Month: October 2017

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