We have a customer who received a quitclaim deed for a dwelling from a relative, who had a mortgage loan secured by the dwelling from another bank. After recording his quitclaim deed, the customer obtained a mortgage loan from our bank. He stated that he plans to use the proceeds of his loan to pay off his relative’s existing mortgage. Would this be considered a purchase, refinance, or not reportable under the Home Mortgage Disclosure Act (HMDA)?

In our view, the loan is not HMDA reportable. From what you have told us, the loan does not fit into any of three HMDA reporting categories — for home purchase loans, home improvement loans or refinancings — and consequently, we do not believe that the HMDA requires you to report this loan.

The HMDA requires lenders to report home purchase loans, home improvement loans, and refinancings. A home purchase loan is “secured by and made for the purpose of purchasing a dwelling.” A home improvement loan 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 a refinancing requires “a new obligation that satisfies and replaces an existing obligation by the same borrower” (among other conditions). In this case, the loan does not fit any of these definitions.

This loan is not reportable as a home purchase loan; your bank may rely on the borrower's statements regarding the purpose of the loan, and in this case, the borrower has not indicated there is any purchase arrangement with his relative. We think this transaction is analogous to an assumption, which occurs when a lender accepts a new borrower as the obligor on an existing obligation. As stated in the CFPB’s Small Entity Compliance Guide, an assumption is not a home purchase loan if the borrower obtains title to the dwelling securing the loan before assuming the existing loan. Similarly, in this case, the borrower obtained the property before obtaining a mortgage to pay off his relative’s existing loan. Although the transaction isn’t a true assumption, because your customer will not be accepted as the obligor on an existing obligation, we think the CFPB’s guidance is instructive.

This loan also is not reportable as a home improvement loan. Again, your bank may rely on the borrower's statements regarding the purpose of the loan, and the borrower has not disclosed any intent to use the loan proceeds for home improvement purposes.

This loan also is not reportable as a refinancing. The loan is not replacing an existing obligation of the borrower; instead, the loan will be used to repay his relative’s obligation.

For resources related to our guidance, please see:

Regulation C, 12 CFR 1003.4(a) (“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 (“Home purchase loan means a loan secured by and made for the purpose of purchasing a dwelling.”)

Regulation C, 12 CFR 1003.2 (“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.”)

Regulation C, 12 CFR 1003.2 (“Refinancing means a new obligation that satisfies and replaces an existing obligation by the same borrower . . . .”)

Official Interpretations, Regulation C, 12 CFR 1003, Paragraph 1, Comment 9 (“An assumption occurs when an institution enters into a written agreement accepting a new borrower as the obligor on an existing obligation.”)

CFPB Small Entity Compliance Guide, Home Mortgage Disclosure (Regulation C) (December 2015) (“An assumption is not a Home Purchase Loan if the new borrower assumes the existing borrower’s obligation after acquiring title to the Dwelling securing the existing obligation because the purpose is not to finance the new borrower’s purchase of the Dwelling.”)

Official Interpretations, Regulation C, 12 CFR 1003, Paragraph 4(a)(3), Comment 1 (“An institution may rely on the oral or written statement of an applicant regarding the proposed use of loan proceeds.”)