Loan Purpose

If customer does a cash-out refinance and uses the cash-out to purchase rental property, I am under the impression this would be a loan purpose of 32 - cash out refinancing; however, I have discovered that our mortgage department has changed this to home purchase because of the intent of the proceeds. Should this be a cash-out refinance or purchase?

Purchase, Purchase trumps refi. The hierarchy is:

purchase
refi (or cash out refi)
home improvement
other

3. Purpose—multiple-purpose loan. Section 1003.4(a)(3) requires a financial institution to report the purpose of a covered loan or application. If a covered loan is a home purchase loan as well as a home improvement loan, a refinancing, or a cash-out refinancing, an institution complies with § 1003.4(a)(3) by reporting the loan as a home purchase loan. If a covered loan is a home improvement loan as well as a refinancing or cash-out refinancing, but the covered loan is not a home purchase loan, an institution complies with § 1003.4(a)(3) by reporting the covered loan as a refinancing or a cash-out refinancing, as appropriate. If a covered loan is a refinancing or cash-out refinancing as well as for another purpose, such as for the purpose of paying educational expenses, but the covered loan is not a home purchase loan, an institution complies with § 1003.4(a)(3) by reporting the covered loan as a refinancing or a cash-out refinancing, as appropriate. See comment 4(a)(3)-2. If a covered loan is a home improvement loan as well as for another purpose, but the covered loan is not a home purchase loan, a refinancing, or cash-out refinancing, an institution complies with § 1003.4(a)(3) by reporting the covered loan as a home improvement loan. See comment 2(i)-1.

I agree with raitchjay that this would be reported as a purchase. As previously said, there is a hierarchy, or "waterfall" that must be used when determining the purpose on multiple purpose loans. Said another way, a loan/application can have multiple purposes, but you only report one purpose on your HMDA LAR in accordance with the established hierarchy.

The way it works is that a purchase is king, meaning it always takes precedence over other purposes. Next in line is a refinance which includes both a refinancing (satisfying and replacing an existing obligation) and a cash-out refinance (which includes money back according to specifics found in the commentary). After a refinancing comes a home improvement loan followed by "other" purpose loans.

To explain this, the following multiple purpose scenarios explain the hierarchy and which purposes must be reported on the LAR:

-Home Purchase Loan and Home Improvement Loan = Home Purchase Loan
-Home Purchase Loan and Refinancing = Home Purchase Loan
-Home Purchase Loan and cash-out Refinancing = Home Purchase Loan
-Home Purchase Loan and other = Home Purchase Loan
-Home Improvement Loan and Refinancing = Refinancing
-Home Improvement Loan and cash-out Refinancing = Cash-out Refinancing
-Refinancing and other = Refinancing
-Cash-out Refinancing and other = Cash-out Refinancing
-Home Improvement Loan and other = Home Improvement Loan

If you are interested in a bit deeper explanation on the hierarchy, I recorded about an 8 minute a video explaining this in detail here: https://www.compliancecohort.com/blog/hmda-loan-purpose-hierarchy

Hope that helps.

Just to be clear - is the property being purchased also being taken as collateral or is the loan only to be secured by the existing property?

RR Becca, maybe I'm missing something without coffee this morning, but it shouldn't matter whether the collateral is the purchased property or the existing property.

1. Multiple properties. A home purchase loan includes a closed-end mortgage loan or an open-end line of credit secured by one dwelling and used to purchase another dwelling. For example, if a person obtains a home-equity loan or a reverse mortgage secured by dwelling A to purchase dwelling B, the home-equity loan or the reverse mortgage is a home purchase loan under § 1003.2(j).

That said, the OP didn't exactly say what was being refinanced, so I have assumed it included a dwelling - if it wasn't, that would be an entirely different scenario.

This is what I was getting at - I just left part of the thought out of my sentence. Apologies.

Oh....i think i see where ya'll are going now....yeah, i assumed that the refinance they were asking about was a dwelling-secured loan. If not, then we aren't in HMDA land at all....