[Dana Staley]

We made a temporary loan to to builder for the purpose of building a home for sale. After the home was built, the builder was unable to find a buyer so when the loan matured the builder transferred ownership of the property from his construction LLC to his rental LLC and took out permanent financing. The builder is the managing member of both LLCs. The transfer of ownership happened at the time the permanent financing was obtained but there was no sales price. We are trying to determine whether this permanent loan should be reported as a Purchase, or if it would be considered “other” purpose and not be reportable. Please advise.

[rcooper]

This is tricky. I don’t think it would qualify as a purchase since it is different borrowers (LLCs); even though the managing member is the same person the borrowers are different entities.

1003.2(j)-3:
3. Construction and permanent financing. A home purchase loan includes both a combined construction/permanent loan or line of credit, and the separate permanent financing that replaces a construction-only loan or line of credit for the same borrower at a later time. A home purchase loan does not include a construction-only loan or line of credit that is designed to be replaced by separate permanent financing extended by any financial institution to the same borrower at a later time or that is extended to a person exclusively to construct a dwelling for sale, which are excluded from Regulation C as temporary financing under § 1003.3(c)(3). Comments 3(c)(3)-1 and -2 provide additional details about transactions that are excluded as temporary financing.

[jholzknecht]

I agree that the permanent loan that replaces temporary financing is generally reported as a “purchase,” if it involves the same borrower. Since this is not the same borrower it is not a “purchase” in this situation.

A “purchase” loan includes a closed-end mortgage loan or an open-end line of credit that is for the purpose, in whole or in part, of purchasing a dwelling. I think this loan qualifies as a purchase in this scenario. If John Doe was purchasing the newly constructed home from the builder, it would be a “purchase” loan. The fact that the purchaser is not John Doe, but is a related entity, shouldn’t change the result.

[rcooper]

Jack – I see what you’re saying and don’t disagree. Just to throw another question out…since there was no exchange of funds would it still be a purchase? Would one LLC’s loan paying off another’s loan constitute purchasing? “Exchange of funds” for the property meaning an official sales price exchanged for the property (ie the question states there was no sales price just a transfer of property).

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