Taking HMDA Speculation Out of Spec Homes
As many of our clients are now going to, once again, be subject to HMDA reporting, we are receiving many questions on construction loans to builders for spec homes for sale. Often the guidance does not provide an example to fit the exact scenario that you may be faced with. This article includes a few of the questions we have recently received and some guidance from the CFPB. Hopefully, this information will help when trying to determine whether or not you have a reportable construction builder home.
Questions received, including responses:
1. We have a construction/perm loan builder loan where the terms are interest only for 18 months, then principal and interest over 20 years. The loan was a one-time close that was funded. This loan was reported as a purchase in the prior year. The builder has now requested additional funds to complete the construction. We are going to complete a modification to increase the loan amount. Will this advance be reportable?
If the advance of funds is accomplished with a modification that does not meet the definition of a refinance that will satisfy and replace a previous obligation to the same borrower, the modification would not be reportable.
While modifications are not reportable in the compliance regulations, for HMDA purposes, the advance of new money is not specifically an example of something that is not considered a refinance, nor is it an example of something that is specifically considered a refinance. It is the opinion of our advisors that you will want to ensure you truly have a modification by looking at whether you are satisfying and replacing an existing obligation under your state law where it may be deemed a refinance as a new advance modification may be inconsistent with state law. However, as HMDA falls under federal compliance regulations and HMDA specifically excludes modifications for reporting purposes, it can be argued that you are following the regulation.
2. We have a builder that purchased a lot loan with no dwelling; then, a year later, the builder requested additional funds to construct a dwelling for sale on this land. If we fund this advance with a modification agreement, will this advance be reportable?
If this advance was completed with a modification agreement, it would not meet the reportable definition of a purchase, refinance, or home improvement under the regulation; therefore, this advance would not be reportable.
Also, the CFPB Commentary states: 1003.3(c) –2. Loan or line of credit to construct a dwelling for sale. A construction-only loan or line of credit is considered temporary financing and excluded under § 1003.3(c)(3) if the loan or line of credit is extended to a person exclusively to construct a dwelling for sale. See comment 3(c)(3)-1. ii through .iv for examples of the reporting requirement for construction loans that are not extended to a person exclusively to construct a dwelling for sale.
So, even if this was a new loan and not a modification, you would still be able to consider this request an advance to construct a dwelling for sale. If this is processed as a new obligation, it is recommended to clearly document that the funding was exclusively used to construct the dwelling for sale, and it would not be reportable.
3. We have a construction-only builder loan with a purpose to build and sell a spec home. The terms are interest only for 18 months and then principal and interest for 180 months, and a buyer has not yet been identified. Now the builder has requested additional funds to complete the construction. Is this new request reportable?
First, there isn’t anything in the regulations that require a potential buyer to be identified. The criteria is that the credit is extended “exclusively to construct a dwelling for sale.” In addition, the regulation does not speak to any mandated restrictions on terms, so the 36 months would/could be acceptable. The key is to make sure the intent of the borrower is clearly documented in the file to avoid potential issues with examiner criticism. If the request is for additional funds, it would likely either be accomplished through a modification agreement or as a refinance. If it meets the definition of a refinance, it becomes a little more fuzzy. The commentary states that the spec loan and any “renewal” is not reportable, but it doesn’t use the term “refinance,” so it is unclear as to whether it would be considered reportable because the purpose of the new loan would be to construct a dwelling but ALSO to refinance credit already extended. You might be able to defend not reporting it because the previous loan was to construct a dwelling for sale, and the purpose of this loan is to finish the construction. The concern is the use of the word “exclusively .”Absent an example in the guidance, I’m not sure an examiner would extend the exception to the subsequent refinance with additional funds. It would be best to go with a modification and avoid the refinance issue.
In addition to the questions above, the CFPB does have a few FAQs regarding builder loans on its website. The most requested one includes the discussions on construction loans where a dwelling exists but is going to be torn down and replaced by a new spec home. Per their guidance, a builder loan to purchase land that includes a dwelling, even if the purpose and use of funds will be to tear down that dwelling and construct a new dwelling for sale, it will be reportable as a purchase. I hope this information is helpful when considering reporting builder loans. The key is to review each request for credit on a case-by-case basis and ensure your documentation includes your reasons for reporting or not reporting these types of applications.