Guide to Reporting Commercial HMDA Loans in 2018

The new HMDA rule changes are fast approaching. Are you ready for them all?

One area of concern I’ve seen a lot lately has been in regard to commercial lending, and when commercial transactions are HMDA reportable. Commercial transactions can be complicated and confusing, so keeping it as simple and streamlined as possible just makes life easier. I see commercial HMDA reportability as being a two-part test, the “security” test and the “business purpose exclusion” test.

The Security Test

This is step one in any new HMDA analysis. Old HMDA required the reporting of home purchase loans, home improvement loans, and refinancings. This required the lender to look at the purpose of loan first to determine if it’s HMDA reportable.

But not anymore.

New HMDA requires that lenders report “covered loans” meaning closed-end mortgage loans and open-end lines of credit (unless an exclusion applies, as we’ll get to). Covered loans are those secured by a dwelling. So it’s a simple first test:

  • Is the loan secured by a dwelling?
    • If yes, see if it’s excluded or exempt for some reason;
    • If no, stop. It’s not HMDA reportable.

A few points about what a “dwelling” is though. A “dwelling” is a residential structure. That’s it. It includes condos, detached homes, manufactured homes, multifamily buildings, etc. It doesn’t include recreation vehicles, boats, or temporary housing (like dorms, hotels, or hospitals). It doesn’t have to be the principal dwelling of the borrower either; investment properties and vacation homes count as dwellings also for HMDA purposes.

What about mixed use properties that have both commercial and residential space? It’s a dwelling if its primary use is residential. HMDA permits the lender to set their own reasonable standards for how to determine what the primary use is, and that standard can apply on a case-by-case basis. In some cases, it might make more sense to base it off of square footage of the property; in others, it might make more sense to compare the income generated. Or perhaps the residential units are filled and the commercial space has been vacant for a while. Different situations apply to different loans, hence the flexibility given to the lender to make a reasonable judgment call.

The Business Purpose Exclusion Test

Once it’s determined the loan is secured by a dwelling, you should check to see if an exemption applies. We’re focusing on the business or commercial purpose exclusion. (12 CFR 1003.3(c)(10)). Here’s the rule:

If the loan is secured by a dwelling, but will go towards a business or commercial purpose, then it is not HMDA reportable UNLESS it is also a home purchase loan, home improvement loan, or refinancing.

In other words:

  • Is the loan primarily for a business or commercial purpose?
    • If no, then it is HMDA reportable (unless another exclusion applies).
    • If yes, then
      • Is it for a home purchase, home improvement, or refinancing?
        • If no, then it is not HMDA reportable
        • If yes, then it is HMDA reportable.

Again, an institution can determine for itself what the primary purpose of the loan is.

Also, as with the security test, the home purchase, home improvement, or refinancing purpose does not need to be on the borrower’s principal dwelling. So, for example, it’s still a HMDA reportable loan to purchase an investment property.

Commercial lending can be tricky, so there are going to be situations where it’s not immediately clear whether a transaction is HMDA reportable. Hopefully this makes it just a little easier though. Of course, at the end of the day it’s always better to be sure of the answer, so if you still have questions on a tricky case, please don’t hesitate to reach out.

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

Validation of Debt Requirements: Debt Collectors vs. Creditors

One of the biggest lessons you learn when studying the law is that the definition of everything matters, and you should not assume that you know what a term means. Take, for example, the validation of debts requirements under the Fair Debt Collection Practices Act (FDCPA) and Massachusetts regulations.

Under the Fair Debt Collection Practices Act, “debt collectors” are required to provide certain information to the consumer regarding the validation of the debts. The FDCPA defines who a “debt collector” is under its provisions. It expressly exempts any person who collects or attempts to collect a debt owed from being considered a “debt collector” if: 1) the debt was originated by such person, or 2) the debt was not in default at the time it was obtained by the person attempting to collect. (See 15 USC 1692a(6)(F)(ii) and (iii)). Mortgage lenders appear to fall within this exemption, as they either originate the loans they service or purchase loans which are not in default. Thus, mortgage lenders are not considered a “debt collector” under the provisions of the FDCPA.

