Borrower took out a loan to build a house, will later be replaced with permanent financing-for now not HMDA Reportable.
Well they took out an additional construction loan for the same house, this will not be replaced with permanent financing so would we report this loan? Wouldn't that basically be double reporting?

They took out another loan for cost overruns or change in plans you mean? How is that loan going to be repaid?

They took out an additional loan for cost overruns. This loan will be repaid with the sale of their current home.

Then it sounds like it is not temporary financing to be replaced by permanent financing and would be reportable.

So we would report both loans?
This one right now and then the other one when it rolls into permanent financing?

Sounds like it to me.

I agree.

The initial loan is a temporary construction loan that will be converted to permanent financing therefore it is exempt. Converting a construction only loan to permanent financing is reported as a home purchase so the permanent loan will be reported.

The second loan is a short term construction/permanent loan. Construction/permanent loans are reportable home purchases.

To give a littler more detail, they will both be paid off with the proceeds of the sale of their current home. First we will pay off the additional construction loan. Then do a principal reduction on the first construction loan. This would be prior to closing the loan with Freddie. So I am thinking then we would not report the second construction loan.

The second construction loan being paid off from the proceeds of the sale is what makes it a short term const/perm loan and not a temporary loan.

I contacted an examiner from FDIC to get their thoughts and this is what they stated:

Ok, it sounds like the second loan is temporary financing and should not be reported on the LAR, since the loan will not amortize and instead will be paid off by one lump sum within a year, more or less.

That is bad advice.

From the regulation:

Official Interpretation
Paragraph 3(c)(3)
1. Temporary financing. Section 1003.3(c)(3) provides that closed-end mortgage loans or open-end lines of credit obtained for temporary financing are excluded transactions. A loan or line of credit is considered temporary financing and excluded under § 1003.3(c)(3) if the loan or line of credit is designed to be replaced by separate permanent financing extended by any financial institution to the same borrower at a later time. For example:

The second loan is not designed to be replaced by separate permanent financing.

That is what I thought, but then I don't think it makes sense to really report the same loan twice either.

How are you reporting the same loan twice? You have 2 separate loans.

If you did a simultaneous 2nd for the purchase would you consider the simultaneous loan the same loan and not report it since both loans are for the purchase of the same property?

Do you mean like a piggyback or HELOC? Our Financial does not report HELOCs. I get what you are saying it is technically 2 separate loans but essentially being paid off the same way and rolled into one.

They are not being "paid off" the same way. The first loan is being refinanced is what you said after a principal reduction.

First we will pay off the additional construction loan - you are paying off the second loan and it is not being refinanced therefore it is a short term loan and not temporary financing.

The regulation is pretty straight forward in that a loan is exempt as a temporary loan only if it is designed to be replaced by a longer term permanent loan. That is not the case for your second loan.

Now it is up to you if you want to follow the regulation or follow inaccurate guidance you received from the examiner you spoke to.

Thank you for your help, I actually had another examiner agree with the first examiner. I contacted HMDA Help to get their take, so we will see what they say.

If your examiners cannot distinguish the difference between temporary financing and a short-term loan, your next examination is going to be excruciating.

LOL Randy.

dmk.....Randy and Dan are correct. People telling you otherwise are wrong. HMDA Help is notorious for giving wrong answers. I'd ride with the advice you've been given.

I can see both arguments which is why I am torn.

Well if HMDA Help agrees with the examiners I will just document their responses in the file and proceed that way. They can't argue with the advice they gave me.

They can't argue with the advice they gave me.

Actually they can. I have been a victim of it myself from one exam to the next due to an opinion of an examiner and our new Board Chairman at the time chose to go along with that opinion to change our reporting procedures instead of letting me argue mine.

Receiving inaccurate advice is not an excuse for not following the regulation.

Well I can see their perspective though, this was their response:

I agree with you. The first loan sounds like the standard construction loans that’s designed to be paid off with perm financing. The second loan sounds like a bridge loan which is the example that is given as temporary financing. It’s designed to be temporary until the previous house sells. I’d say neither is reported now with the first loan reported when the loan goes permanent.

The permanent financing is going to pay off both loans.

"The permanent financing is going to pay off both loans."

But that is not what you told us and that my fiend makes all the difference in the world.

So, you are either not explaining it the same way to all parties, or those other parties have no understanding how HMDA currently works.