Source: https://www.rskcompliance.com/2016/10/
Timestamp: 2019-04-24 14:53:47+00:00

Document:
The Bank has made a commercial loan secured by two residential properties owned by the borrower, which leases the properties to individuals. One of the properties is located in the Bank's CRA assessment area, but the proceeds of the loan are being used for capital improvements to the property that is outside the assessment area.
Can this loan be counted as having been made in the Bank’s CRA assessment area?
The location of a small business loan is either where the loan proceeds were applied or the headquarters of the borrower. If the loan cannot be counted as a small business loan, it might still be considered as a community development loan, if certain criteria are satisfied.
The answer to the Bank’s question will depend on the determination of certain facts.
Under Regulation BB, which implements the Community Reinvestment Act (“CRA”), a small business is located in the geography where the main business facility is located or where the loan proceeds otherwise will be applied, as indicated by the borrower. A “small business loan” is a loan included in “loans to small businesses,” as defined in the instructions for preparation of the financial institution’s Consolidated Report of Condition and Income. 12 CFR §228.12(o)(3),(v).
For example, if the proceeds of a small business loan are used in a number of different locations, the loan would be reported for the location of the borrower’s headquarters or where the greatest portion of the proceeds were applied, as reported by the borrower. Interagency Questions and Answers Regarding Community Reinvestment, §____.43(a)(3) – 1.
In this case, the loan proceeds were applied outside of the Bank’s CRA assessment area. If the loan is a small business loan, however, and the headquarters of the borrower are inside the CRA assessment area, the Bank can still report the location of the loan as being within the assessment area.
Activities that promote economic development by financing businesses or farms that meet the size eligibility standards of the Small Business Administration's Development Company or Small Business Investment Company programs (13 CFR 121.301) or have gross annual revenues of $1 million or less. 12 CFR §228.12(g).
The size eligibility standards for a business having the SIC code number of 531110 (Lessors of Residential Buildings and Dwellings) is $27.5 million. 13 CFR §121.201.
Community development loans are among the CRA performance criteria for small intermediate banks, which have an asset size of at least $304 million as of December 31 for each of the prior two calendar years and less than $1.216 million as of December 31 for either of the previous two calendar years. 12 CFR §228.26(c); FFIEC, Explanation of the Community Reinvestment Act Asset-Size Threshold Change (2016).
A retail institution will receive consideration for community development activities that benefit geographies of individuals located within a broader statewide or regional area that includes the institution’s assessment area, even if they will not benefit the assessment area, as long as the institution has been responsive to community development needs and opportunities in its assessment area. Interagency Questions and Answers Regarding Community Reinvestment, §____.12(h) – 6.
The Bank has a loan which was characterized as a 12-month construction loan. However, the write up of the loan states that the home which is being constructed is 70 percent complete and that the loan will be used to refinance an existing construction loan at another bank. The only work left to be completed is for cosmetics, landscaping, and fixture installations. Would this loan be HMDA-reportable as a home improvement loan?
The loan is HMDA-reportable as a home improvement loan, provided that it is not a construction loan or temporary financing.
As we know, Home Mortgage Disclosure Act (“HMDA”) and its implementing Regulation C have many ambiguities and gray areas. In this case, however, the regulatory requirements and official guidance may illuminate a proper answer to the Bank’s question.
If a loan is a home improvement loan as well as a refinancing, an institution reports the loan as a home improvement loan. Staff Commentary, ¶1003.2 – Home Improvement – 5.
A “home improvement loan” is 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. 12 CFR §1003.2 – Home Improvement – (a).
HMDA does not define “construction loan,” though its meaning is fairly self-explanatory. If the home is already built, however, then anything else done to it would be an improvement, since a house can only be constructed once. A factor to consider in making this determination would be whether a certificate of occupancy has been issued. If it has, then the house has essentially been completed, and the work being financed by the Bank’s loan would be in the nature of improving it. If a certificate of occupancy has not been issued, then the construction may still be underway and the loan is not a home improvement loan.
(3) Temporary financing (such as bridge or construction loans). 12 CFR §1003.4(d)(3).
This means that if the loan is considered to be a construction loan, then certainly it is non-reportable, but if it is considered to be a home improvement loan, it is still non-reportable if it is also temporary financing.
The regulation lists as examples of temporary financing construction and bridge loans. See 203.4(d)(3). Construction and bridge loans are illustrative, not exclusive, examples of temporary financing. The examples indicate that financing is temporary if it is designed to be replaced by permanent financing of a much longer term. A loan is not temporary financing merely because its term is short. For example, a lender may make a loan with a 1-year term to enable an investor to purchase a home, renovate it, and re-sell it before the term expires. Such a loan must be reported as a home purchase loan.
Is the loan a construction loan? If it is, then it is not HMDA-reportable.
Is the loan intended to be replaced by another loan? If so, it is temporary financing and not HMDA-reportable.
However, if the loan is not for construction and will not be replaced by another loan, then it will be HMDA-reportable, in this case as a home improvement loan. Of course, in any matter whether the legal and regulatory requirements are ambiguous, the Bank will have to adopt a rationale, document its reasons for doing so, and then follow such consistently.

References: §228
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 §121
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