HMDA Temporary Financing for Bridge Loans
In this Compliance Clip (video), Adam talks about HMDA applicability for bridge loans under the new temporary financing rules. While these rules have been around for a bit now, we are still seeing some confusion with reporting (or not) bridge loans as it relates to HMDA.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about HMDA temporary financing for bridge loans. The question we have today is, “Are bridge loans still automatically exempt under the new HMDA rules?”
You have to understand under the old hunter HMDA prior to 2018, which are the rules we are following today, the language for temporary financing was different. So language today is different than what it was before, and under the old rules, it basically said temporary financing like bridge loans or construction loans. And because the way that language was written under the old rules, some understood those rules to mean that bridge loans were automatically exempt as temporary financing. Then temporary financing had a different definition under the FFIEC frequently asked questions, and it was a little bit confusing.
Well, under the new rules, we have new language. So what we're gonna look at today is our answer. And our answer of course, is found in Regulation C, and it's found in 1003.3(c0(3), and specifically the commentary to this part of the rule. So let's look at the official commentary. The commentary talks about bridge loans and says, “A loan or line of credit is considered temporary financing and excluded under 1003.3(c)(3) if the loan or line of credit is designed to be replaced by separate permanent financing extended by any financial institution to the same borrower at a later time.”
This here is a mouthful. So let's break it down. We're talking about a loan or line of credit, and for it to be considered temporary financing and be exempt from HMDA reporting, the loan or line of credit must be designed to be replaced by separate permanent financing. That's the test number one. So it has to be designed to be replaced by separate permanent financing. So we're talking about a short-term loan that sets us up for a long-term loan that will replace that short-term loan, right? So for example, if I have a line of credit, then I'm going to pay down when I get my new loan, but not pay off, that's not replacing it. We need to replace that and essentially satisfy the mortgage pay off that, note, completely that would satisfy and replace that permanent financing. And that's our test number one.
Now moving on, there's more to this we have to look at because it talks about the loan must be to the same borrower. So if I'm doing this as a construction company first with a short-term loan, long-term loans to me as an individual, that's not to the same borrower. So it needs to be to the same borrower.
And the third piece, of course would be it's gonna happen at a later time. So what temporary financing is, really not specific yet to bridge loans, is that it's a loan or line of credit that's designed to be replaced by separate permanent financing to the same borrower at a later time. Now, the commentary gives us some examples, and there is an example that talks about bridge loans specifically. And in this example it says, “Lender A extends credit in the form of a bridge or swing loan to finance a borrower's down payment of a home purchase. The borrower pays off the bridger's swing loan with funds from the sale of his or her existing home and obtains permanent financing for his/her new home from lender A or from another lender. The bridge or swing loan is excluded as temporary financing under 1003.3(c)(3).” Now, this could be a little misleading upon first glance because the challenge is that bridge or swing loans are not defined anywhere in Regulation C and under rules.
So what is a bridge or swing loan? Well, they're talking here about how a borrower would pay off a bridge or swing loan with funds from the sale of his or her existing home. So we're using an old home to bridge the gap in financing to get our new home. So we use the funds. We buy a new home, then we get a new loan on the new home and we pay off, and that's a bridger or swing loan essentially is what they're talking about. And again, it's not really defined. So it’s not an absolute. But there is a key in all of this. There's an absolute key here because when we look at this example in the commentary, it could be a little misleading if we don't look at a key term because the key term here, of course, is “obtains permanent financing for his or her new home.”
A bridge loan is only a bridge loan if we obtain permanent financing. So if we have a bridge loan and then we sell our old home and pay off that loan with the funds from our home, and we have money left over and don't get a new loan, that's not considered exempt because it doesn't meet the definition of temporary financing that we just talked about from the commentary.
The bottom line here is, in order for a loan to be exempt as a bridge loan has to meet the definition of temporary financing, which means it must be designed to be replaced by new permanent financing at a later time to the same borrower. That's how bridge loans work today.
That's all I have for you for this Compliance Clip.