Are Construction Loans HMDA Reportable?
The short answer is: no, sometimes, and it depends. Why in compliance does the answer always seem to be “it depends”? As it relates to construction loans under HMDA, it depends on the type of construction loan and whether Regulation C provides a specific exclusion. While every construction loan scenario is not discussed below, the more prevalent scenarios impacting banks in 2018 are covered. And while most compliance officers are still rejoicing having just submitted 2017 data, let’s not rest on our laurels. We all know there are many nuances and corner cases within HMDA, but one that plagues many institutions is whether to report construction loans. Now let’s cut to the chase and address some specific scenarios.
Construction Only Loan (Two-Phase Financing) – Many banks offer a construction-only loan product and will assist a borrower with obtaining permanent financing through another department of the bank or through another lender (usually through the secondary market channel). In this instance, there are two phases of lending–one for financing the construction of the dwelling and the second phase to provide permanent financing. The construction loan in this scenario is designed to be replaced by the permanent financing and therefore is considered “temporary financing” and specifically excluded from reporting under Regulation C. (The financial institution extending the permanent financing would of course report the loan as a “home purchase.”)
Temporary Financing: “A transaction is excluded as temporary financing if it is designed to be replaced by separate permanent financing extended to the same borrower at a later time. The separate permanent financing may be extended by any lender (i.e., by either the lender that extended the temporary financing or another lender).”
Construction-to-Permanent Loan (Single-Close) – When a construction loan will automatically convert to permanent financing after the construction phase is complete (i.e., only one combined loan), the transaction is reported once on the bank’s loan / application register (LAR). In this scenario, the construction loan and permanent financing are like peanut butter and jelly–they just go together. Therefore, the tasty combined loan is not considered “temporary financing” and therefore not excluded from reporting.
Builder (“Spec”) Construction Loan – The economy is booming in many parts of the country and as such builders are constructing “spec” homes or “pre-sold” homes in large numbers. That said, these types of loans (thankfully) are not reportable. Specifically, if a loan or line of credit is made to a person exclusively to construct a dwelling for sale it is considered “temporary financing” and thus excluded from reporting requirements.
“A construction-only loan or line of credit is considered temporary financing and excluded under Regulation C if the loan or line of credit is extended to a person exclusively to construct a dwelling for sale.”
“Other” Construction Loan – Wait, there’s an “other” category? Unfortunately, (kind of) yes. While not what most would consider a construction loan, a loan to improve real property on which the dwelling securing a loan is located would be reported for HMDA purposes. For example, if a loan is secured by a dwelling and is for the purpose of constructing a garage on the real property where the dwelling is located it would fall into this “other” category and would be reportable as a “home improvement” loan.
“For example, a Home Improvement Loan includes a covered loan used to install a swimming pool, construct a garage, or improve landscaping on the real property on which the dwelling securing the covered loan is located.”
“Flip” (Investor) Loan – While these types of loans are also not really construction loans, it’s worth discussing them. In most cases, “flip” loans are reportable. For example, if a bank extends a nine-month loan to an investor who then uses the loan proceeds to purchase a home, renovate it, and sell it before the loan term expires, then the loan is reportable. The loan does not fall under the definition of temporary financing because it is not designed to be replaced by separate permanent financing.
Let’s ‘Get it Right’
If you haven’t already, you should get familiar with the new FFIEC HMDA Getting it Right! Guide (2018 Edition). The guide will answer many, if not all, questions on collecting, reporting and submitting HMDA data in 2018. If you find your eyes crossed and are feeling frustrated, please feel free to contact us. We would be more than happy to help!
William A. (Dru) Childress
CRCM | CPA
e: dru@sentryadvisory.com
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