Home » Topics » Real Estate Settlement Procedures Act/ Regulation X » Primary Purpose: Refi or Purchase?
July 24, 2023 at 12:12 pm EDT #341775kwatsonParticipant
Please advise on below:
Borrowers have a lot in town that had a MH that was destroyed and removed from lot. They would now like to purchase a new MH to place on the lot. We will be taking an interest in both, the lot and the new MH. The majority (all of) the funds are for the purchase of the new MH. This makes me believe it will be considered a “purchase” transaction. However, does that affect the need for a right of recission on the transaction? Also, does it look incorrect if the LE/CD says “purchase” even though they already own the lot in which the address shows?
Thanks in advance!July 25, 2023 at 3:01 pm EDT #341810Kimberly Boatwright, CAMS, CRCMKeymaster
Based on the information provided it sounds like a purchase transaction. Not a refinance, based on the details its unclear as to why there would be a right of recission? As far as the LE/CD this is a difference between TRID and HMDA. TRID and HMDA have different purpose options and different purpose definitions, the same loan may have one purpose under HMDA but that same loan would have a completely different purpose under Regulation Z (and TRID). HMDA provides for four different purchase options: 1) purchase, 2) refinance or cash-out refinance, 3) home improvement, or 4) other. TRID provides for four slightly different purpose options: 1) purchase, 2) refinance, 3) construction, and 4) home equity loan. The LE/CD will need to align with TRID purposes:
TRID loan purpose can be defined as follows:
Purchase Loan Purpose. A purchase is defined as credit to finance the acquisition of the property that secures or will secure the transaction. Since bare land loans are subject to TRID, this means that a purchase loan will often include either a purchase of bare land or the purchase of a dwelling.
Refinance Loan Purpose. A refinance is defined as credit that will be used to refinance an existing obligation that is secured by the property that secures or will secure the transaction. A refinancing is a new transaction requiring new disclosures to the consumer and occurs when an existing obligation that was subject to Regulation Z is satisfied and replaced by a new obligation undertaken by the same consumer.
Construction Loan Purpose. A construction purposes is one where the credit will be used to finance the initial construction of a dwelling (not renovations to an existing dwelling) on a property that secures or will secure the loan. TRID Loan Purpose Hierarchy, a construction loan purpose will only be used when an applicant already owns the land they are building on and they are not refinancing that land with the construction loan.
Home Equity Loan Purpose. A home equity loan is a credit that is not a purchase, refinance, or construction loan. These loans are often debt consolidation loans, second mortgages (new money), or other loans where an applicant owns a home free and clear.
The TRID loan purpose waterfall (hierarchy) is as follows: One, purchase; two, refinance; three, construction; and four, home equity loan. When determining which purpose to disclose, a creditor must look at the waterfall of four possible purposes in the order that they appear in Section 1026.37(a)(9) of Regulation Z and select the first one that applies to the loan.
To illustrate use of the waterfall, if the loan meets the definition of purchase because the consumer intends to use the credit to purchase the property that will secure the loan, the creditor must disclose the purpose as purchase even if the loan also meets any other definitions appearing later in the waterfall. A creditor must disclose the purpose as refinance if the consumer intends to use the credit to construct a dwelling on real property that the consumer already owns and to satisfy an existing loan secured by that real property. If the credit will be used to finance the initial construction of a dwelling on the property and will not be used for any purchase or refinance purpose, the creditor must disclose the purpose as construction. Even if the loan is secured by real property being purchased and disclosed as a purchase on the Loan Estimate, if the loan is also financing the construction of a dwelling, the provisions of Section 1026.17(c)(6)(ii) still apply. So the loan’s purpose as disclosed on the Loan Estimate does not impact the applicability of other construction-specific provisions of Regulation Z.”
Based on the waterfall example provided by the CFPB your LE/CD will need to align with those requirements. Since you asked about a right of recission I’m assuming some of the land still has a loan?
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