Massachusetts has a similar debt validation requirement for debt collectors under Division of Banks regulations, 209 CMR 18.18. That too exempts “debt collectors” from including those who originated the debt and those who obtained the debt when it was not in default. (209 CMR 18.02.) So even though the regulation is under the Division of Banks’ regulations, by its definition mortgage lenders do not fall under the provisions of the regulation if they originate the debt or purchase debt not in default.

BUT there is another Massachusetts validation of debts requirement that comes under the Office of the Attorney General regulations of 940 CMR 7.08.  It says that: “It shall constitute an unfair or deceptive act or practice for a creditor to fail to provide to a debtor or an attorney for a debtor the following within five business days after the initial communication with a debtor in connection with the collection of a debt…” It doesn’t fall under the Division of Banks regulations because it is much broader and encompasses creditors other than banks as well. “Creditor” is defined in 940 CMR 7.03 and it means “any person and his or her agents, servants, employees, or attorneys engaged in collecting a debt owed or alleged to be owed to him or her by a debtor and shall also include a buyer of delinquent debt who hires a third party or an attorney to collect such debt…” This is a much broader definition, and one which would encompass a mortgage lender servicing its own loan.

Now, this doesn’t mean that the validation of debts requirements themselves are all the same; they do share many similar requirements though. But just because two different terms may seem similar or mean similar things in common language, doesn’t mean that regulatory agencies or legislatures can’t redefine the terms to create the outcome they want.

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

Disclosing Lender Credits

When it rains it pours, and lately it’s been raining questions about lender credits for me. Maybe it’s the Baader-Meinhof Phenomenon, or maybe lenders are being more generous or creative with their credits lately, I’m not sure. But either way, it’s a good excuse to talk about lender credits (as if an excuse is even needed).

A bit of general advice first: don’t over-complicate lender credits. Funding a loan can be complicated, but this is not. There are two types of lender credits: general credits and specific credits.  That’s it. And remember that the regulations should be read from the consumer’s perspective, so some of the behind-the-scenes funding moves might be hidden on the disclosures. But I’ll go into that.

Specific Lender Credits

These credits are pretty much exactly what they sound like: they are credits that pay for a specific line-item closing cost. If you can’t attribute the credit to a single cost, then it is not a specific lender credit. For example, if you advertise that you will pay for the appraisal for a loan, then that’s a specific lender credit. The credit will be applied to that particular fee no matter what the actual cost of the appraisal is.

Be careful when disclosing specific lender credits. As I’ll discuss below, specific lender credits aren’t identified on the LE, and overestimating the cost of a lender credit early on can have tolerance and good faith analysis implications. Generally, when estimating the amount of lender credits for specific fees on the LE, it is better to underestimate what the potential credit will be.

General Credits

If you provide credits but can’t identify a specific fee which the credits are allocated to pay for, then they are general credits. It doesn’t matter the source of the funds, where they are used, what or the reason for the credit; if it’s not tied to a particular fee, it’s a general lender credit. This can include certain rebates or special state programs too. For example, if a state housing program subsidizes affordable housing by reimbursing lenders for closing cost credits, the credits the lender provides the borrower at closing are general lender credits even though the lender is reimbursed post-closing.

The CD is a snapshot at the borrower’s costs at the time of closing, and the borrower doesn’t see or care about whether the lender is reimbursed for the credit. All the borrower knows is his or her closing costs are lower.

Disclosing Specific and General Lender Credits

Specific lender credits are disclosed in the “Paid by Others” column of the CD. General lender credits are disclosed in Section J of the CD.

But the LE does not have a “Paid by Others” column. Therefore, you cannot differentiate between specific and general lender credits on the LE. They are both lumped together.

This is where you must be careful when estimating specific lender credits.

Say you agree to pay for the appraisal for a transaction, and estimate on the LE that it will cost $750. However, as it turns out, the appraisal only actually cost $500. You disclose on the “appraisal” line that the $500 fee was “Paid by Others” to show a specific lender credit for that fee.

You are still $250 lender credits short of what was disclosed on the LE though. The CFPB views this as an increased cost to the consumer, even though from Day 1 the LE credit was only intended to reflect the cost of the appraisal and nothing more. You would have to either re-disclose or provide $250 of general lender credits, and no one wants to do that.

