Tagged: HMDA; temporary financing
September 24, 2015 at 1:20 pm #8147
I’m going to begin with our example and then ask questions pertaining to our example. We have a borrower who applied for a “bridge” loan of 12 months to purchase a new principal dwelling. The collateral for the new loan was the current principal dwelling which had enough equity in to purchase the new home.
The lender noted that the borrower had no intent on long term financing and that the note would be paid off by the pending sale of their current principal dwelling.
First and foremost, I understand that HMDA excludes temporary financing such as bridge loans or construction loans, but then fails to really define what a bridge loan is. I also understand that the FFIEC has provided guidance on what should be considered temporary financing.
David Dickinson from Banker’s Compliance Consulting has written an article on temporary financing which can be found here (https://www.bankerscompliance.com/compliance-resources/free-downloads.htm). In part, it says:
Two Phase Financing
The examples indicate that financing is temporary if it is designed to be replaced by permanent financing of a much longer term.
This statement is the one that has caused the most confusion. Normally, temporary financing is replaced by permanent financing. The typical bridge loan will not be fully repaid by the sale of the old home. The temporary loan will be replaced by permanent financing of a much longer term when the old home is sold. Likewise, most construction loans are replaced by a permanent loan. It is the permanent financing from these scenarios that is reported for HMDA. The general rule is, banks should not double report a borrower’s transactions.
But what if the bridge loan will not be replaced with permanent financing? For instance, assume your borrower bought a home in California for $40,000 back in 1970. Today the home is worth $500,000. Now this person wants to purchase a home in the Midwest for $250,000 but needs bridge financing until their California home sells. There is enough equity to pay off the temporary financed amount once the sale is complete. No permanent financing is intended.
When some read the FFIEC Q&A, they believe it says to report the bridge loan described above because it is not “designed to be replaced by permanent financing”. However, this understanding is incorrect as Regulation C clearly states “A financial institution shall not report: Temporary financing (such as bridge or construction loans).” The Q&A may appear to be inconsistent with the regulation; however, the Q&A (or for that matter any guidance: commentary, staff interpretation, etc.) can never contradict the law or regulation. Further guidance is used to fill in the blanks and answer questions, not contradict what has been stated by the law. Therefore, reporting a bridge or construction loan because it is not followed by permanent financing is not accurate.
So what does this sentence in the Q&A mean? We believe it provides guidance to those situations where you don’t have a bridge or construction loan, yet you’re not sure if it is temporary or short term. In fact, more clarification is provided in the next few sentences of the Q&A.
Using David’s example, we would not report our loan because it would be defined as a bridge loan. However, we are getting confused with the guidance that suggests you should determine if the loan will be replaced by another loan when deciding if to report a loan on your LAR. I think it could easily be argued that the loan in question should be reported due to the fact that it is the only “opportunity” to report the loan in question.
I’m hoping that you can tell us two things:
1. Is our loan reportable?
2. When should we use the guidance of determining if the loan will be replaced by permanent financing of a much longer period?September 25, 2015 at 8:30 pm #8159
Great job on your research!
I am of the opinion based on the regulation that the example you gave is considered “temporary financing” and would not be reportable under the regulation. The loan officer documented that the loan wouldn’t be replaced with permanent financing and would be paid off with proceeds from the sale of the home. I think this is a very true example of temporary financing and was well documented by the lender.
In addition, the guidance of determining if the loan will be replaced by permanent financing must be based on the lenders best indication by the customer that the loan will be replaced by more permanent financing. If the lender determines that the customer is likely to replace the temporary loan with permanent financing, whether by your financial institution or another, it should not be considered temporary and would be reportable.
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