VIDEO: HMDA Temporary Construction Loan Modification
In this Compliance Clip (video), Adam answers a HMDA question that he recently received about reporting a temporary construction loan that has been modified on the HMDA LAR. Specifically, the initial loan was temporary financing and was designed to be replaced by a permanent loan, but was not sold on the Secondary Market as intended. Watch as Adam tries to simplify a somewhat confusing topic.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about a HMDA temporary construction loan that has been modified. Specifically, I received this question recently. This question said, “We had a construction loan that we were unable to sell on the Secondary Market for permanent financing like we intended. We ended up doing a modification on our in-house portfolio for a term of 20 years. Since we did not report the temporary financing construction loan, would we now report this modification on our HMDA LAR? It is a dwelling-secured, closed-end and no longer temporary, and previously not reported on our HMDA LAR.”
What we have here is a loan that the bank did in their in-house portfolio as a construction loan, and the customer was planning to get a new loan on the Secondary Market. The initial loan was temporary financing because it was designed to be replaced by another loan to the same borrower that'd be much longer term, thus the secondary market loan. Unfortunately, they were unable to do the loan for the secondary market and sell it on the secondary market. Therefore, they extended the loan, did a modification and they are now keeping it in portfolio. So they didn't do a new loan. They just did a modification. Instead of doing two loans, like they originally intended, they have one loan that was now modified. That loan is no longer temporary because it's now permanent financing. Does this loan now need to go on the HMDA LAR?
The answer to this, of course, is going to come from Regulation C and the Home Mortgage Disclosure Act. But also we can get a little bit more clarity if we look at the CFPB's Frequently Asked Questions in the section on Construction and Construction/Permanent Transactions, Frequently Asked Questions number 2 and 3. These frequently asked questions talk more about a builder loan where the builder had done the loan. They were planning to sell it, but they weren’t so they’re able to now do a modification and keep it as a spec home or something like that. I can't remember exactly, but it's a slightly different situation, but it absolutely applies to this question.
Instead of giving you the overview of those frequently asked questions, I just want to give you a summary of that. The first thing to know is the fact that the house was not sold after construction and permanent financing was unexpectedly obtained. It's unexpected. They planned to sell it, but now the plans change, so it's unexpectedly obtained. This does not render the construction-only loan reportable under HMDA. In other words, it is not now suddenly reportable because things changed. The idea with HMDA is it is what it was. So at the time of closing, it was a temporary loan, you leave it as a temporary loan. In addition, the original construction loan was later modified into permanent financing. Because of this, without a new extension of credit occurring, the modification is not reportable under Comment 2 to 1003.2(d). In fact, we can go on to explain this a little bit further. There's some examples. They talk about some transactions completed pursuant to installment sales contracts, such as some land contracts, depending on the facts and circumstances, may not involve extensions of credit rendering the transaction closed-end mortgage loan. The bottom line is a modification is not reportable. That's what all of this is saying.
It's not a new loan, modifications are not covered under HMDA rules. So just because we had an initial loan where things changed, we don't worry about things changing later, that modification does not trigger the loan to now be HMDA reportable. That is the bottom line on this question.
That's all I have for you for this Compliance Clip.