Question & Answer
Question: Our construction lenders often make loans to consumers to purchase a lot and take security in the lot. If the amount of the loan is more than $25,000, are these loans subject to Regulation Z, even if there is no dwelling?
Answer: Yes. The issue that determines coverage is whether the lender is taking security in real property. The exemption for loans of more than $25,000 is available only for loans not secured by real property. Whether or not there is a dwelling does not affect this coverage.
It is a good idea to remind all your loan officers about this exemption. At the same time, review the differences between this coverage rule and others, such as flood, ARM rules and RESPA.
Flood does not apply to unimproved property. Therefore a loan secured by an unimproved lot is not subject to that rule. However, when improvements are made or a construction loan is made, the flood search should be conducted. Tip: If you know that the consumer is planning at some future time to construct a dwelling on the lot being purchased, it might be a good customer service to perform a flood search for the lot loan simply to provide the customer with information about the lot that could become important in planning construction.
The adjustable rate mortgage rules in Truth in Lending are triggered by taking security in the consumer's dwelling. An unimproved lot therefore would not trigger the ARM disclosure rules. If the lot loan has a variable rate feature, that feature should be disclosed with the standard elements of 226.18(f).
Finally, RESPA may or may not apply to the transactions. RESPA coverage will depend on whether any proceeds of the loan will be used for construction. If the loan is only for lot purchase and no proceeds will be used for construction of a dwelling, it is exempt. If any portion will be used for construction of or improvements for a dwelling, it cannot be exempted as a lot loan. Note, however, that the lot loan may fall within the temporary financing exemption because the lot loan will be refinanced within two years, such as when construction is complete and the borrower converts the loans to permanent financing.
Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 3, 1/96
First published on 01/01/1996