47,552
Bloomington, IN
Quote:

I might be reading your memo to your loan personnel wrong,




No, you're not. I defined what we will consider to be construction and bridge loans. HMDA specifically exempts these loans and I'll rely on that exemption in spite of the implications from the Q&A.

As I said in a reply to my examiner and another BOLer. What the he!! were these people on when they came up with this interpretation?
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