July 11, 2019 at 11:09 am #15787
Need clarification concerning the real estate exclusion. Section 1041.3(d)(2) states that credit secured by any real property, or by personal property used or expected to be used as a dwelling, and the lender records or otherwise perfects the security interest within the term of the loan is excluded under the rule. My question is what about refinanced real estate where the mortgage is recorded during the term of the loan being refinanced?
Loan A is secured by real estate and the mortgage is recorded – excluded under the Rule
Loan B refinances Loan A – Loan B is secured with the same mortgage that was recorded during the term of Loan A
Is Loan B excluded from the Rule or is it considered a covered loan?July 17, 2019 at 2:33 pm #15802
You’re right, there isn’t clarity on the real estate secured loan exclusion as it applies to refinances and unfortunately the preamble to the final rules doesn’t provide much clarity either. It does indicate that the requirement for the perfection of the security instrument during the term of the loan is in part to avoid the real estate loan exclusion being used as a sham:
requirement that the security interest in
the real estate be recorded or perfected
also strongly discourages attempts to
use this exclusion for sham or evasive
purposes. Recording or perfecting a
security interest in real estate is not a
cursory exercise for a lender—recording
fees are often charged and
documentation is required.
The purchase money exclusion specifically states the exclusion applies to the initial purchase, meaning refinances are excluded, so that is clear. However, considering the context of how real estate security interests work there is a little more ambiguity in this exclusion. I believe the intent is to exclude real estate secured loans, specifically because if the security instrument has already been perfected in the original loan and will extend to the refinance then there isn’t the need to re-file/record it during the term of the refinance. But again that isn’t completely clear with the way the regulation is worded.
I have reached out to the CFPB to see if they will offer any clarification on the language of this exclusion.July 18, 2019 at 2:28 pm #15808
The CFPB called me back today and said the refinance loan in your example would meet the real estate secured loan exclusion since it ‘otherwise perfect” the security interest in the property through language in the loan agreement and the mortgage.
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