Land only purchase with existing house collateral

Posted By: Love those Regs

Land only purchase with existing house collateral - 10/01/19 08:39 PM

Consumer is buying land to build his personal residence on at a future date. Our collateral will be the land AND a lien on his existing dwelling. Term is for 2 years. The primary source of repayment is the future construction loan we anticipate making. I'm thinking this does NOT meet the definition of temporary financing since the source of repayment is not permanent financing. If we report this, I'm thinking it would be for "Other" purpose. Agree?
Posted By: raitchjay

Re: Land only purchase with existing house collateral - 10/01/19 08:48 PM

So you're saying you are making a temporary loan....with plans for another temporary loan (the construction loan)...followed then by a permanent loan? If that's the case, i'd still consider the loan exempt as temporary financing. The perm financing you contemplate doesn't have to be the very next loan down the road IMO.
Posted By: raitchjay

Re: Land only purchase with existing house collateral - 10/01/19 08:52 PM

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.

"later time", not "immediately by the next loan".
Posted By: Love those Regs

Re: Land only purchase with existing house collateral - 10/02/19 02:30 PM

Thank you, raitchjay. With your response in mind, let me add to the scenario. Most times, when we make a construction loan we do not anticipate making the permanent loan; however, there are times we do make the permanent and when that happens we modify the construction loan and not pay it off and replace with a new loan. The modified loan is not reported on HMDA. So, if we do end up making the permanent loan, which at this time we have no idea what will happen because the loan at this point is only to purchase the land with construction at some point in the future, then it still would not be reported. So, we have a loan that seems like should be reported at some point but never is.
Posted By: raitchjay

Re: Land only purchase with existing house collateral - 10/02/19 05:29 PM

I can't speak much to modifications other than to say, to my knowledge, they aren't reportable. But a temporary loan isn't reportable, regardless of whether your bank or some other bank is going to do the perm financing.

ETA: Don't know if this will help, but i try to stay away from thinking too much about "it seems like this loan ought to be reported".....i didn't write the rules and i just look at things in a black and white way in regards to HMDA. The way i look at it, if loans "fall through the cracks", then the CFPB must have wanted them to, since they wrote the rules.
Posted By: rlcarey

Re: Land only purchase with existing house collateral - 10/03/19 12:25 PM

Consumer is buying land to build his personal residence on at a future date. Our collateral will be the land AND a lien on his existing dwelling. Term is for 2 years. The primary source of repayment is the future construction loan we anticipate making.

This sounds to me like a short term home equity loan and is for the purchase of bare land. The fact that at some point in time the customer may get a construction loan to build a new home, I really don't think is a consideration. There would be no requirement that this loan be replaced with a construction loan. Plans change.
Posted By: raitchjay

Re: Land only purchase with existing house collateral - 10/03/19 01:41 PM

Randy, i took the sentence "the primary source of repayment is the future construction loan we anticipate making" at face value. It sounded to me like there is no plan at maturity in 2 years for the borrower to walk in with a big wad of cash to pay the loan off, so i couldn't see how the loan wouldn't be temporary financing.
Posted By: Love those Regs

Re: Land only purchase with existing house collateral - 10/03/19 02:03 PM

Customer is already working with a builder on house plans so the construction loan isn't going to be too far off in time. Customer is planning to sell current house and put funds towards the construction costs. We took a lien on the current dwelling in lieu of a cash down payment on the land purchase.

I'm still leaning toward reporting this as a Consumer "Other" purpose loan. I think it boils down to we took the equity in a personal dwelling for the purchase of land which is reportable. Rlcarey, is that the point you were making too? And thank you for joining in the discussion.
Posted By: raitchjay

Re: Land only purchase with existing house collateral - 10/03/19 02:09 PM

Regardless of the fact that there's some home equity going on, if the loan is temporary (and it sure sounds to me like it is), then the loan isn't reportable.
Posted By: rlcarey

Re: Land only purchase with existing house collateral - 10/03/19 03:29 PM

Why is it temporary and not a short term loan? Just because the consumer says they plan to build in the future and that if they do they will refinance the loan into a construction loan, does not make this a temporary loan, like a construction loan that is going to have to be taken out.
Posted By: raitchjay

Re: Land only purchase with existing house collateral - 10/03/19 03:34 PM

"The primary source of repayment is the future construction loan we anticipate making. "

As i said above, this scenario sure didn't sound to me as if the plan was for the borrowers to walk in in 2 years with a big wad of cash to pay this loan off. And minus that big wad of cash, i think the loan meets the criteria quoted above from the OSC:

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.
Posted By: raitchjay

Re: Land only purchase with existing house collateral - 10/03/19 03:40 PM

In a later post, Love Those Regs said that they plan to sell their current house and put the proceeds "toward construction costs". Unless those funds are anticipated to pay OFF the original loan, my reading of things is that long term financing would still be contemplated, thus making the first loan temporary and not reportable.
Posted By: Adam Witmer

Re: Land only purchase with existing house collateral - 10/03/19 07:19 PM

I can see both sides of the coin on this, mainly because I'm not exactly clear what is meant by "the primary source of repayment is the future construction loan we anticipate making."

That said, I'm reading this statement that the plan is to replace this loan with a construction loan that would planned to be replaced by permanent financing (please clarify if that isn't the case, Love Those Regs). If that's true, I'm seeing it the same way raitchjay is - it looks like a temporary loan that is excluded from reporting. In fact, I can see this fitting into Comment 1(ii) to 1003.3(c)(3) as I can see this initial loan as essentially being the first part of the construction loan that will be "renewed one or more times" down the road - before finally being replaced by permanent financing.

On the other hand, if the OP hadn't said "the primary source of repayment is the future construction loan we anticipate making", I would have assumed this was reportable as "other." I know many people who buy land today with hopes of building some day, but 1) the purpose of the loan isn't to build (i.e. purchase) a dwelling and 2) the loan isn't made with the primary source of repayment being a construction loan.

Again, clarification from the lender may be warranted.
Posted By: rlcarey

Re: Land only purchase with existing house collateral - 10/03/19 07:25 PM

The other kicker is that this is not a temporary loan under 1026.43 since they also took their current dwelling, so I hope from an ATR standpoint, the consumer can pay this balloon note at the end of two years regardless of any future refinancing plans..
Posted By: raitchjay

Re: Land only purchase with existing house collateral - 10/03/19 07:29 PM

Very good point Randy.