HMDA says you should not collect/report on business purpose home equity loans/lines unless the purpose is to purchase, refinance or improve a dwelling. So, for example, you would not collect/report on a dwelling-secured loan to purchase business inventory. However, if that loan is later refinanced (and meets the HMDA definition of refinance), it would be HMDA reportable. The problem is, you might not know at the time of application whether such loans are HMDA reportable. So, do you collect demographic information at the time of application, or don’t you?
David explains more in the video.
We're talking about business purpose and home equity. And we're under the heading of "Do not report" on page 18. So imagine I can't make payroll this month. Don't tell anybody. I mean, I got two people helping out on this webinar. So I go to the bank and say, "Hey, I need a line of credit to make payroll." That's business operations. My banker says, "You know, Dave, what do you get for assets? I see some computers." "I have some cameras. That's all I got." "Well, we want your house as collateral." That'd be prudent. So you've got a dwelling-secured loan. It's not to purchase, refinance, or improve. Does it fit in this other bucket?
And the answer is no. If it's the first time and it's being used for other than a dwelling, it's business operations other than a dwelling. I don't want just to say business loans because a rental house is a business loan. Apartment complexes are business loans. First Reg Z, right? But in this case, it's not a housing-related business. Then we do not want that. Here's the catch. You want to write this down, but if refinanced. So, the first time I do this loan, you're going to say, "That's a business equity loan. We're not doing HMDA, even though it's dwelling secured." But if I come back and we refinance that, then it meets the definition of refinancing. And so, you would record that as a refinance. Now, I'm going to mix something together here. A little bit ago, we were talking about refinances on page 13. And I talked about that it had to replace satisfy extinguish, right?
That loan A is being taken out by loan B. Now I've got these home equities. Let's put a couple of things together and connect some dots. What if someone had a million-dollar line of credit at your institution and used that to buy houses and fix up some of their rentals and things like that? You would call that HMDA because it's dwelling secured and it's used for dwelling business operations, but dwelling related. Now, that line of credit is filling up because I just bought two rentals. And so, the loan officer approaches the customer and says, "Hey, let's take that money, and we'll put that on a five-year amortization. We're going to term it out, but we're not paying off the line of credit. We're paying down the line of credit." Do you follow me?
That line of credit will continue so that this borrower can buy more houses and do things. But you're allowing them to take that chunk and amortize it out. That is a new loan that you just did. Is that a refinance? And the answer is no. If you go back to page 13 with me, one of the issues C-1 was that the refinancing occurs on contract law, meaning that it satisfies, replaces, and extinguishes. Loan A is wiped out with loan B. Well, that didn't happen. Loan A, line A continues. This million-dollar line got paid down so that we can draw it back up, but it didn't get satisfied, replaced, or extinguished. Instead, we have a new loan.
Is it to purchase? Well, no, it's already been spent, if you will. And now they're just going to pay that down or pay it off by putting it on a five or 10-year amortization. So it's not a purchase. It's not a refinance because it didn't satisfy replace, extinguish. It's not an improvement. Is it another? Well, it's not housing related. It's a business loan paydown. So it doesn't fit here. I mean, in a sense, what it does is it fits letter C as an exemption, and it really falls through the cracks. If we were to refinance that loan, we would have a refinancing for HMDA. But that first time you take that line and pay it down with this new loan, I'm talking about this new loan. What is that?
Published
2022/11/14