As a rule, the lender may increase the lender credits provided, but they cannot decrease them.

That’s why it’s better to underestimate. If you estimate that appraisals can be between $300 and $750, then estimate lender credits of $300 (if you wish to estimate any at all). If the appraisal costs $500, then you can increase the lender credits to $500 without having to re-disclose; but if you overestimate, then you’re in trouble.

This is true for “no-cost” loans as well. If you’re unsure about the exact costs to close a no-cost loan when you provide the LE, then keep the estimate of the lender credits provided as low as possible. Once the actual costs are known, you can always increase the credits to ensure you stand by your no-cost pledge. But if you overestimate from the beginning, you risk going from simply covering the closing costs to actually paying the borrower to borrow money from you.

(For more info on lender credits, see 12 CFR 1026.19(e)(3)(i)—Comment 5; or the CFPB’s Guide to the Loan Estimate and Closing Disclosure forms, page 69.)

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

The New TRID Rules Cheat Sheet (Part 3)

Continuing with the TRID cheat sheets, here’s the next batch of summaries regarding the new updates that will take effect in October 2018.

Good Faith and Revised Disclosures

This is another long list, as there is a lot in it. Here we go.

  1. There is some new commentary on the good faith standards when third-party services are left off the settlement service provider list. Just new commentary, not a change to the actual rules.
  2. Clarifies the standard that applies if the borrower is permitted to shop and selects a provider not on the SSPL.
  3. A revised LE can be provided for either informational purposes or to reset tolerances if applicable, and it must be based on the best information reasonably available.
  4. Clarifies that an LE cannot be issued after a CD if the interest rate changes. If the rate requires re-disclosure, the CD must be used. This doesn’t appear new, just additional commentary.
  5. Extending the expiration date of an LE extends the time the consumer has to indicate an intent to proceed. If the consumer indicates intent to proceed during the extended period, the creditor must use the original charges disclosed in the LE for good faith and tolerances.
  6. If a revised LE is issued after the Intent to Proceed, the expiration date and time for the disclosed costs are left blank.
  7. Per-diem interest changes post-consummation do not require a re-disclosed CD.
  8. There are new options for disclosing a refund for a tolerance violation, and there is new guidance on properly disclosing principal reductions.

Decimal Places and Rounding

Prepaids per-diem & monthly amounts for Initial Escrow = rounded to nearest whole cent

Percentages = rounded to 3 decimal places, but zeroes don’t count

Calculating Cash to Close

The Calculating Cash to Close table receives a list of updates and clarifications.

  1. Clarifies that the loan amount used for the Closing Costs Financed is the face amount of the note.
  2. Clarifies the disclosure of the amount disclosed as the Down Payment/Funds from Borrower.
  3. Provides guidance on the amount disclosed as the Down Payment /Funds from Borrower in cash-back purchase transactions, simultaneous subordinate financing purchase transactions, and construction transactions.
  4. Provides guidance on when the integrated disclosures should include an amount for the Down Payment/Funds from Borrower.
  5. Provides guidance on Adjustments and Other Credits in the integrated disclosures.
  6. Provides further guidance on how to disclose lender credits.
  7. Says to use the most recent LE when completing the LE column in the Calculating Cash to Close table.
  8. Provides additional guidance on calculating the Closing Costs Financed on the CD.
  9. Provides additional options for disclosing the seller credits statement on the CD.
  10. Gives details on which amounts are included in the Adjustments and Other Credits.

I thought this would be the last one of these, but looking at what’s left I think there enough for one more. So look out for that coming soon!

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

The New TRID Rules Cheat Sheet (Part 2)

Let’s continue with the TRID rules cheat sheet started last week. A lot of changes for construction loans, and a there’s a new tolerance rule to beware of.

