Although TRID rules have been around for a while now, there still seems to be some confusion when it comes to understanding the TRID loan purpose that should be listed on the Loan Estimate (LE). Much of the reason behind this confusion is that the rules actually contradict the loan purpose rules of Regulation C and the Home Mortgage Disclosure Act (HMDA). Therefore, it is important for each creditor to fully understand the TRID loan purpose hierarchy and when each TRID loan purpose should be listed on the Loan Estimate.
HMDA Purpose vs TRID Purpose
One of the biggest challenges in understanding TRID loan purposes is to realize there is a difference in purpose definitions under TRID and HMDA. As 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). The reason for this difference is that the definitions of purposes (i.e. purchase, refinance, ect.) are defined differently under each rule. To explain, let’s take a quick look at the purpose options under both HMDA and TRID.
HMDA provides for four different purchase options: 1) purchase, 2) refinance or cash-out refinance, 3) home improvement, or 4) other. (As this article is focused on the TRID loan purpose hierarchy, we are not going to get into details about the HMDA purpose hierarchy. For more information on HMDA purposes and the HMDA purpose hierarchy, read this article.)
On the other hand, TRID provides for four slightly different purpose options: 1) purchase, 2) refinance, 3) construction, and 4) home equity loan.
TRID Loan Purpose
Regulation Z defines the four purpose options under TRID and the commentary provides examples of each purpose. In simple terms, each 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. As we will explain when we discuss the 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.
TRID Loan Purpose Hierarchy & Waterfall
In some instances, a loan will actually have multiple purposes, making it more challenging to know which purpose should be listed on the Loan Estimate. To explain this, it is important to understand that the TRID purposes have a “waterfall” - or hierarchy - that determines which purpose should be listed on the Loan Estimate when multiple purposes are present.
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.
TRID Loan Purpose for Construction Loans.
The same loan purpose waterfall applies to construction loans. In fact, the CFPB provided an illustration of the TRID loan purpose waterfall in their March 2016 webinar that discussed construction loans under TRID:
“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.”
You can learn more about the TRID loan purpose for construction loans here.
TRID Citations on Loan Purpose
The actual regulation provides each loan purpose as follow:
“(9) Purpose. The consumer's intended use for the credit, labeled “Purpose,” using one of the following terms:
(i) Purchase. If the credit is to finance the acquisition of the property identified in paragraph (a)(6) of this section, the creditor shall disclose that the loan is for a “Purchase.”
(ii) Refinance. If the credit is not for the purpose described in paragraph (a)(9)(i) of this section, and if the credit will be used to refinance an existing obligation, as defined in § 1026.20(a) (but without regard to whether the creditor is the original creditor or a holder or servicer of the original obligation), that is secured by the property identified in paragraph (a)(6) of this section, the creditor shall disclose that the loan is for a “Refinance.”
(iii) Construction. If the credit is not for one of the purposes described in paragraphs (a)(9)(i) or (ii) of this section and the credit will be used to finance the initial construction of a dwelling on the property identified in paragraph (a)(6) of this section, the creditor shall disclose that the loan is for “Construction.”
(iv) Home equity loan. If the credit is not for one of the purposes described in paragraphs (a)(9)(i) through (iii) of this section, the creditor shall disclose that the loan is a “Home Equity Loan.”
In addition to the regulation, the commentary provides some additional information about the TRID loan purpose:
“1. General. Section 1026.37(a)(9) requires disclosure of the consumer's intended use of the credit. In ascertaining the consumer's intended use, § 1026.37(a)(9) requires the creditor to consider all relevant information known to the creditor at the time of the disclosure. If the purpose is not known, the creditor may rely on the consumer's stated purpose. The following examples illustrate when each of the permissible purposes should be disclosed:
i. Purchase. The consumer intends to use the proceeds from the transaction to purchase the property that will secure the extension of credit. In a purchase transaction with simultaneous subordinate financing, the simultaneous subordinate loan is also disclosed with the purpose “Purchase.”
ii. Refinance. The consumer refinances an existing obligation already secured by the consumer's dwelling to change the rate, term, or other loan features and may or may not receive cash from the transaction. For example, in a refinance with no cash provided, the new amount financed does not exceed the unpaid principal balance, any earned unpaid finance charge on the existing debt, and amounts attributed solely to the costs of the refinancing. Conversely, in a refinance with cash provided, the consumer refinances an existing mortgage obligation and receives money from the transaction that is in addition to the funds used to pay the unpaid principal balance, any earned unpaid finance charge on the existing debt, and amounts attributed solely to the costs of the refinancing. In such a transaction, the consumer may, for example, use the newly-extended credit to pay off the balance of the existing mortgage and other consumer debt, such as a credit card balance.
iii. Construction. Section 1026.37(a)(9)(iii) requires the creditor to disclose that the loan is for construction in transactions where the creditor extends credit to finance only the cost of initial construction (construction-only loan), not renovations to existing dwellings, and in transactions where a multiple advance loan may be permanently financed by the same creditor (construction-permanent loan). In a construction-only loan, the borrower may be required to make interest-only payments during the loan term with the balance commonly due at the end of the construction project. For additional guidance on disclosing construction-permanent loans, see § 1026.17(c)(6)(ii), comments 17(c)(6)-2, -3, and -5, and appendix D to this part.
iv. Home equity loan. The creditor is required to disclose that the credit is for a “home equity loan” if the creditor intends to extend credit for any purpose other than a purchase, refinancing, or construction. This disclosure applies whether the loan is secured by a first or subordinate lien.
2. Refinance coverage. The disclosure requirements under § 1026.37(a)(9)(ii) apply to credit transactions that meet the definition of a refinancing under § 1026.20(a) but without regard to whether they are made by a creditor, holder, or servicer of the existing obligation. Section 1026.20(a) applies only to refinancings undertaken by the original creditor or a holder or servicer of the original debt. See comment 20(a)-5.”