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#1659763 - 02/02/12 04:30 PM Construction only loan-what disclosures?
kake Offline
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Oregon
Have not done a construction loan since I have become the "loan compliance staff". From what I am reading I am so glad that we do not offer permanent or closed end financing for consumers when secured by a dwelling but it appears we do still offer construction loans.

Need some help. Borrower has a current loan with us secured by bare land as an abundance of caution. Borrower has approached us and asked if we would be interested in financing the construction of their personal residence when he is ready to build. He expects construction to take 8-12 months. He is wanting to roll the current land loan into the construction loan (not sure why as the construction rate will be higher). We will not be doing the perm loan!

I do not yet have an application and might not for several months but thought I would try to get my ducks in a row.

Property is over 25 acres.

Straight line of credit, interest due monthly.

Construction loan 12 months or less.

Temporary financing and being over 25 acres, will anything in RESPA apply?

Any disclosures required within 3 days of application? We have disclosures for HELOCs given within 3 days of application but there would be different fees involved for a construction loan.

ECOA? Collect Government monitoring? statement in Bankers Compliance said to not collect race and sex for construction only loan. Do we collect the rest of the data?

Any other disclosures to think about?

Of course will order flood before hand.

If I am in over my head, let me know.

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#1659840 - 02/02/12 05:08 PM Re: Construction only loan-what disclosures? kake
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#1659857 - 02/02/12 05:35 PM Re: Construction only loan-what disclosures? kake
kake Offline
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Thank you, I did find that document but was a little reluctant to use as it was last updated 8/1/09.

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#1659880 - 02/02/12 05:45 PM Re: Construction only loan-what disclosures? kake
Richard Insley Online
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By taking out your land loan with the new construction loan, you'll need to estimate your TIL disclosures by some method other than Appendix D. The methods offered there assume you don't know the amounts or timing of advances and expect an average utilization of 50% of the loan amount. Because you're paying off the land loan with the first advance, you do know a certain amount about the draws and it's not reasonable to estimate that this borrower's overall utilization will be 50%.
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#1793908 - 03/12/13 07:28 PM Re: Construction only loan-what disclosures? kake
silver shamrock Offline
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Kentucky
Originally Posted By: kake
ECOA? Collect Government monitoring? statement in Bankers Compliance said to not collect race and sex for construction only loan. Do we collect the rest of the data?


I want to return to the part where the original poster asked about government monitoring collection for a construction-only loan. I have often referred back to the same matrix another poster mentioned and found it very useful, but have never understood the last part of paragraph #2 on the second page -- "Do not collect race and sex for construction only loans." I've attended several seminars and never heard this mentioned by a single presenter. Can anyone identify a regulatory citation, or regulatory agency interpretation of Reg. B where this has been gleaned? The question about collecting government monitoring for two-phase construction to permanent loans (in this case, two separate loan originations) has come up several times and I want to have a definitive basis for supplying an answer. We are a non-HmDA reporting bank, btw.

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#1793920 - 03/12/13 07:37 PM Re: Construction only loan-what disclosures? kake
rlcarey Online
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A temporary loan would not be subject to HMDA, so no authority to collect there. You would have to default to Regulation B:

3. Temporary financing. An application for temporary financing to construct a dwelling is not subject to §1002.13. But an application for both a temporary loan to finance construction of a dwelling and a permanent mortgage loan to take effect upon the completion of construction is subject to §1002.13.
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#1793998 - 03/12/13 09:32 PM Re: Construction only loan-what disclosures? Richard Insley
fmissle Online
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Pac NW
Originally Posted By: Richard Insley
By taking out your land loan with the new construction loan, you'll need to estimate your TIL disclosures by some method other than Appendix D. The methods offered there assume you don't know the amounts or timing of advances and expect an average utilization of 50% of the loan amount. Because you're paying off the land loan with the first advance, you do know a certain amount about the draws and it's not reasonable to estimate that this borrower's overall utilization will be 50%.

I’ve used the Appendix D, PART 1 before when we’ve taken out the land loan with the construction.
To this point, I haven’t had an examiner say anything (maybe I’m lucky).

But it seems to me that that the method still works.

Quote:
If the actual schedule of advances is not known, the following methods may be used to estimate the interest portion of the finance charge and the annual percentage rate and to make disclosures.


Just because I might know a single advance (although first and largest) doesn’t mean I know the rest of them. Am I just totally missing the boat on this?

Do you take the refinance portion, and then assume that amount will be outstanding the whole time and 50% of the remainder will also be outstanding the rest of the term?

