HMDA Loan Purpose Code for Business Purpose Loans
This HMDA video focuses on the loan purpose code for business purpose loans. Plus, Adam explains that there is one code you will never use for business purpose loans.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to focus on the Loan Purpose for Business Purpose Loans under the Home Mortgage Disclosure Act. This video applies only to HMDA reporters.
We're looking at the rule for loan purpose. The rule is 1003.4(a)(3), and specifically, this rule says to report whether the covered loan or application is a home purchase loan, a home improvement loan, a refinancing, a cash-out refinancing, or for an “other” purpose other than those first several purposes. So that is the rule.
The rule is pretty simple. In and of itself, it's very vague. And because of this, we often get questions that take a deeper dive into the rules. So the question today is what purposes are used for business or commercial purpose loans?
When the new HMDA rules that took effect on January 1, 2018 first came out, I was reading through the rules myself and I got a little excited because I read something that looked like business loans were going to be excluded. I was like “Oh, yay!” but then I read on and realized that wasn't the case. The point is that originally some of us thought that business loans might be excluded but the way the rules are written, that is not the case. What they did do, however, is make the rules for business loans different than they are for consumer purpose loans.
So the answer to our question of what purposes are used for business or commercial purpose loans, the answer is found in Comment 5 to 1003.4(a)(3) which is the citation in Regulation C that talks about the requirements for loan purpose. So Comment 5 talks about the purpose for business or commercial purpose loans and what it says is to report only purchases, refinancings, and home improvement loans. That's what it specifically said. If you look at the exclusions as well it basically says if the loan is not for a purchase or refinance or home improvement, it is going to be excluded from HMDA reporting.
So, just to be clear and to clarify something here that cash-out refinancings, I believe, are going to be reported on business purpose loans. There's been some discussion over the period of time that HMDA has now been implemented as to whether or not you report cash-out refinancings for business purpose loans, and I say you do. It is somewhat debatable but my thought is that you absolutely could report it because, technically, cash-out refinancing is just a type of refinancing it's not a separate category it's just a type of refinancing and we could prove that by looking at the small entity compliance guide. They specifically have a chart that talks about which type of loan trumps another type of loan in the HMDA hierarchy. And basically, what you see there is you never have both an opportunity for a refinancing and a cash-out refinancing, meaning that those two categories are one category. Basically, your first option is a purchase, your second option is a refinance. Part A is a refinance without cash-out and Part B is a cash-out refinance and then the third part is home improvement the fourth is other. So I look at that as all one category so you could have a cash-out refinance for a business or commercial purpose loan.
Now the rule basically says that you will never report “other” as your loan purpose for business or commercial purpose loan. So you're going to report a purchase, a refinance or home improvement, but you should never have a code for “other” for a business or commercial purpose loan.
That covers our topic for today. I hope that this was informative. I hope you enjoyed it.