Construction Loans

Construction loan rules got a lot of changes, and probably could have served as a blog on its own. But let’s break down the changes into its simplest form:

  1. Disclosing construction-permanent loans as 2 separate transactions: Clarifies how the 3 business rules work when disclosing construction-perm loans as two transactions. If receiving two separate applications, one for the construction phase and one for the permanent phase, then the 3 business day rule for delivering the LE applies following receipt of each separate application. If receiving one application for both phases (but still disclosing as two separate transactions) then both the construction LE and permanent LE must be delivered within 3 days of receiving the joint application.
  2. The new rules clarify how creditors must allocate construction versus permanent financing charges, fees, and points.
  3. The new rules clarify how construction inspection and handling charges are disclosed, as well as their applicability to the good faith standard.
  4. Clarifies how transactions without a seller should disclose the appraised value or estimated value of property on both the LE and CD, including when to use estimated values of improvements.
  5. Provides clarification on how the term of a construction-perm loan should be disclosed if the loan is being disclosed as part of a single transaction.
  6. Clarifies how to complete the Product disclosure, disclosure of interest-only features, and balloon payments disclosure for construction-only and construction-perm loans.
  7. Clarifies when the creditor must use the ARM disclosure for construction-permanent loans when the creditor may increase the consumer’s interest rate after converting to the permanent phase.
  8. Clarifies certain interest rate disclosures for construction-only and construction-perm loans.
  9. Clarifies disclosure of whether amounts can increase after closing for construction loans when the amounts and timing of advances are unknown.
  10. Clarifies aspects of the Projected Payments table.
  11. Clarifies disclosure of mortgage insurance and escrow payments in the Project Payments table when only the permanent phase requires payment, and the loan is disclosed as a single transaction.
  12. Clarifies how various construction costs should be disclosed on the LE and CD, and also address when creditors place a portion of the proceeds into a reserve account at closing.

Disclosing Simultaneous Subordinate Liens

The new rules modify and address the disclosures for bridge loans, and the disclosures provided to the sellers on the seller CD.

Tolerances for Total of Payments

The 2017 rules are adding a new tolerance to watch out for. Under the new rules, the “Total of Payments” disclosure on the CD will have the same tolerances as the “Finance Charge” disclosure; which is it’s considered accurate if the amount disclosed is 1) understated by $100 or less, or 2) is overstated.

Once again, just a quick-and-easy guide to give you an idea at a glance what the upcoming changes are about. More to come next week!

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

The New TRID Rules Cheat Sheet (Part 1)

The new TRID rules are out, though they don’t fully take effect until October 1, 2018. Starting in about 60 days, compliance with them are optional. Even though they are optional, it’s always smart to be ahead of the curve and prepared for when they are mandatory.

Still, not all the rules will all apply to everyone. So here’s a cheat sheet, a quick reference for what rules are changing. Use it to evaluate what will apply to your institution so you can start planning and prioritizing what you need to do to be compliant by October 2018.

Post-Consummation Notices

Currently, the TRID rules requires a creditor or servicer to provide certain disclosures after the loan is closed. The new rule applies to 2 disclosures: the notice when an escrow account is closed, and the partial payment policy of a new owner of loan. Those notices aren’t changing.

Under the old rules though, the notices only applied to mortgage applications received on or after October 3, 2015. The new rules say the notice requirements will apply now regardless of when the application was received.

Loan Secured by a Cooperative

Currently, whether certain disclosures need to be provided on loans secured by cooperatives depends on how state property law classifies the cooperative (that is, whether it’s treated as real property or personal property). The new rule takes away the state law requirement, and requires the disclosures to be made on all loans secured by cooperatives (closed-end consumer loans, of course).

Loans to Trusts

Commentary is being added to clarify that loans to certain trusts established for tax or estate planning purposes is treated as though they are extended to natural persons.

Exemptions for Housing Assistance Loans

TRID rules provide disclosure exemptions to certain housing assistance loans (the details are outside this post; it’s supposed to be a cheat sheet, remember?) The new rules say:

  1. Transfer taxes can now be payable by the consumer, and
  2. Recording feeds and transfer taxes are excluded from the 1-percent cap on total costs payable by the consumer.

It also changes the disclosures required.

I want this to be a quick reference, so I’m going to keep it relatively short. The next part of the new rule will get into some deeper and more pertinent subjects, such as significant construction loan rules, tolerances, and good faith and revised disclosures. I don’t want them to get buried here, so I’m going to leave this as it is.

Remember though, this is just scratching the surface. We’ll be learning a lot more about the new rules in the next few months.

