A borrower is refinancing her first mortgage with us in order to pay off a personal loan from another bank. For HMDA reporting, based on the purpose of the transaction, should the loan be considered a purchase loan or a refinance? We also note that the original mortgage was in the name of the customer, but the refinancing will be in the name of her revocable living trust, with the customer signing as the trustee.

In our view, the transaction does not satisfy the definition of either a purchase loan or a refinancing under Regulation C and likely is not reportable under HMDA.

HMDA requires lenders to report demographic data on certain types of transactions, including home purchase loans, home improvement loans, and refinancings. A home purchase loan is a loan “secured by and made for the purpose of purchasing a dwelling.” Similarly, a home improvement loan requires that the loan is made for the purpose of improving the home. In this case, the loan is made for the purpose of repaying a personal debt and does not meet the definition of a home purchase loan (or a home improvement loan).

When determining whether a transaction constitutes a refinancing, you do not need to consider the purpose of the loan. Instead, you consider only whether (1) the obligation satisfies and replaces another obligation to the same borrower and (2) each obligation is secured by a dwelling. Here, both the new and existing obligation are secured by a first lien on a dwelling. In addition, based on the facts provided, it appears as if the new obligation will completely satisfy and replace the existing obligation.

However, as you pointed out, the original mortgage loan was made to an individual customer, and the new loan will be made to the customer’s living trust. Neither HMDA, Regulation C, nor any agency guidance that we are aware of clarifies whether a person and their living trust are considered the “same borrower” for the purpose of classifying a transaction as a “refinancing.”

In our view, a natural person and their living trust would not be considered the same borrower. For example, for reporting purposes, a natural person and a trust do not share the same government monitoring information (GMI). A natural person has an age, marital status, ethnicity, race, sex, and income. A trust has none of those things, with the potential exception of income. The FDIC has indicated that when a customer obtains a loan in the name of a trust, and the customer signs the loan documents as a trustee (rather than as an individual), the bank would report “NA” (not applicable) for the GMI. We believe that because a natural person and a trust have different GMI reporting requirements, they should not be treated as the “same borrower” in the context of a refinance.

Because the transaction does not fit the definition of any transaction covered by HMDA, we do not believe the transaction is reportable.

For resources related to our guidance, please see:

Regulation C, 12 CFR 1003.4 (“A financial institution shall collect data regarding applications for, and originations and purchases of, home purchase loans, home improvement loans, and refinancings for each calendar year.”)

Regulation C, 12 CFR 1003.2 – Definitions

“Home purchase loan means a loan secured by and made for the purpose of purchasing a dwelling.”

“Home improvement loan means (1) A loan secured by a lien on a dwelling that is for the purpose, in whole or in part, of repairing, rehabilitating, remodeling, or improving a dwelling or the real property on which it is located; and (2) A non-dwelling secured loan that is for the purpose, in whole or in part, of repairing, rehabilitating, remodeling, or improving a dwelling or the real property on which it is located, and that is classified by the financial institution as a home improvement loan.”

“Refinancing means a new obligation that satisfies and replaces an existing obligation by the same borrower, in which: … (2) For reporting purposes, both the existing obligation and the new obligation are secured by liens on dwellings.”

FFIEC Guide to HMDA Reporting, pg 28 (“The purpose of the loan being refinanced is not relevant to determining whether the transaction is a refinancing for HMDA purposes. Nor is the borrower’s intended use of any additional cash borrowed relevant to determining whether the loan is a refinancing.”)

FDIC HMDA Validation Teleconference (June 16, 2011) – Questions and Answers

Question – “If an application is received and at application the GMI information is captured for two individual borrowers as: Borrower white, male, not Hispanic; Co-borrower white, female, not Hispanic. Sometime before the loan closes the borrowers tell us they want to hold title in the name of a trust. Would we be required to change the GMI to NA for a non-entity?”

Answer – If the borrowers signed the note (not just a guaranty) as individuals and not just in a trustee capacity, then you’d report the GMI on those individuals. If they did not sign the note as individuals, then you’d report NA for GMI.