Compliance Blog

HMDA has switched from a purpose-based standard to a dwelling-secured rule in terms of scope for loans where the credit union has taken "final action" on or after January 1, 2018; however, there is an exception for business purpose loans that has been tripping up some of our members as they adjust to the new normal. Fear not, some things just don't change. This blog will discuss how to address business loans in this new landscape and the particular issues that arise with loans for mixed-use (residential and commercial) purposes.

Under the old Regulation C, closed-end, business or commercial purpose loans made to purchase, refinance or improve a dwelling were reportable under HMDA. While the CFPB shifts transaction coverage away from the purpose-based scope for consumer loans in new Regulation C, it does not do so for commercial or business purpose loans. Instead, it retains the same purpose-based scope of reportable business or commercial purpose transactions by excluding all other business or commercial loans or lines of credit not made for the three specific purposes of home purchase, refinancing, or home improvement. Thus, a closed-end mortgage loan or an open-end line of credit that is, or will be, made primarily for a business or commercial purpose is excluded from the new definition of a covered loan, unless the loan or line of credit is a home purchase loan, a home improvement loan or a refinancing as defined in the new section 1003.2.

To figure out whether to use the dwelling-based approach versus the purpose-based approach, the credit union in each case may look to whether a closed-end mortgage loan or an open-end line of credit is for a business or commercial purpose. This analysis might be simple in many cases, but gets a little trickier in "mixed-use" situations where a property is used for both residential and commercial purposes, for example, a loan to improve the heating system in a building containing apartment units and retail space.

The new HMDA rule clarifies that a property used for both residential and commercial purposes is a dwelling if the property's primary use is residential. The rule also grants credit unions the discretion to use any reasonable standard to determine the primary use of the property on a case-by-case basis. Here is the commentary for reference:

4. Mixed-use properties. A property used for both residential and commercial purposes, such as a building containing apartment units and retail space, is a dwelling if the property's primary use is residential. An institution may use any reasonable standard to determine the primary use of the property, such as by square footage or by the income generated. An institution may select the standard to apply on a case-by-case basis.

There is some discussion in the preamble to the rule as well but not much on what might be a "reasonable standard." However, the rule contains a similar provision for determining whether a loan is for agricultural purposes, so while not directly on point, that preamble discussion may be somewhat informative.

Sometimes credit unions also ask about loan purpose. That's a bit of a different issue, but the commentary to new section 1003.3(c)(10) indicates that section 1026.3(a) of Regulation Z and its commentaryinform whether the loan is for business or commercial purposes.

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So, I heard something juicy: A note from Carrie Hunt, NAFCU EVP of Government Affairs and General Counsel

At NAFCU we hear a lot of rumors- some true and some just pulp fiction.  Part of what we do is to figure out fact from falsehood.  One of our latest pieces of intel came from the Sunshine State.  We were hearing there was some new law or rule in Florida that was restricting credit union expansions to 5% of a county's population.  So, upon slicing in, we discovered that there is no formal rule/statute limiting a field of membership expansion to 5 percent of a county's population.  HOWEVER, the Florida Office of Financial Regulation (OFR) may limit expansion on a case-by-case basis.  It seems that their concern is that a credit union with a field of membership of only 5,000 trying to expand to a field of membership of 100,000, would be too extreme of a move. As a result, the Florida OFR sometimes set limits based on the population size depending on how many members the credit union currently serves. 

Hmm.  I would prefer the fruit to ripen on the tree before being picked.