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

An Overview of Medical Marijuana Regulation

(Sorry for the long post, I kept it as brief as I could while hitting the important points.)

Marijuana has had a roller coaster of a year. In November, four states (Massachusetts, California, Maine, and Nevada) all passed measures to legalize its recreational use. Twenty-six states have legalized or permitted its use in one form or another. But then, on the other hand, the current Attorney General is asking Congress for permission to broaden the Department of Justice’s ability to go after medical marijuana businesses.

Here’s the thing: there is a lot of money out there in the marijuana industry (it’s already estimated at about $7.1 billion), and handling money is kind of what financial institutions do. There are many valid and competing public policy and risk concerns with handling marijuana money though. As a financial institution, you need to be aware and informed of the landscape and debate in order to make a well-reasoned decision on how to deal with this corkscrewing business.

So here’s a brief overview on the issues of the day to get a sense of how we got here and where we are going. Note this only applies to medical marijuana; it does not apply to recreational use!

The Cole Memo

In October 2009, Deputy Attorney General David Ogden issued a memo to the attorneys in its agency directing them on the Department of Justice’s policies and approaches to enforcing federal marijuana legislation in light of state medical marijuana laws. In June 2011, Deputy Attorney General James Cole issued another memo addressing widespread questions about the Ogden Memo and effectively updating it. Then, in August 2013, Deputy AG Cole issued yet another memo, called “the Cole Memo” even though the prior memo was also authored by Cole, which updated the prior two memos in light of state ballot initiatives to legalize marijuana for recreational use.

The DOJ had established eight “enforcement priorities” through the last two memos, and the Cole Memo reiterates them. The eight priorities that the federal government finds “particularly important” are:

  1. Preventing distribution of marijuana to minors;
  2. Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
  3. Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
  4. Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
  5. Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
  6. Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
  7. Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
  8. Preventing marijuana possession or use on federal property.

The Cole Memo was a significant shift in how the DOJ used its resources in enforcing those “enforcement priorities.” The old memos could be categorized as saying the DOJ was going to try to get the most “bang for its buck” and thus it took into account size and scale of an operation, regardless of its compliance; but the new memos focused instead on ensuring that proper regulatory schemes are enacted and followed in those states that decriminalized.

Think of it as kind of like the regulators shifting from prioritizing individual infractions, to instead prioritizing that you have a proper CMS in place in order to minimize the likelihood of infractions.

FinCEN Guidance

Shortly after the Cole Memo, the Financial Crimes Enforcement Network (FinCEN) issued its own guidance for financial institutions on how to meet their BSA expectations. The FinCEN guidance draws heavily from the Cole Memo and the Cole Memo’s enforcement priorities. It emphasizes too that “the obligation to file a SAR is unaffected by any state law that legalizes marijuana-related activity” and that the institution is therefore still required to file a SAR for marijuana related transactions. However, to prevent them from getting overwhelmed with an avalanche of SARs, FinCEN created three different levels of SARs financial institutions must file when it relates to marijuana:

  1. Marijuana Limited SAR Filings: These filings are for marijuana-related transactions, but the financial institution does not have reason to believe implicate any of the Cole Memo priorities;
  2. Marijuana Priority SAR Filings: These filings are for marijuana-related transactions in which the financial institution has a reason to believe may implicate one or more of the Cole Memo priorities;
  3. Marijuana Termination SAR Filings: These are for marijuana-related transactions in which the financial institution deems it necessary to terminate the relationship with the business.

There is much more in the FinCEN Guidance memo, and it is still “effective” as of this post (6/14/2017). Note that doesn’t mean it’s “controlling” or has any real weight in court though. But that brings us to…

United States v. McIntosh

In August 2016, the Ninth Circuit Court of Appeals issued its decision in United States v. McIntosh, 833 F.3d 1163 (9th Cir. 2016). In this case, the Department of Justice brought criminal charges against multiple defendants on federal marijuana charges. The defendants in the case were all involved in their state’s medical marijuana businesses, which was legal under their state law.

