Answer:
You are correct that HMDA reporting is based on purpose and collateral (although collateral is irrelevent for home improvement lending). But HMDA reporting excludes temporary financing of any sort. However, HMDA regs do not define "temporary financing". Some misunderstanding about the 24 month issue comes from the fact that RESPA, a different regulation altogether, in clarifying the term "temporary financing" states that any loan with a term of more than 24 months in NOT temporary financing. Well, many lenders have taken that to mean that any loan with a term of 24 months or less is temporary financing, but that is incorrect. First, the clarification in RESPA only applies as the term is used in RESPA. Definitions from one reg don't carry over to any others unless specified that they do. So we can't use the RESPA clarification for HMDA purposes. For HMDA purposes in determining whether a loan is temporary financing, I train our lenders to use both the term and the anticipated source of repayment in making the determination. Certainly, the guidance from RESPA is reasonable, and absent any definition in HMDA I've instructed our lenders that any loan with a term of more than 24 months will not be considered temporary financing for HMDA reporting. But it is also possible to have a loan with a term of less than 24 months that is not temporary financing either it's just a short term loan. I use the following examples to help explain:
A borrower comes in for a short term loan to pave their gravel driveway. They want a 6 month loan that will be paid back from a combination of regular salary and Christmas bonus. Although this is short term financing, I would not consider this "temporary financing" and if this loan is classified on our books as "home improvement" it should be reported for HMDA.
On the other hand, a borrower comes in and wants a 6 month loan to add a deck to the house. They are in the process of shopping for a mortgage refinance on the whole house and will be paying off the deck loan with the mortgage refinance. I would classify this loan as temporary financing, because the payoff is to come from some more permanent type of financing.
In my examples, both loans are 6 month loans, but one is temporary and one is not. The difference is in the expected source of repayment.
Part of the confusion comes because ultimately ALL lending is (or at least we hope it is) temporary financing. Some with just have longer terms than others.
A thought just occurred to me I wonder if I could avoid HMDA reporting altogether? HMDA doesn't define "temporary financing" but says lenders should not report any loan that is temporary financing. If we internally define all of our lending as temporary financing (which is certainly our expectation we don't want any loan to be permanent), we wouldn't have to report anything. I'll have to ponder that some more.
First published on BankersOnline.com 11/5/01
print
share