Covered Loans Under HMDA

The old HMDA rules required financial institutions to report on applications, originations, and purchases of home purchase loans, home improvement loans, and refinancings. The new rules, however, replaces the “home purchase,” “home improvement,” and “refinancing” language with “covered loans.” Whether a transaction is a “covered loan” has become much more complicated though.

A “covered loan” is

  1. a closed-end mortgage loan, or
  2. an open-end line of credit, and
  3. not an excluded transaction.

Both closed-end mortgage loans and open-end lines of credit need to be secured by a lien on dwelling, not just any old open-end line of credit. The new HMDA rules give “open-end line of credit” its own unique definition, so don’t be confused. I’m also going to refer to both types of credit as just “a loan” in the following list of excluded transactions:

Excluded Transactions (12 CFR § 1003.3(c)(1)-(12))

  1. A loan purchased by a financial institution acting in a fiduciary capacity (such as as a trustee)
  2. A loan secured by a lien on unimproved land;
  3. Temporary financing
  4. Purchase of an interest in a pool of loans;
  5. The purchase of servicing rights;
  6. The purchase of loans as part of a merger or acquisition (or as part of the purchase of assets and liabilities of a branch office)
  7. A loan or application for a loan for under $500;
  8. The purchase of a partial interest in a loan;
  9. A loan used primarily for agricultural purposes;
  10. A loan used primarily for business purposes
    1. UNLESS it is a home improvement loan, home purchase loan, or a refinancing, as determined by the “primary purpose” test of Regulation Z (TILA).
  11. A closed-end mortgage loan originated by a financial institution that originated fewer than 25 closed-end mortgage loans in each of the two preceding calendar years; OR
  12. An open-end line of credit originated by a financial institution that originated fewer than 100 open-end lines of credit in in each of the two preceding calendar years.

A Closer Look at #11 and #12

Numbers 11 and 12 are important for when you determine whether you need to report certain loans. They come up again when you’re looking at whether you’re a “financial institution” that needs to report under HMDA. (Section 1003.2(g)). One part of the test of being a reporting financial institution for HMDA is you need to have originated either the 25 closed-end or 100 open-end loans in the previous two calendar years. But, once you’ve figured out whether you’re a financial institution that needs to report, when looking at which loans you report, you only report the type loans above the “25 or 100 for 2 years” test.

For example, if you originate 200 and 250 open-end lines of credit for the last 2 years, but only originated 20 and 15 closed-end mortgages, then you would only report the information for the open-end lines and not the closed-end.

And if you’re asking yourself “why?” or trying to figure out the logic of it all, it’s because of #11 and 12 above. The closed-end mortgages in that example are a excluded transactions under section 1003.3(c)(12), and therefore they are not a “covered loan.”

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

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