The defendant’s made some unusual motions under the circumstances to prevent the Justice Department from prosecuting, and it worked, for the most part. The defense argued that a rider on a federal appropriations bill funding the government prevented the Department of Justice from using any federal funds to “prevent [the] States from implementing their own State laws that authorize the use, distribution, possession, or cultivation of medical marijuana.” The rider was from 2014 and was set to expire in a year, but the rider has since been renewed by Congress in each subsequent appropriations bill since it was included. The defendant’s argued that by spending federal dollars to prosecute the defendant’s for federal Controlled Substances Act violations, the DOJ was violating the rider and unlawfully using funds Congress didn’t give them.

The court agreed, with some reservations, and ruled that the rider only prevented the DOJ from prosecuting medical marijuana businesses who strictly complied with State law. If the business did not strictly comply with the State’s regulations and laws, then they are fair game for the DOJ.

From the Cole Memo to FinCEN guidance, the consistent message has appeared to be “acceptable, with strict compliance.” The McIntosh ruling changed that message though from a policy choice to a mandate imposed on the DOJ by the courts. Thanks to the rider in the funding bill, as long as there is strict compliance with state law concerning medical marijuana, the courts appear to be saying the DOJ has no authority to use federal funds to prosecute violations of federal law (for that limited purpose).

Sessions’s Letter to Congress

Finally, on May 1, 2017, Attorney General Sessions submitted a two-page letter to Congress requesting more authority to prosecute medical marijuana businesses. You may have heard the story framed as “Jeff Sessions Wants to Go After Medical Marijuana” or “Jeff Sessions personally asked Congress to let him prosecute medical marijuana” or that Sessions wants to “crackdown” on medical marijuana.

A more accurate statement is that Sessions was writing because he wants the rider cited in McIntosh gone. His letter specifically mentions the case, and urges Congress to remove the rider from the next appropriations bill. This would give the DOJ much greater freedom to set its own policy and agenda, and to pursue cases without fear of “losing” funding. (They won’t really lose funding, they would just be able to be enjoined from continuing to prosecute.)

Conclusion

So that is the brief history of how we got to where we are regarding the federal government’s position on the medical marijuana business. (Note again that none of this applies to recreational use.) The federal policy position appears to be in a state of flux at the moment with a lot of uncertainty, which is never a good time to start making decisions. But the point is there is a huge market developing and it is going to need to be served at some point, and the best way to stay ahead is to stay informed.

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

Disclosing Construction vs. Refinance Loans

This is a question I received recently, and I think it’s a situation that might not come up often enough to remember all the rules about it. So it’s always helpful to review.

Here’s the situation: A borrower comes to you and is seeking a loan to make major additions to their home. They have an existing home, so the original structure is there, but the new additions will be more than double the size of the home, and increase the value more than two times. You consider this to be a construction loan given the size of the project. It’s a 30 year loan with a one year interest only construction period.

Because there is an existing structure though, there is also an existing lien already on the property. Therefore, part of the loan, in addition to financing the construction of the addition to the home, will be used to pay-off and replace the existing loan.

How should you characterize this type of loan for TRID purposes? How is it disclosed?

First, it’s not a purchase transaction because the borrower has already purchased the existing structure on the property, so that’s already off the table. That’s a simple answer. So it comes down to construction, refinance, or home equity then.

Home equity is the catch-all for loans secured by the property but is not for the purpose of purchasing the property, constructing it, or refinancing an existing lien. If it doesn’t fit into one of those categories, it’s probably a home equity loan. But it’s preferred; it’s a fallback. So, unsurprisingly, it’s down to a construction or refinance loan.

It’s tempting to think this loan is a construction loan for TRID purposes. The work that will be done is extensive and worth more than the original property, the loan is more than twice the amount of the original lien, and the new loan is even structured with a 1 year interest-only payment period. For all intents and purposes, it looks like a construction loan, and maybe even internally you consider it to be a construction loan.

Be careful though. The definition of a construction loan is found in 12 C.F.R. § 1026.37(a)(9)(iii), and a significant part of the definition is that a construction loan is, for TRID purposes, only when the credit will be “used to finance the initial construction of a dwelling.” In our situation here then, the dwelling is already there; it’s just being massively updated. Therefore, because the loan is for additions to an already existing structure, it is not for financing the initial construction of a dwelling.

