Hello,

We have the permanent financing of a bridge loan - the lender has coded it as a purchase but I am thinking it is a refinance. I can only find where the permanent financing of a construction loan is reported as a purchase. Am I right that this loan would be a refinance?

Thanks for your help!

It would be coded as a purchase. The initial Bridge note would not have been reported as it is considered "temporary financing", which is not reportable.

Construction and permanent
financing. A home purchase loan
includes both a combined construction/permanent
loan and the permanent
financing that replaces a constructiononly
loan. It does not include a construction-only
loan, which is considered
“temporary financing” under Regulation
C and is not reported.

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).

While i agree with much of your post, i don't think that particular FAQ leads one to a "purchase" designation. The "such a loan must be reported as a home purchase loan" is in reference to the the previous sentence, that is, a splash-and-dash flip home purchase.

Now, the revised rules for 2018 may well say that such a loan would be a HMDA purchase (i'd have to revisit them), but that FAQ does not.

(Nor do all bridge loans involve construction, so the 'permanent financing that replaces a construction only loan' isn't necessarily in play either.)

The bridge loan was to purchase a home, loan was secured by existing home and purchased home. New loan being reported on LAR is for recently purchased home. I am thinking this is a refinance and the purchase reporting "slips through the cracks". Anyone able to confirm or deny this line of thought?

A temporary non-reportable loan under HMDA is treated as if the loan never happened. For example, 6 month construction loan is not reported - permanent loan is reported as a purchase. The granting of the permanent loan does not change the characteristic of the original transaction.

When multiple purposes are involved - purchase trumps refinance.

MULTIPURPOSE LOAN If a loan falls into more than one of the three categories, report the loan under just one category according to the following rule. If the loan is a home purchase loan, report it as such even if it is also a home improvement loan and/ or refinancing;

There are two camps in these situations.

Camp 1: The permanent loan that refinances the temporary loan will be reported with the purpose of the temporary loan. So in your case, the temporary loan being refinanced was for a purchase, so the permanent loan will be reported as a purchase. The same would apply if you do a temporary home improvement loan - the permanent would be reported as a home improvement loan.

Camp 2: The regulation only applies the above logic to permanent financing when the temporary loan was for the initial construction of a dwelling. However, no where does it explicitly state to apply this concept to other types of temporary loans. So in your case, even though the temporary loan was for the purchase of a dwelling, the permanent loan itself isn't used for a purchase, so it is reported as refinance.

I can see the argument for both sides, but personally, I'm in camp 2 and would report as a refinance. As with all things HMDA, document the file and treat similar situations consistently.

Camp 2 - The regulation only applies the above logic to permanent financing when the temporary loan was for the initial construction of a dwelling.

Where??

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.

I'm not sure how if you have permanent financing that replaces temporary financing, the purpose of the permanent loan changes from the original purpose of the transaction?

FWIW, I agree with Randy. What did they request? They asked to purchase a house. You did a temporary loan (not reported) and then a permanent loan (purchase). You don't report the temporary/exempt loan. You do report the permanent (purchase) loan. Why would you breaking this into 2 phases make their request a "refinance" vs. a "purchase" for HMDA?

Because the 2nd loan isn't the 1st loan.....and i don't see where Reg. C says what the customer asked for is the determining factor in what you report. The 2nd loan meets the definition of a refinance. We all see the logic (after all, the reg and commentary state that exact logic when it comes to construction only, construction perm, and construction only followed by perm financing) in reporting them as a purchase.....but as TMatt says, nowhere (that i see) do they apply that logic to anything but construction.

Is the 2nd (perm) loan "satisfying and replacing an existing obligation to the same borrower"? Yes. Does the Reg., commentary, or any of the FAQs specifically (or in any manner really) say "the permanent financing that replaces ANY temporary loan reverts back to the original purpose"? Not that i see. Again, we all get the logic, but if you take a strict interpretation of the regulation, it most definitely meets the definition of a" refinance". You have to read between the lines, take something specifically said about construction and apply it to non-construction, to get to" purchase"....IMO.

I don't think anybody is saying "it's wrong to report these as purchases".....but i don't see how you can say it is "wrong" to report them as refinances.

What?!? That makes no sense to me.

If I'm wanting to purchase a house, it's a purchase. If I want to improve my house, it's a home improvement. If you break these loan requests into 2 loans (vs 1), it doesn't change what I'm requesting. HMDA doesn't want double reporting, so the first phase is exempt. Then you report the permanent loan (per what was requested).

As Randy quoted, the FAQs (and the new regulation) use the words "illustrative", "not exclusive" and "examples". The regulation has spelled out this logic clearly and gave an example of construction to perm (as you acknowledge). To say "well, it doesn't say that here" is asking the regulators to spell out every scenario you could ever encounter. I communicate with regulators at the D.C. level frequently. They say "bankers want everything spelled out exactly, yet they complain that the regs are too long. They don't apply the logic we provide in the regulations." This logic pushes the regulatory writers to issue longer and longer rules - which we all hate.

