Article By: Gregg Oberg, Spillane Consulting Associates, Inc.
Compliance Support on Speed Dial
SCA has established a Compliance Hotline to assist our clients with those one-off, unanticipated questions. Wondering if you need a LE and CD on an abnormal transaction? Not sure how to handle multiple properties as security in HMDA reporting? Just want a second set of eyes on an advertisement or new policy? These are all good reasons to call or email SCA’s Compliance Hotline. Not everyone has a team ready to handle these questions confidently and quickly; but SCA does.
Not Just Compliance
At SCA we have decades (probably more like 100’s, ask one of our consultants, they’ll tell you their background) of years of combined experience in banking, finance, and specifically the mortgage industry. Odds are, somebody here has encountered the problem you’re seeing—or at least an analogous issue from which we can draw lessons. When you call the SCA Compliance Hotline, you’re not getting the regulatory reference—you’re getting a thoroughly reasoned response, drawing on all our combined expertise.
Show, not Tell
I thought a lot about how to describe the type of question we see on a daily basis from our Compliance Hotline clients. But the only thing I can say with certainty is “we get a wide range of weird/interesting questions.” With that said, let me SHOW you some of the interesting scenarios we see. It seems only fair to give you some answers if you’re going to read this shameless self-promotion!
These are actual questions and answers from the HMDA 11th HourWebinar in February, hosted by the MBA’s Ben Craigie, in which Embrace Home Loans’ Ben Giumarra and I discussed implementation challenges with the new rule.
1. Commercial loan that is secured by a piece of land that has 6 individual parcels, parcel 1: 4 family, parcel 2: 4 family and 6 family, parcel 3 has a 6 family, remaining 3 parcels are land only-when we report, do we select just one of the dwellings? And do we only report the number of units for the dwelling we’re selecting, or do we aggregate amongst all the dwellings?
Comment 4(a)(9) to 1003.4 handles loans secured by multiple properties. The first step in your example is to determine which one you will be using for purposes of 4(a)(9) (property address related fields). The comments state that when multiple properties are taken as security, you get to select ONE of these properties SO LONG AS they do contain a dwelling. So parcel 3-6 should not be the address in 4(a)(9).
Let’s assume you selected Parcel 1 as an example. The data points that refer to the specific property you select (those that contain a cross reference to 4(a)(9) in the statute) are to be reported ONLY with reference to that property. The other data fields are reported with regard to the entire transaction.
Specifically to your question, 12 C.F.R. 1003.4(a)(9) Official Commentary-2 provides that “for aspects of the entries that do not refer to the property identified in 1003.4(a)(9) (i.e. 1003.4(a) … (31)…) Financial Institution … reports the information applicable to the covered loan … and not information that relates only to the property identified in 1003.4(a)(9).” 1003.4(a)(31) requires the reporting of number of units.
Bottom Line: whether you pick parcel 1, 2, or 3, you’ll still aggregate the total units for purposes of 1003.4(a)(31), which is 20 if my math holds up.
2. What constitutes a mixed-use property? Must they share a roof and a wall? or if we have a detached commercial property on the same parcel as a residential dwelling, is this mixed use so that we perform our analysis as to whether more commercial or residential?
No, they do not need to share a wall. In this case, perform the typical analysis you do with a mixed-use property as if these two were under the same roof. Essentially, if they’re on the same parcel it doesn’t matter how they’re laid out (side by side, top/bottom, completely detached, etc.
Reasoning: The definition of Dwelling under HMDA includes detached structures. So, for example, a guest house on property could be considered a dwelling. HMDA Dwellings also include manufactured home communities, without regard to whether the actual manufactured homes are used as security on the loan, as long as the underlying land itself is.
So, taking those two examples, it becomes clear that HMDA Dwelling focuses on the property itself, not so much the structure. In the guest house example, we would consider both the main dwelling and the guest house to be dwellings under the definition. However, because they are on the same parcel, the loan is secured by that property entirely, not individual units. Thus, in the even you had multiple dwellings on the same property, the “detached” status is irrelevant. Now applying this logic to mixed use property, it is clear we have one property with both commercial and residential uses, in at least two detached structures on the property. You would determine the primary purpose of the property (either commercial or residential) using your institutions procedure for such determinations. If you determine that it is not a dwelling, then no HMDA reporting.
3. For occupancy on a 1-4, a mixed-use commercial loan that has been determined to be HMDA reportable is made to an entity, it is guaranteed by an individual who will occupy as their primary residence. Do we report as owner-occupied if the borrower and owner of the property is the entity? i.e. deeded to entity / borrower, not guarantor.
Very fact specific. First off, the technical requirement to report is not whether it is or is not owner occupied, that is just a factor in determining the use of the property with respect to the applicant(s).
HMDA requires us to report the property use as either primary/secondary residence, or investment property. Specifically, “[w]hether the property … will be used by the applicant or borrower as a principle residence, as a second residence, or as an investment property.” 1003.4(a)(6)
Although HMDA does not define “applicant”, the definitions contained in ECOA/Reg. B are generally applicable. Reg. B defines Applicant to include anyone who is or may become contractually liable regarding an extension of credit (1002.2(e)). It explicitly includes guarantors.
So, we’ve concluded that the applicant, under this definition, is going to live in the property as a primary residence. The question then becomes how to treat a property when the borrowers have multiple competing uses for it. Assuming that the property is an investment to the entity listed as the applicant, we must decide which one we report on.
As there isn’t a clear answer provided in the rules for this scenario, let’s talk common sense on the facts of the transaction. What is the guarantor’s relation to the entity? What was the entities primary purpose in holding this property? Why is the guarantor living there? Is he an employee that is housed there as a benefit? Is this simply a case of an individual borrower closing in LLC on a run of the mill dwelling secured transaction? Remember that we are making these determinations based on the best information available at the time, as provided by the borrower. If you can properly document WHY you made either decision (primary or investment) and would continue to walk down the same path in making this determination every time, I think you are safe.
I am leaning towards this is a primary residence just because I think the true purpose of this transaction is to purchase a primary residence for the guarantor.
How To Get Started?
Give us a call or email us! One of us will get back to acknowledging the receipt of the question, and most answers can be provided within 2 business days, at most. We’ll keep you in the loop on expected hours to complete, and follow up with any questions we need to solve the issue.
**These are our opinions. We’re not authorized, or willing, to express those of others.**
Thank you to Gregg Oberg, Spillane Consulting Associates, Inc., who with the support of other experts at SCA have put together this newsletter.