The loan is actually a refinancing then. There is an existing lien which will be “satisfied and replaced” by the permanent financing of the new loan, and this is an essential element for identifying refinancings.

This falls outside the normal situation for refinancings, so I understand any hesitation or uneasiness with calling the transaction a refinancing. But the definition of refinancing is broad, and only has a few elements to it. A refinancing must be 1) a new extension of credit, which will be used to 2) satisfy and replace an existing obligation, and 3) is secured by the subject property. That’s pretty much it. So even though this transaction might not be the typical refinancing transaction, it still falls under TRID’s refinancing definition.

Finally, don’t forget the priority order for TILA. If a transaction has multiple purposes, the preferred order is 1) Purchase, 2) Refinance, 3) Construction, and 4) Home Equity. So even if this transaction is both a construction and refinance transaction, refinance is preferred over construction, and therefore should be reported first.

This may be just a long-winded way of looking at the construction vs. refinancing rules, which you may already know quite well. But it doesn’t hurt to revisit the rules from time to time, especially when you have unconventional transactions come across your desk.

 

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

 

Answering a Few Questions on the New HMDA Rules

A few weeks ago I published the slides to a presentation I did on the new HMDA rules. One slide, slide 33, had questions with no answers. They were intended to spark discussion on the rules and illustrate some differences between the old rules and the new ones, in real time, so I didn’t put in any answers on the slides. So I’ve decided to answer them here. Some questions are meant to be a bit vague though, and the answer dependent on information that isn’t in the question, to help illustrate what information is important and what isn’t so important.

#1. A lawyer purchases a 2-family dwelling intending to convert it into his law office.

Not reportable, for two reasons. First, remember the new focus is on what’s securing the loan. Covered loans are only loans secured by a dwelling, but once it’s converted into a law office, the structure securing the loan is no longer a dwelling. Second, business purpose loans are exempt unless they are also home purchase, home improvement, or refinancings. Since the purpose of the loan is not to purchase a home, it’s not reportable. This would not have been reportable under the old rules either, but mostly for the second reason.

#2. A borrower takes out a home equity loan on his primary residence to put a down-payment on a vacation home.

Reportable, as a home purchase. This would have been reportable under the old rules also, but again the reason is different. Under the old rules, it would have been a home purchase because the loan was being used to purchase another dwelling. Under the new rules, it’s a reportable loan because it’s secured by the first dwelling (the purpose is not as relevant). This is again to highlight how the determination of whether a loan is reportable depends on the security interest more than the purpose.

#3: A builder gets a construction loan to purchase a single-family dwelling, demolish it, and construct a new single-family dwelling to be sold upon completion.

This one was meant to be a bit ambiguous. The “to be sold upon completion” part suggests it could be temporary financing and not intended to be permanent, and therefore not reportable. It also depends, under the new HMDA rules, whether or not it’s secured by a dwelling. BUT if the loan is secured by the newly constructed dwelling and intended to be permanent financing, it is reportable. If the loan was a short-term construction only loan that would be replaced by a buyer’s permanent loan after construction, then this loan is not reportable but the buyer’s loan would be. Not really enough information here to be certain either way, but the important thing is to know that the answer depends on how the loan is secured and whether it is permanent or temporary financing.

#4. Lender refinances a loan secured by multifamily apartment complex to finance the construction of a new apartment building.

Reportable, home purchase. Similar to #2, but this shows how the business exemption works. This is a business purpose loan on investment property, so it’s normally not reportable. But there is an exception to the exemption which makes business purpose loans that are secured by dwellings AND used as a home purchase, home improvement, or refinancing reportable. So here you have a business purpose loan that is 1) secured by a multifamily apartment dwelling, and 2) being used to purchase a dwelling, making it a reportable commercial loan. It would also be reported as a home purchase and not a refinance.

#5: A builder gets a construction loan to purchase vacant land and finance the construction of a single-family dwelling to be sold immediately after completion.

Similar to #3, this one doesn’t have enough information. If the loan is secured by the vacant land, then it’s not reportable under the exception to reporting loans secured by unimproved land. If it’s a construction-only loan intended to be replaced by permanent financing, then the construction-only loan is temporary and not reportable. If it’s intended to be permanent financing and secured by the new newly constructed dwelling, then it’s reportable.

