HMDA Other Purpose
In this HMDA video, Adam discusses the "other purpose" field on the HMDA LAR and explains when to use it as well as when to never use it.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to focus on the other purpose under the Home Mortgage Disclosure Act. This rule does only apply to HMDA reporters.
The rule is found in 1003.(4)(a)(3). That's the citation of Regulation C that references the rules for loan purpose and it says to report whether the covered loan or application is a home purchase loan, a home improvement loan, a refinancing, a cash-out refinancing or for an “other” purpose. As I've explained before, sometimes, the rules don't provide us enough information such as this question: when do you have an other purpose loan?
The answer to this is found in the commentary to 1003.(4)(a)(3), which is the citation of Regulation C and it is found in Comment 4, specifically.
So Comment 4 talks about other purpose and it says that you report “other” when a loan does not meet the definition of a purchase, a refinance or a home improvement loan. Now, before we go on to the examples, just to be clear, a refinance includes a cash-out refinance and just a refinancing so if it doesn't meet the definition of a purchase, a refinance, a cash-out refinance or a home improvement loan, then you report it as an “other” purpose.
One of the examples would be is if you had a free and clear home - a home that's paid off and owned by your applicants and they're getting a loan request or a loan to pay for educational expenses. They are essentially doing what I like to call an equity loan. I call that an equity, some lenders call that a refinance, but for HMDA purposes, it's not a refinance because to have a refinance you have to satisfy and replace an existing obligation. When they own the home free and clear, thus this example, then there is nothing being paid off; they're not satisfying and replacing existing obligation so it could not be a refinance. It also is clearly not a purchase and it's clearly not a home improvement loan. So when you have a free and clear home where money is used to take the equity out of the home to pay for educational expenses, this is an other purpose and is HMDA reportable.
Another example would be the same thing a free and clear home where they're taking equity out to refinance unsecured debt. So you're not satisfying and replacing an existing obligation. The other part of that that I didn't mention earlier is that the other obligation had to be secured by a mortgage. So you're not satisfying and replacing an existing obligation secured by a mortgage. So if you're paying off a bunch of credit cards and maybe even an auto loan that would not qualify under the definition as a refinancing, and therefore you would report that as an other purpose.
What’s interesting is under the old rules prior to January 1, 2018, these examples were examples of loans you would not report under HMDA, which really made no sense but because the way the definitions of a purchase refinance and home improvement are and were, they would not be HMDA reportable except now we have an other purpose and these are reported, which to me it makes sense. So those are the examples.
Another thing that you need to keep in mind on the other purpose is that if you are unconditionally obligated to refinance an obligation or a loan subject to conditions within the borrower's control then you would report this as an “other” purpose. So if you're unconditionally obligated to redo the loan, let's not call it a refinance because it's not under HMDA definitions, you report it as an “other” purpose.
Also under other purpose, it’s very important to note here that you will never use other for a business purpose loan. The way the rules are is that you will only use for business purpose loans a purchase a refinance which includes a cash out refinance and home improvement loan. You'll never use other for a business purpose loan.
That's all I have for today.