Let’s say you have a closed-end loan that is secured by a primary dwelling made by ABC Bank which is going to be satisfied and replaced by a loan from your bank. How would you classify this loan? It depends on the regulatory purpose.
If you were reporting this loan for HMDA it would be a refinancing, because to meet the HMDA definition of refinancing the loan must be a new dwelling-secured obligation that satisfies and replaces an existing dwelling-secured debt obligation by the same borrower. The above loan meets those criteria. Looking further at the definition of refinancing in the HMDA regulations it applies to either open-end credit or closed-end credit, and a HMDA refinancing could be either for a consumer purpose or for a business purpose.
Compare that with a Regulation Z refinancing, which is defined as closed-end consumer purpose loan made to a consumer that satisfies and replaces an obligation undertaken by the same consumer. For a loan to be a Regulation Z refinancing it must also be extended by the same financial institution that extended the original loan. If your bank makes a loan to satisfy and replace a loan made by ABC Bank, as proposed above, that loan is not considered a refinancing for Regulation Z purposes. For it to be a Regulation Z refinancing, your bank must be satisfying and replacing a loan made by your bank.
The term “refinancing” can be further confused as some banks have internal policies to refer to certain loans as “refinancing” or “cash out refinancing” when there is no satisfaction and replacement taking place. The common theme for both HMDA and Regulation Z refinancings is satisfaction and replacement, but banks will often internally refer to a loan secured by a primary dwelling which is owned free and clear and might be best described as a “home equity loan,” as a “cash out refinancing.” When it comes to classifying a loan, be sure to focus on for which regulation or purpose you’re doing the classifying.
Another regulatory example of this involves home equity loans. In Regulation Z consumer purpose real-estate secured loans are categorized as having one of four purposes: purchase, refinancing, construction, or home equity. Any loan that is not a purchase, refinancing, or construction loan falls into the catch-all purpose of home equity. A loan secured by a commercial property that was being used for debt consolidation or purchasing personal property like a boat or vehicle would be considered a home equity loan, despite not being secured by anyone’s home. Internally banks probably would not call this a home equity loan, even though it would be a home equity loan for Regulation Z purposes. For HMDA reporting purposes this loan would fall into the HMDA catch-all of “other,” which is what happens when the loan isn’t used for the purchase of a dwelling, home improvement or a refinancing.
So, a particular loan could be reported one way on the HMDA LAR, another way on the Closing Disclosure, and a third way in the bank’s internal system, under the right circumstances. Therefore, it’s important to keep track of how each loan is classified for which purpose and on which documentation. Should you have any questions as to how to classify a loan for which regulation or which purpose, don’t hesitate to reach out to us on the hotline for help.