#6. A borrower gets a short term loan to purchase a dwelling, improve it, and immediately sell it.

Not reportable. Short term loans, not intended to be permanent (even if it’s extended later), are temporary financing and not reportable.

So there you go. Often times with these things the rules aren’t that complicated, it’s the underlying facts that make things complicated. Hopefully that helps, but if you still have any questions, please don’t hesitate to reach out! I’m always happy to chat with a fellow HMDA fan.

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

Open-End Lines of Credit Under the New HMDA Rules

I wrote previously about the new HMDA rules, and how they are changing our vocabulary a bit. The new vocabulary includes new, broader definition of what’s included in HMDA, and that’s how it’s expanding the scope of HMDA. Some loans that were previously not covered by HMDA now are covered, such as HELOCs.

Here’s a quick refresher/reference of what’s covered under the old and new rules:

  • Old HMDA: Home purchase loans, home improvement loans, and refinancings.
  • New HMDA: “Covered loans,” meaning closed-end mortgage loans and open-end lines of credit, not otherwise exempt.

Let’s look at the open-end lines of credit definition because it is a bit clunky and awkward. “Open-end lines of credit” have their own special meaning under the new HMDA rules, and the rules refer to and semi-incorporate the definition of “open-end credit” in Reg. Z (TILA).

Under HMDA, an open-end line of credit is an extension of credit that:

  1. Is secured by a lien on a dwelling, and
  2. Is an open-end credit plan as defined under Reg. Z, but without regard to whether the credit is
    1. consumer credit,
    2. extended by a creditor, or
    3. extended to a consumer.

(12 CFR § 1003.2(o))

Just looking at that definition requires some mental gymnastics, not to mention simultaneous references to two different regulations, just to determine whether or not a loan is HMDA reportable or not. So I’m going to try to combine the rules for a slightly simpler, easier to reference rule. But first, what’s an “open-end credit” plan under Reg. Z?

Under Reg. Z, “open-end credit” means consumer credit extended by a creditor under a plan which:

  1. The creditor reasonably contemplates repeated transactions;
  2. The creditor may impose finance charges on an outstanding balance; and
  3. The credit extended to the consumer during the term of the plan (up to a limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid.

(12 CFR § 1026.2(a)(20).

Reg. Z and HMDA have their own distinct definitions for terms, hence the part about disregarding the Reg. Z definitions of “consumer credit,” “creditor,” and “consumer.” So HMDA, in the final part of its definition, is trying to a Reg. Z definition without all the other Reg. Z terminology as well.

Ugh…

But you can essentially substitute “consumer credit” for just “credit,” and “creditor” for “financial institution,” and “consumer” with “applicant” and plug it back into the HMDA definition for open-end line of credit.

So to put it together into one HMDA rule, for HMDA an open-end line of credit is an extension of credit that:

  1. Is secured by a lien on a dwelling, and
  2. Is credit extended by a financial institution which,
    1. The institution reasonably contemplates repeated transactions;
    2. The institution may impose finance charges on an outstanding balance; and
    3. The credit extended to the applicant during the term of the plan (up to a limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid.

Some final notes: I didn’t go into the first part of the HMDA definition because it’s fairly self-explanatory, but it’s very important and distinguishes between a HMDA reportable line of credit and a non-reportable line. This goes to the new dwelling-secured standard of HMDA.

Also the last requirement for the credit being generally available during the term of the plan means the plan must have a reusable line, even if it has a termination date. (See 12 CFR § 1026.2(a)(20)—Official Interpretation 5). This means the total credit lent under the plan is theoretically unlimited for the term of the plan as long as the borrower continues to repay the credit used.

Finally, for real estate, open-end real estate mortgages must be evaluated independently under the definition regardless of what it’s called in the industry. “The fact that a particular plan is called an open-end real estate mortgage, for example, does not, by itself, mean that it is open-end credit under the regulation.” (See 12 CFR § 1026.2(a)(20)—Official Interpretation 7.) In other words, don’t be fooled by a name; just because something may be called an “open-end mortgage” doesn’t meet it necessarily meets the regulatory definition for open-end credit.

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com