I know the flip side of this: We try to apply logic and a field examiner cites us because they have a different opinion.

In Summary: I hear what your saying raitchjay. Report it the way you see it. I do think it's wrong to call it a refinance, but if you're comfortable, go for it.

I don't need everything spelled out....i read the regulation the way it is written. You interpret one scenario and apply it to another. I don't fault you for doing so--it's a different philosophy, that's all. I don't see one way as "right" and the other "wrong". You do. That's fine. I am comfortable with it....have never ever been cited or criticized in an exam for reporting them the way i do. From reading on BOL, lots of other banks report them as I do. Lots report them as you do.

Construction loans and bridge loans are "illustrative" and "examples" of temporary financing. However, the section that refers to permanent loans that replace construction loans is found in the commentary to the definition of a home purchase loan. It only lists one situation and doesn't indicate this is an example or illustrative. That leads me to conclude that this is the only situation that should be handled in this manner.

5. Construction and permanent financing. A home purchase loan includes both a combined construction/permanent loan and the permanent financing that replaces a construction-only loan. It does not include a construction-only loan, which is considered “temporary financing” under Regulation C and is not reported.

Glad you posted that TMatt....i wasn't following the references to that FAQ and how they related to this particular subject...now i think i understand a bit better the argument that was being made. I agree with you...i just didn't realize how those words were part of the argument being made. Like you, i only see the words "illustrative", "not exclusive" and "examples" as you do--in relationship to what is and is not temporary financing, not how to report the perm out of those temporary loans.

Are you saying that you report the permanent take out financing of a construction loan as a refi, raitchjay?

No, because it is specifically stated that the permanent financing that replaces a construction only loan is to be reported as a purchase. No such language exists for any other loan types except construction.

See TMatt's last post above....it summarizes nicely my ideas on this subject.

I'll just say I have gone back and forth on this over time, however I firmly belong in Camp 1.

My specific reason? The way the bank has to set something up [two-three-whatever phases] is not what the customer requested...it's how we have to do it to make numbers/situations work. I report the permanent phase of whatever other temporary loan I'm dealing with originally began as and ultimately ends as...usually a purchase.

My final thought on this: The commentary/reg/FAQs could very easily have the sentence "For permanent financing loans that replace temporary, non-reportable loans, the purpose shall revert back to the purpose of the original loan had it not been exempt as temporary financing." Then, they could just delete the "the permanent financing that replaces a construction only loan is reported as a purchase" language because it would then be redundant.

But.....they didn't do this. They easily could have. I think it's quite a leap of faith (personally) to say "well, i think they INTENDED to say that, so i'm going to read into what they said and extrapolate it over to other loan purposes".

They could have made temporary financing loans reportable too if they were that concerned about purpose.....i just really don't see what the fuss is. If someone applies for a HI loan and my bank breaks it up into a 6 month interest only loan and then comes along and perms it out...the 2nd loan IS a refinance..it is extinguishing a dwelling-secured loan. It is not a home improvement loan unless more money is added for home improvement. If the regulators were that concerned that an HI loan wouldn't be reported, i think they would remove the temporary financing exemption.

We have often had to impart the 'spirit and intent' of regulatory interpretation because regulators, by and large, are not bankers and don't think like a banker does or how a banker has to structure something to make loans fit not only S&S but APR calculations as well. A construction loan is a no-brainer, but the typical regulatory author is not going to think about other reasons a loan may have to be structured in phases.

Just one of many, many incomplete circles out there within regulatory thought processes.

Is either one right or wrong? Likely not in this case. Stick with a method and be consistent with it. But my 'spirit and intent' would tell me I'd be reporting way more refinances that are really purchases in disguise by putting myself in Camp 2.

I had a bubble this morning with one of these amortized phases of original temporary purchase/rehabs.

I bet I have some scrubbing to do. This bank arbitrarily documents a new application on every single loan. [for commercial, we handle TRID multi-phase loans differently due to disclosure timing being upon first application].

Although I report the original purpose, I'm fairly certain the application date has not occurred to me, but if we know at the time of initial application we will handle the initial loan as a temporary and repayment is to amortize, shouldn't my amortized phase revert to the initial request date which corresponds to the initial 'type' ie, purchase?

I'm quite sure it should, but I want to see if there are any differing opinions [limited to only those who belong to the same camp I do )

FWIW...my examiners said its ok to report as a Purchase. And, as I understand so far, for 2018, they are supposed to be reported as a purchase. So, for us, this part is not changing.

But that's not my actual question. My question is the correct application date, which even if they obtain a new one when they begin the amortized loan process, I believe it should really revert to the original application date.

I believe it should really revert to the original application date.
I agree. The new "application" is not a request for credit. It's an update attestation of information.

Thanks for the confirmation, David