We are considering offering a low interest rate for the construction term and locking the borrower in to the permanent rate prior to the one time close. Would this be considered an ARM and in need of the appropriate disclosures? The rate will increase at the permanent phase. We will be giving the applicant a GFE and ETIL with a two-phase ETIL & TIL. An allonge is signed at closing and the loan is modified after the construction phase prior to selling on the secondary market. I would like your thoughts - what should be watch out for.

Read Richard Insley's response in this thread .

What is a one-time construction/perm loan then? If I have two notes I technically have two closings? Doesn't this contradict what we advertise as a one time close. If so, how do banks process one-time close construction/perm loans?

Your original post asked it you would have an ARM based on your rate and note structure. Richard's answer is in the affirmative:

"By combining your contracts into a single note with a term exceeding one year, you have an ARM."

His last comment is simply saying by keeping the notes separate your life on the compliance side would be simpler.

You will have an ARM loan and the appropriate ARM disclosures will be required.

You can close two loans at a single settlement. The borrower simply signs two credit agreements.

In the original post, I don't see anything that constitutes an ARM. (Are we missing something?) If your construction loan bears one interest rate and the perm bears another and both rates are set at closing, then at the worst, you have a stepped-rate loan.

I missed the step rate aspect of the transaction. I was thinking the second phase was to be a variable rate. My mistake.

Dan- Very likely you didn't miss anything. The original poster didn't say the construction loan rate is variable (maybe prime+), but that's frequently the case. If so, then it would be an ARM if both phases are done on a single note.

Richard & Dan:

Here is the product. Fixed rate construction loan for 120 with permanent financing to be sold on the secondary market for 30 years. If I understand this correctly here are the disclosures required: GFE/ETIL- 2 phase; at closing both a construction note and a 30 year note are signed (as well as a lock agreement - with a float down option); Final TIL 2phase and we will file a 120 day mortgage, at the end of the construction term but prior to selling to the secondary market the note and mortgage are modified to reflect the accruate repayment terms (1st payment date, final maturity) and adjust the rate if it has decreased since lock agreement was signed. The borrower would also be given an updated Final TIL at modification to reflect actual 30 year maturity and payment dates. Have I hit everything?

Ok - one final question. If we have both the construction and permanent phases locked at a fixed rate with a signed lock agreement at closing. Couldn't we use one note since we are reflecting the true terms in the final TIL with both phases? If we would we would only use one note we would also have the borrower sign an allonge at closing.
Ok - I think that's it for now.

Betsy,

Quote:

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at closing both a construction note and a 30 year note are signed

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This sounds to me like you are doing two separate closings at one time and not a "one time" closing. Therefore, I would advise two separate sets of disclosures, but I would also advise waiting until the construction phase is done and do the other closing at that time, then you don't have to worry about modifying the note and rates. However, it's your call.

Out of curiosity, what are the effective dates (note date, accrual date, etc.) on the 30 year note being signed at the same time the separate construction note is being signed?