HMDA is the federal statute that requires financial institutions to collect and report data on closed-end mortgage loans, as well as open-end lines of credit, secured by dwellings. According to the rationale, this data will be used in identifying potential patterns of discrimination in mortgage lending. But what about commercial loans? Are they subject to HMDA reporting?
What loans are HMDA reportable
Under the Home Mortgage Disclosure Act, financial institutions must collect data and report on certain mortgage loan applications. HMDA data identify geographic patterns of lending discrimination and provide data to enforce fair access to housing credit. Not all loans, however, are subject to HMDA reporting.
Here’s a breakdown of which loans are typically reported:
- Home purchase loans: Financing to buy a residential property.
- Home improvement loans: Loans to renovate or repair a dwelling.
- Refinancing loans: Replacing an existing mortgage with a new one.
However, there are some key points to consider:
- Loan type: Only closed-end mortgage loans and open-end lines of credit are reportable.
- Institution volume: Institutions must originate a certain number of loans (usually 200 for open-end lines of credit) within the past two years to be subject to HMDA reporting.
- Exclusions: Certain transactions are exempt, like loans secured by vacant land or those originated in a fiduciary capacity (e.g., by a trustee).
Are investment properties HMDA reportable
Yes, investment properties financed with certain loans can be HMDA reportable. The key factor is the purpose of the loan and type of dwelling involved.
Breakdown:
HMDA applies to closed-end mortgage loans secured by a lien on a dwelling. This would include investment properties as long as they are considered to be dwellings. Dwellings may include single-family homes, condominiums, manufactured homes, and even some vacation homes.
Here, purpose of loan will matter. If the loan is for either purchasing an investment property or refinancing the same, then chances are it will be reportable under HMDA. However, “investment” itself is a general term.
Here are some additional points to consider:
- Business purpose loans generally aren’t reportable. If it’s a business purpose other than the purchase, improvement, or refinancing related to the property collateral, then chances are it isn’t reportable.
- Be specific. HMDA reportability will be dictated by what the funds are to be used for. You need to find out exactly what — is it going to be for purchasing a rental property, improving a rental property, or for some other use?.
Are construction loans HMDA reportable
No, generally, a construction loan is not HMDA reportable. They are excluded from the HMDA as temporary financing under the Home Mortgage Disclosure Act regulations. There are a couple of key points to consider:
Construction to permanent financing: If the construction loan is intended to be replaced by permanent financing for the borrower,it is exempt from HMDA reporting
The permanent loan would be the one for the purchase of the dwelling.
Construction for sale: Construction loans solely for the construction of a dwelling to be sold are also exempt [2]. These would fall under speculative construction loans.
However, there are a limited number of exceptions to the exemption:
Combined construction/permanent loans: If the loan combines construction and permanent financing, then it is HMDA reportable.
Construction on owned dwelling: If the construction loan is for an already-owned dwelling, then it may or may not be reportable, based on purpose.
For further clarity on these and other situations, refer to the Consumer Financial Protection Bureau’s (CFPB) guidance, or seek the advice of a qualified financial professional.
Generally Not Reportable:
- Pure Business Purpose: Commercial loans obtained strictly for business purposes, such as equipment purchases or inventory financing, are exempt from HMDA reporting.
Reportable When Used for Dwelling-Related Activities:
- Home Purchase: A commercial loan used to purchase a dwelling is HMDA-reportable.
- Refinancing: If any commercial loan refinances an existing obligation secured by a dwelling, this is HMDA reportable.
- Home Improvement: Any commercial loan for home improvement is HMDA reportable, if the loan is for significant improvements of a dwelling.
Key Points to Remember:
- It is the purpose of the loan, not the borrower that determines HMDA reporting — individual or business.
- A dwelling-secured business purpose loan with a purpose other than home purchase, refinance or improvement is not HMDA-reportable.
- It is business purpose that makes the difference, not because the borrower is a business entity.
FAQs
Q: I have a commercial line of credit with my bank secured by my investment property. If I use the funds for business purposes is it HMDA-reportable?
A: No, assuming that the purpose of the credit line is not for dwelling-related purposes such as purchase, refinance or improvement.
Q: I am refinancing my business loan with a commercial loan secured by my primary residence. Is this HMDA-reportable?
A: Yes, because the loan refinances a dwelling and, therefore is within the scope of HMDA reporting.
Q: I am unsure if my commercial loan is HMDA reportable. How can I know for certain?
A: Contact your financial institution’s compliance department or lending professional for further consultation.
Conclusion
Understanding the applicability of HMDA to commercial loans is very critical to both the lender and the borrower. It allows for proper identification of reportable transactions, so a lender will not have issues with compliance. The borrower can receive proper HMDA disclosures prior to consummation and avoid HMDA reporting delays. Remember to consult qualified counsel when questions arise about HMDA compliance.
I am Henry, a professional in commercial financing with more than 10 of experience under my belt in this industry. Over the years, I have committed my tenure to the professional guidance of some of the businesses out there just like yours through the complex truths of a commercial loan process. I have developed such fervent interest and commitment to truly making it possible for many clients to get funding which enables them to develop and grow.
