The condos or apartments over a retail shop or convenience store is pretty clear cut. We have to determine the primary use of the building before we can determine the use of the loan.
Is a single family residence with a basement salon or mechanic shop in the attached garage considered mixed-use, or is that still just a residential property with a possibility of a multi-purpose loan?
Any time there is residential and non-residential purposes on a property that you are taking as collateral, you need to determine the primary purpose of the building(s). This could be a single building or multiple buildings. Regulation C uses the term "property" but also indicates in Comment #3 to §1003.4(a)(9) that the property could have different addresses. IOW, it could be more than one building.
If your examples, a single family with a business in the basement or attached building (or even a detached building) could be residential or not residential (and thus exempt from HMDA). You need to make the determination for each property. "An institution may use any reasonable standard to determine the primary use of the property, such as by square footage or by the income generated. An institution may select the standard to apply on a case-by-case basis." [Commentary to §1003.2(f) #4]
_________________________To add to David's comment, you can't use the mixed-use test on a single family loan for the purpose of home improvement.
From the Sept 2017 final rule:
4. Mixed-use property. A closed-end mortgage loan or an open-end line of credit to improve a multifamily dwelling used for residential and commercial purposes (for example, a building containing apartment units and retail space), or the real property on which such a dwelling is located, is a home improvement loan if the loan's proceeds are used either to improve the entire property (for example, to replace the heating system), or if the proceeds are used primarily to improve the residential portion of the property.
Also, the preamble to the 2017 final rule:
"In the April 2017 HMDA Proposal, the Bureau proposed to amend the commentary to § 1003.2(i) to clarify further the reporting requirements for home improvement loans secured by mixed-use property. Specifically, the Bureau proposed to amend comment 2(i)-4 to clarify that the comment applies only to multifamily dwellings .[81] For the reasons discussed below, the Bureau is adopting comment 2(i)-4 as proposed, with a minor amendment for further clarity."
So, if your examples are for HI loans, the mixed-use test won't apply as both of your examples have single family residences.
_________________________
Adam Witmer, CRCM
All statements are my opinion, not those of my employer, and should not be taken as legal advice.
www.compliancecohort.com
Adam's right. Here's how we address this in our HMDA Manual:
3. Mixed Use Property (With a HMDA Defined Dwelling):
A loan or line …to improve a (HMDA defined) multifamily dwelling (5 + units) used for residential and commercial purposes (for example, a building containing apartment units and retail space), or the real property on which such a dwelling is located, is a home improvement loan if the loan’s proceeds are used either to improve the entire property (for example, to replace the heating system), or if the proceeds are used primarily to improve the residential portion of the property. An institution may use any reasonable standard to determine the primary use of the loan proceeds. An institution may select the standard to apply on a case-by-case basis. [Commentary to §1003.2(i) #4] Therefore, if the property is considered a dwelling, report as follows:
a. 1-4 Family Property Secured:
Report any improvements made to the dwelling or the real property on which the dwelling is located. . [Commentary to §1003.2(i) #4 and §1003.3(c)(10) #3 (ii)]
b. Multifamily (5 + Units) Property Secured:
Report only improvements made to the residential portion of the dwelling and/or property. . [Commentary to §1003.2(i) #4]
Back to the OP: If you're not talking about improving the dwelling or non-dwelling portions of a building(s) - such as a purchase, refinance or equity loan - then you need to classify the property as residential or non-residential. IF you determine that it is primarily a dwelling, THEN you have met the collateral test for HMDA applicability.
_________________________I want to make sure that I have this straight. In determining mixed use, the approach must be taken with the whole PROPERTY (Parcel) correct? In other words, if I have a primary dwelling that shares a property with a "USTORE iT" facility, I must determine the use for the entire property considering income and/or square footage? It just seems a little strange. The old rules would have had us report it because the primary is the primary is the primary. So I am thinking that I am misunderstanding something.
In the primary/ustorage facility example, the primary doesn't generate any income. So it will be commercial property every time.
I want to make sure that I have this straight. In determining mixed use, the approach must be taken with the whole PROPERTY (Parcel) correct? In other words, if I have a primary dwelling that shares a property with a "USTORE iT" facility, I must determine the use for the entire property considering income and/or square footage? It just seems a little strange. The old rules would have had us report it because the primary is the primary is the primary.
