CFPB Proposes HMDA Clarifications Part II: Temporary Financing; LEI Resources
Late last month, the CFPB has issued a proposed rule that would further amend the HMDA rules. The proposed rule seeks to clarify some of the rules in the 2015 final rule and contains a few new provisions. Last month, we blogged on the new geocoding tool. Today's blog will focus on temporary financing.
Currently, §1003.4(d) exempts temporary financing from HMDA reporting. The current rule does not define temporary financing, but it provides bridge and construction-only loans as examples of temporary financing. The 2015 HMDA final rule moved §1003.4(d) to new §1003.3(c) and added commentary and examples of temporary financing.
Under the 2015 final rule, a loan or line of credit is temporary if it is "designed to be replaced by permanent financing at a later time." In the preamble to the final rule, the CFPB explains that it declined to provide a bright-line rule for temporary financing, such as all construction loans are temporary or all loans with a term of less than one year are temporary, because that would be contrary to HMDA's purposes. Under a bright-line rule, financing for the same property could be reported twice while other financings may not be reported at all. Rather, the CPFB included a number of examples in the staff commentary to the final rule to help explain which loans are temporary. Here are a couple of those examples:
"ii. Lender A extends credit to finance construction of a dwelling. A new extension of credit for permanent financing for the dwelling will be obtained, either from Lender A or from another lender, and either through a refinancing of the initial construction loan or a separate loan. The initial construction loan is excluded as temporary financing.
iii. Assume the same scenario as in comment 3(c)(3)-1.ii, except that the initial construction loan is, or may be, renewed one or more times before the permanent financing is made. The initial construction loan, including any renewal thereof, is excluded as temporary financing.
iv. Lender A extends credit to finance construction of a dwelling. The loan automatically will convert to permanent financing with Lender A once the construction phase is complete. Under §1003.3(c)(3), the loan is not designed to be replaced by permanent financing and therefore the temporary financing exclusion does not apply."
The preamble to the proposed rule explains that the CFPB believes the 2015 final rule created some ambiguities regarding whether the permanent financing must be a separate transaction and whether the same borrower must obtain both the temporary and permanent financing. The proposed rule would revise the staff commentary to state that a loan or line of credit is temporary if it is "designed to be replaced by separate permanent financing extended to the same borrower at a later time" (emphasis added). The proposed rule would also revise the examples to make these requirements more clear.
The proposed rule also seeks to clarify that a loan obtained to construct a home for sale is temporary financing. The CFPB believes that reporting these loans would not further HMDA's purposes because these loans would provide limited data on "whether financial institutions are serving the housing needs of their communities." Additionally, the loan to purchase the newly built home would be reportable under HMDA. The proposed rule would add an additional comment to specifically include loans obtained to construct a home for sale as temporary financing, meaning these loans are not HMDA reportable.
The CFPB goes on to explain that it believes loans to construct a home for sale are different from loans to an investor who purchases a home, renovates it, and then sells the home. The CFPB believes that these types of loans to investors would provide data that serves HMDA's purposes. For example, a public official would be able to determine the added value of the renovations by comparing the value of the home determined at the time the investor applies for the loan to the value of the home determined at the time the buyer applies for a loan to purchase the home. The proposed rule seeks to clarify that these types of loans to investors are HMDA reportable.
Comments on the proposed rule are due to the CFPB by May 25, 2017.
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Lately, we have received a number of questions in the compliance box on where credit unions can obtain an LEI. The HMDA final rule, that will go into effect on January 1, 2018, requires all credit unions that are subject to HMDA reporting to have a “legal entity identifier.” NAFCU did a blog on this last year which may be a helpful starting point.
If a credit union must obtain an LEI, §1003.4(a)(1)(i) of the final rule requires credit union obtain the LEI from a utility endorsed by either the LEI Regulatory Oversight Committee (LEI ROC) or the Global LEI Foundation (GLEIF). The LEI ROC has put together a "How to obtain an LEI" page on their website that provides some of the basic principles for obtaining an LEI. It explains the self-registration process and outlines what documentation will be needed. The page also provides a link to the GLEIF's list of approved LEI issuing organizations. Specific information on how to apply for an LEI can be found on each of the organizations' websites.
About the Author
Jennifer Aguilar, NCCO, was named regulatory compliance counsel in February 2017. In this role, Aguilar helps credit unions with a variety of compliance issues.