If we require a borrower to keep an amount equal to 12 months of payments on a construction-perm loan in an account at our bank, do we disclose it anywhere other than in the note and the sentence on the TIL that says the APR doesn't include the required deposit?

I've never dealt with interest reserves but you need to review the following from Appendix D and maybe do a bit more research on interest reserves.



5. Interest reserves. In a multiple-advance construction loan, a creditor may establish an “interest reserve” to ensure that interest is paid as it accrues by designating a portion of the loan to be used for paying the interest that accrues on the loan. An interest reserve is not treated as a prepaid finance charge, whether the interest reserve is the same as or different from the estimated interest figure calculated under Appendix D.

i. If a creditor permits a consumer to make interest payments as they become due, the interest reserve should be disregarded in the disclosures and calculations under Appendix D.

ii. If a creditor requires the establishment of an interest reserve and automatically deducts interest payments from the reserve amount rather than allow the consumer to make interest payments as they become due, the fact that interest will accrue on those interest payments as well as the other loan proceeds must be reflected in the calculations and disclosures. To reflect the effects of such compounding, a creditor should first calculate interest on the commitment amount (exclusive of the interest reserve) and then add the figure obtained by assuming that one-half of that interest is outstanding at the contract interest rate for the entire construction period. For example, using the example shown under paragraph A, part I of Appendix D, the estimated interest would be $1,117.68 ($1093.75 plus an additional $23.93 calculated by assuming half of $1093.75 is outstanding at the contract interest rate for the entire construction period), and the estimated annual percentage rate would be 21.18%.

Dan, I almost specified that this is not an interest reserve account (guess I should have). This is an account that we are requiring in case the customer is unable to sell his current (very expensive) home and is unable to make his loan payments. We do not intend to use the money for payments unless the customer doesn't make them on his own.