The 2015 final rule put (most of) the mixed-use tests in the definition of a dwelling. This means that under the 2015 final rule you are making a determination on whether or not a property is a dwelling where the old mixed-use rules were more of a per-loan test . This means that in 2018 you must determine if the property is a dwelling or not. If, based on the mixed-use test, you determine that the property does not meet the definition of a dwelling, you can't report it because you don't have a dwelling. This is a change from the old rules as the mixed-use test wasn't part of the definition of a dwelling, so you were looking at each loan to determine mixed-use.
Here is the mixed-use section from the commentary on the definition of a dwelling in the 2015 final rule:
"4. Mixed-use properties. A property used for both residential and commercial purposes, such as a building containing apartment units and retail space, is a dwelling if the property's primary use is residential. An institution may use any reasonable standard to determine the primary use of the property, such as by square footage or by the income generated. An institution may select the standard to apply on a case-by-case basis."
_________________________
Adam Witmer, CRCM
All statements are my opinion, not those of my employer, and should not be taken as legal advice.
www.compliancecohort.com
So from the guidance above and considering my example. we would look at the parcel and determine the primary use (using square footage or income approach) to determine if the parcel is commercial or residential?
Or, because there is a dwelling on the parcel, it is automatically considered HMDA reportable and the only time you would have to consider use is if you have a BUILDING that has commercial space and residential space?
So from the guidance above and considering my example. we would look at the parcel and determine the primary use (using square footage or income approach) to determine if the parcel is commercial or residential?
Correct, but you can use more than just square footage or income approach. The regulation says "such as", but those 2 are exclusive. You might also use income per square foot, the borrower's statement of intent (ask them why they are buying the building, for instance), etc. You don't have to apply this consistently.
Or, because there is a dwelling on the parcel, it is automatically considered HMDA reportable and the only time you would have to consider use is if you have a BUILDING that has commercial space and residential space?
Just because there is a dwelling on the parcel doesn't automatically make the primary use a dwelling. You'll notice Reg C exempts ALL dwelling secured properties if the dwelling is located on a farm. There's a good example that illustrates my first sentence.
I have a friend that has what used to be a farm. He lives in the house located there and has a concrete mixing business. The business uses most of the outbuildings located on the land. Yes, it's his primary dwelling, but the primary use of this property is for non-residential purposes. If he were refinancing this property, I would not call this a "dwelling" and would not call it a HMDA application.
Also, imagine a commercial property with stores on the first floor and apartments above (maybe 1 or 2 floors of apartments). This property could easily be called a "non-dwelling" because the borrower wants to buy it for the retail space. Yes, there's some apartments that come with it, but the borrower is most interested in the retail space. The income per square foot of the retail space probably outweighs the residential portion too.
_________________________Thank you both for your replies. this definitely clears it up for me. By the way David, thank you for the very useful flowchart. Thank you also, Adam Witmer.
Happy HMDA to all.
Now I am going to reverse this scenario a little bit and ask what you guys think.
Scenario:
property includes two parcels that have the same address.
On one parcel is the primary dwelling.
On the other parcel is a Bar.
Both parcels with the same property address are securing the loan. In this instance, would it be HMDA reportable because the primary is on a separate parcel as the bar, even though it is one address? Or, do you look at the property as a whole and determine the deal to commercial based on the fact that say, the bar has more income per square foot then the retail space?
Here's what the regulation says:
An institution may use any reasonable standard to determine the primary use of the property , such as by square footage or by the income generated. An institution may select the standard to apply on a case-by-case basis. [Commentary to §1003.2(f) #4]
Notice the regulation uses the term "property". “Property†can be a parcel of land (not just one building) & even have different addresses [see §1003.4(a)(9)#3]
If they have the same address, I have a tough time not looking at it as a whole. You say they are on different parcels of land, but how is that defined? Did you survey the house out from the bar? §1003.4(a)(9)#3 says you could have different addresses which would tell me they are looking at the entire property as a whole.
You said: [i]. the bar has more income per square foot then the retail space That's just one factor. I recommend you not always use square footage. You can use ANY reasonable standard. Income approach, income per square foot, the borrower's intent, etc. I think choosing the majority of space (square footage) is going to get some banks in trouble.