I am looking into a denied loan, and looking for some advice. The borrower is a remodeling company that is contracted for commercial and residential buildings, and requesting funds for "Working Capital". Looking more into the documentation, it looks like the working capital is to do a major remodel on an apartment complex the company contracted to do (borrower or owner does not own this complex). The loan is secured by the owner's primary dwelling, and technically improving a dwelling - on its face, it looks like I should report this for HMDA as a home improvement, but I was wondering if you guys have different thoughts or how would you report this type of scenario?

Thanks,

Welcome to BOL.

I don't see a loan made to home remodeling company to do a contract job being a covered transaction.

Hi Dan,

I appreciate the welcome. Could one argue that the funds are going toward the company's operations (labor, per diem, supplies) rather than a the dwelling in this case?


Thanks,

Dan - don't you have a dwelling secured loan with a purpose to improve a dwelling? Regardless of who/what the loan is to?

So if you do business with J&R Window/Siding Company and everytime they come in to fund a contract are you going to report those loans as HI loans?

Could one argue that the funds are going toward the company's operations (labor, per diem, supplies) rather than a the dwelling in this case?

That would be my exact argument and IMO this is an exempt business purpose loan.

I just asked the question. I have not run into this situation yet.

If my response appeared "flippant" it was not intended to. It was intended to make one think about the details for the true purpose of the loan, which IMO is operating funds.

Thank you, Dan. That is helpful for the future.

Appreciate the feedback. It was the verbiage of the capital specifically mentioned for the remodel job - but again, I think the argument of funds going towards the company's operational cost rather than the complex should suffice.


Again, thank you

The issue here though @Dan, is that J&R Window/Siding company isn't going to generally give you a residential dwelling as part of the collateral to get a loan to fund the window project. Generally, you would get Accounts Receivable, Inventory, etc. Business purpose has only one exemption from HMDA - "Other." This is not an "Other," but rather a "Home Improvement."

1. General. Section 1003.2(i) defines a home improvement loan as a closed-end mortgage loan or an open-end line of credit that is for the purpose, in whole or in part, of repairing, rehabilitating, remodeling, or improving a dwelling or the real property on which the dwelling is located. For example, a closed-end mortgage loan obtained to repair a dwelling by replacing a roof is a home improvement loan under § 1003.2(i). A loan or line of credit is a home improvement loan even if only a part of the purpose is for repairing, rehabilitating, remodeling, or improving a dwelling. For example, an open-end line of credit obtained in part to remodel a kitchen and in part to pay college tuition is a home improvement loan under § 1003.2(i).

3. Commercial and other loans. A home improvement loan may include a closed-end mortgage loan or an open-end line of credit originated outside an institution's residential mortgage lending division, such as a loan or line of credit to improve an apartment building originated in the commercial loan department.

Exclusions: (10) A closed-end mortgage loan or open-end line of credit that is or will be made primarily for a business or commercial purpose, unless the closed-end mortgage loan or open-end line of credit is a home improvement loan under § 1003.2(i), a home purchase loan under § 1003.2(j), or a refinancing under § 1003.2(p);

Sounds kind of funny and all, but at the end of the day, you have a business purpose loan that is for, in whole or in part, improving/remodeling a dwelling. That, in and of itself, would make the loan reportable. The rub here, to me, is the Borrower came and requested a "Working Capital" loan, not a Home Improvement loan. It was the extra diligence of the Bank that directly tied the funds to the Remodel of the Apartment Complex. Interesting scenario. If you really have firm evidence on the funds going toward the specific remodel job, I would lean towards actually reporting this. To those who disagree, I would pose this question: If you had a real estate investment company that came to you and requested a loan for "Working Capital" and you determined basically that they were going to use the funds to purchase a couple of houses and the loan was going to be secured by an apartment complex that the company owned free and clear and not the purchased houses, what would you do? Would you not report such a loan as a "Purchase" for HMDA?

It's not uncommon to secure working capital loans for short term projects (for small to medium size businesses) with the borrower's dwelling.

If your analysis (and I don't totally disagree with your argument) has determined these to be covered transactions then you should report them and be prepared to support your decision. But as always make sure every such loan is consistently reported.

I do not believe the intent is to capture a home improvement contractor's short term remodeling contracts as home improvement loans and if presented with such a transaction I would exempt it.

The remodeling company is borrowing money to complete a business contract, the real estate investment company is purchasing dwellings that they will own and the property (inventory if you will) will most likely either be rentals or for resale by the real estate investment company. I don't see the two scenarios being comparable.

I agree with you on the intent piece, but when you look at the specific scenario and tie it to the Reg . . . if the shoe fits, you gotta wear it

Dan and Compliance, I appreciate the feedback.

I apologize in advance if I am suppose to start a new thread, but this is going with the same topic. Would the reporting situation change if it was a consumer loan rather than commercial? For example:

Borrower uses equity from primary home to help repair a friend's/relative's (non-borrower's) roof?

Thanks,

Nothing in the definition of a HI loan specifies the improvement has to be done to the borrower's property or the property securing the loan..