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Construction Loans

Question: We made a construction loan to a customer with the commitment to make permanent financing. If we gave disclosures that covered both construction and permanent, do we have to give disclosures again when the loan is converted to permanent? What if there is a change in terms? What if we gave only construction period disclosures?

Answer: First, when looking at disclosure rules, you have to consider both Truth in Lending and RESPA requirements. Let's do TIL first. TIL allows you to give combined construction-permanent disclosures when you close on the construction loan or to give separate disclosures for each loan phase. If you gave only construction disclosures when you settled on the construction loan, you would have to give new disclosures for the permanent loan. If you gave combined disclosures, you do not have to provide new disclosures for the permanent phase of the loan. Note, however, that this answer could change if you changed the loan type, such as changing a fixed rate loan to a variable rate loan. Then, you really would have a new loan type triggering new disclosures, especially if you issue a new note.

As for RESPA, the question is when the loan becomes covered. If you have only committed to the construction phase, the loan may be exempt from RESPA. However, if you are obligated by the note to issue permanent financing, then the HUD-1 disclosure is triggered by closing for the construction loan. You would not need to issue a second HUD-1 when the permanent phase begins. However, the same caveat applies. If the permanent loan differs from the loan type that had already been disclosed, you should look at whether the transaction is a new one triggering new disclosures.

Copyright © 2004 Compliance Action. Originally appeared in Compliance Action, Vol. 9, No. 1, 2/04




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