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HMDA – HELOC – Business Purpose

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  • #36792
    SMcNeal
    Participant

    We have a HELOC made to an individual for the purpose of buying out his business partners interest in their company. Would this loan be HMDA reportable as a Consumer purpose HELOC or not reportable under HMDA’s business purposes which was not used to purchase, refinance or home improve a dwelling? I have persuasive arguments for both sides and wanted other takes on the matter.

    • This topic was modified 2 months ago by SMcNeal.
    #36795
    pparks
    Participant

    Given that this is a HELOC, what are his plans for it after he buys out his partner’s interest? When I think strictly of the initial purpose, my inclination is to not report it as it is for business purposes (if no refi is involved)…but I am curious if someone ever asked about the subsequent purposes. The main thing here is taking what you believe to be the most defensible position and be consistent in your approach with future similar transactions.

    #36800
    jholzknecht
    Keymaster

    Good question. Good input from pparks.

    HMDA contains an exemption, in Section 1003.3(c)(10), for a closed-end mortgage loan or open-end line of credit that is or will be made primarily for a business or commercial purpose, unless the closed-end mortgage loan or open-end line of credit is a home improvement loan under § 1003.2(i), a home purchase loan under § 1003.2(j), or a refinancing under § 1003.2(p). The open-end line of credit is for a business purpose and it does not appear to be for home improvement, home purchase or refinance. So the line of credit would be exempt.

    Pparks notes that the initial purpose is business, but if later transactions are consumer purpose maybe the line is for consumer, not business, purpose; which would trigger HMDA and right of rescission issues.

    For a transaction to qualify as a line of credit, there is an expectation of repeated transactions. If line is used only to purchase the business and there are no further extensions contemplated, then the transaction is not a line of credit. It would be a closed-end extension of credit. The closed end loan would require different documentation.

    #36826
    SMcNeal
    Participant

    Thank you both for your input it has helped us further our discussions with our lender.

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