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Application or Loan Data > Purpose

Refinancing

The definition of refinancing has been changed to provide additional consistency and reliability in the reporting of data from institution to institution. The revision replaces the four optional tests—including the “purpose” test—with a “collateral” test.

For a loan or application to be considered a refinancing under the revised definition, the application or loan must meet the following two-prong test:

  1. Does the loan/application satisfy and replace an existing loan?
  2. If so, are both the old and new loan/application secured by a lien on a dwelling?

If the loan/application meets both parts of the test, it must be reported as a refinancing.

CURRENT DEFINITION

The definition in effect until Jan. 1, 2004, provides a great deal of flexibility in what loans can be reported, which makes it difficult to analyze lending patterns. Until the Regulation C changes take effect, lenders can select from among four scenarios in deciding which refinancings to report, as long as the lender is consistent. Two of the four scenarios are based on the purpose of the loan, and two are based on the collateral. Under the current definition, a loan is a refinancing if it satisfies and replaces an existing loan, and if the:

  • lender determines that the purpose of the existing loan was home purchase or home improvement (purpose test); or
  • the applicant states that the existing loan was for home purchase or home improvement (purpose test); or
  • the existing loan is dwelling-secured (collateral test); or
  • the new loan will be dwelling-secured (collateral test).

REVISED DEFINITION

The revised definition provides guidance for both "coverage" and "reporting" purposes. It is important to note the distinction. The coverage definition of refinancing is used in determining if an institution is a covered institution and, therefore, whether it must report HMDA data. The reporting definition of refinancing determines whether a loan or application must be reported on the lender’s HMDA-LAR.

For coverage purposes, a refinancing is a new home purchase loan that satisfies and replaces an existing loan by the same borrower, in which the existing loan is a home purchase loan, and both the existing and the new loan are secured by first liens on dwellings. In determining whether the existing loan is a home purchase loan, the lender may reference available documents or rely on a statement by the applicant.

For reporting purposes, a refinancing means a new loan that satisfies and replaces an existing loan by the same borrower, in which both the existing loan and the new loan are secured by liens on dwellings. However, the purpose test has been eliminated. Therefore, all loan refinancings secured by a dwelling (where the original loan was also secured) will now be reported, regardless of the purpose of the original or new loan. Likewise, unsecured loans will no longer be reported as refinancings, regardless of the purpose.

MODIFICATION, EXTENSION AND CONSOLIDATION AGREEMENTS EXCLUDED

The new definition of a refinancing continues to exclude modification, extension and consolidation agreements (MECAs). These transactions are excluded because they do not meet the "bright-line" test for a refinancing. That test is whether a mortgage loan satisfies and replaces an existing mortgage loan. MECAs do not meet this test. In most instances, a new note or similar document will evidence whether the old obligation has been extinguished and replaced by a new obligation.

REPORTING REFINANCINGS ON THE HMDA-LAR

For reporting refinancings, enter Code 3 in the loan “purpose” field on the HMDA-LAR.

See the “refinancing” code in the Purpose field of the LAR.

The following examples help illustrate the revisions to the refinancing rules in Regulation C:

EXAMPLE ONE

FACTS: John Smith has an existing loan for buying inventory for his lumber business. The loan is secured by a lien on Smith's residence. In January 2004, Smith applies to refinance the loan. The new loan is also secured by a lien on his residence. Bank of Great Falls requires Smith to sign a new note for the transaction, which extinguishes the old debt and replaces it with a new debt.

QUESTION

Is the new loan reported as a refinancing under the revised regulation?

ANSWER

Yes. Effective Jan. 1, 2004, the lender must report the new loan as a refinancing because it meets the two-prong test of the regulation:

  • The new loan satisfies and replaces the old loan, and
  • Both the old and new loans are secured by a dwelling.

Note that the purpose of the loan, to refinance a business purpose loan, is not relevant under the new rule. The lender should enter Code 3 in the loan “purpose” field.

QUESTION

If the original loan was unsecured, but the new loan was secured by Smith’s residence, would the lender report the loan as a refinancing?

ANSWER

No. To be reported as a refinancing, both the old loan and the new loan must be secured by a dwelling.

 

EXAMPLE TWO

FACTS: Bank of Swanamee receives an application from Jerry Anderson for a mortgage loan to pay off an existing debt. The existing debt was a $15,000 unsecured home improvement loan at another local bank. In order to obtain the best loan terms available, including a lower interest rate, Mr. Anderson will secure the new loan by a first lien on his home.

QUESTION

Is the new loan considered a refinancing for reporting purposes under the revised definition of refinancing?

ANSWER

The new definition requires that both the existing loan and the new loan be secured by lien on a dwelling. Since the existing loan in this case was not secured by a lien on a dwelling, the new loan is not considered a refinancing.

 

EXAMPLE THREE

FACTS: Mountain Springs Bank routinely renews its one- and three-year balloon mortgages. The renewal consists of executing a modification to the existing note, which changes the maturity date, the interest rate and payment required by the borrower. Bank management believes that these transactions improve the bank’s Community Reinvestment Act (CRA) performance.

QUESTION

Is the bank permitted to include these transactions as refinancings on its HMDA-LAR?

ANSWER

The rules regarding the status of modifications, extensions and consolidation agreements have not changed. These transactions are not considered refinancings because the new obligation does not extinguish the existing obligation. Therefore, they are not HMDA-reportable transactions.

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