Bridge Loan and Reg Z
Question: Our mortgage department is making a purchase loan to a long-term customer. The customer needs a bridge loan to complete the sale and purchase transaction. The customer wants to combine the bridge loan with the 30-year mortgage as a six month period with interest-only payments. After the bridge loan is paid off, the 30-year amortization cycle would begin. Is this legal under Regulation Z? If so, how do we disclose it?
Answer: First, this transaction would be legal under Regulation Z. It may be the only one of its kind but that doesn't make it illegal. As a general rule, Regulation Z does not restrict the terms or features of a credit agreement. Rate caps, along with a few other rules, are an exception to this concept. Instead, Regulation Z requires you to take all features into account when calculating and disclosing the total cost of credit.
In your example, it is the calculation of the total finance charge and APR that pose the challenge. A loan that is not structured to match your calculation program must be carefully handled. In this situation you have a 30.5 year loan or 366 months. Your first payment period will be 6 months with interest only. Then the amortization period begins. If the loan is fixed rate, this would be 360 payments at a consistent amount. If the loan is variable rate, the repayment period should total 360 payments but would be sorted or allocated based on rate change dates, as you would for any variable rate loan.
Before making final disclosures, we recommend that you check your numbers carefully. Use two systems, one to calculate and one to check. Also look at the disclosures to be sure the numbers make sense before sending the documents for closing. Finally, make sure that the payments disclosed add up to 366.
Copyright © 2005 Compliance Action. Originally appeared in Compliance Action, Vol. 10, No. 11, 10/05
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