(i.e. $500,000 draw down line of credit. $200,000 of that will be used to pay off the lot loan. Do you assume that the total outstanding will be $350,000)

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#1794006 - 03/12/13 09:38 PM Re: Construction only loan-what disclosures? kake
rlcarey Online
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Do you take the refinance portion, and then assume that amount will be outstanding the whole time and 50% of the remainder will also be outstanding the rest of the term?

Yes, if the first draw is that large, then that would be the correct way to handle it.

Don't refer to this as a line of credit as this is not an open-end plan. Refer to it as a multiple draw closed end credit so people don't get confused.
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#1794024 - 03/12/13 10:42 PM Re: Construction only loan-what disclosures? rlcarey
fmissle Online
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Originally Posted By: rlcarey
Yes, if the first draw is that large, then that would be the correct way to handle it.


Have you seen examiners cite on this issue, or comment on it? I ask because in my limited experience with this structure I haven't. Is there anything in the commentary that addresses it?

Thanks!

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#1794029 - 03/12/13 10:54 PM Re: Construction only loan-what disclosures? kake
rlcarey Online
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Yes, there is commentary:

Appendix D—Multiple-Advance Construction Loans

1. General rule. Appendix D provides a special procedure that creditors may use, at their option, to estimate and disclose the terms of multiple-advance construction loans when the amounts or timing of advances is unknown at consummation of the transaction.

You know the first advance so the Appendix will apply to the remainder of the term.

Have regulators cited it, yes I can say they have as the estimation of only half the balance being outside for the entire term of the loan really is not an accurate estimation when you know that almost half of the loan amount is disbursed from the get go.
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#1794033 - 03/12/13 11:43 PM Re: Construction only loan-what disclosures? rlcarey
fmissle Online
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Originally Posted By: rlcarey
Yes, there is commentary:

Appendix D—Multiple-Advance Construction Loans

1. General rule. Appendix D provides a special procedure that creditors may use, at their option, to estimate and disclose the terms of multiple-advance construction loans when the amounts or timing of advances is unknown at consummation of the transaction.

You know the first advance so the Appendix will apply to the remainder of the term.

Have regulators cited it, yes I can say they have as the estimation of only half the balance being outside for the entire term of the loan really is not an accurate estimation when you know that almost half of the loan amount is disbursed from the get go.


This makes sense to me. I’m not trying to be argumentative, I promise. What type of threshold would you use for the amount known? If I’m financing the cost of the Title Insurance, Escrow, etc. that would probably not be enough to count.

What if I know the first draw at closing will go to pay for the architect?

Does anybody use a % of the total loan amount as the trigger, or something else?

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#1794038 - 03/13/13 12:45 AM Re: Construction only loan-what disclosures? kake
rlcarey Online
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I think it is a judgement call based on the transaction and amount that you know will be extended. In most cases, it involves the closing costs and maybe the cost of the lot, but usually that is a fraction of the total loan amount. I don't think the regulators will get real excited about the loan, unless it clearly represents a lack of estimation. While I said I have seen this, it has been on a rare occasion where it is really apparent that the estimation was terribly flawed.
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#1801104 - 04/03/13 07:25 PM Re: Construction only loan-what disclosures? kake
ckme Offline
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If I may add to this post a different scenario, what if you are doing the construction only loan and MAY have to do the perm loan (committed to do if not eligible for secondary market). I understand we have to disclose for construction loan, but what do we do for the perm loan? This is a loan that may or may not happen, if we create an application do we have to collect GMI and report it as withdrawn if the perm loan is never done?

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#1801113 - 04/03/13 07:35 PM Re: Construction only loan-what disclosures? kake
RR Joker Offline
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You give early disclosures for both loans. You give the '60 day' construction letter if you want an opportunity to revise the perm loan estimate down the road.

If it is approved, but they go with secondary market, it will be approved-not accepted.
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#1801168 - 04/03/13 08:33 PM Re: Construction only loan-what disclosures? kake
SLU Voice Offline
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When ATR comes into play, if the financial situtation of the borrower changes drastically between const loan and perm loan, do we not do the perm loan and call the note? If we do the perm loan, are we setting ourselves up for inevitable litigation when we have to F/C because we know at the time of the perm loan that the customer will not have the ATR?

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#1801178 - 04/03/13 08:40 PM Re: Construction only loan-what disclosures? kake
rlcarey Online
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If you think you might do the perm loan, isn't the perm loan totally underwritten up front?? Why would you put yourself in a position to call the loan.
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#1801225 - 04/03/13 09:41 PM Re: Construction only loan-what disclosures? kake
SLU Voice Offline
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The perm was supposed to be taken out by the bank's mortgage dept and sold in the secondary market, but by the time it got that far, the cust credit score fell by 150+ points and was ineligible for secondary market purchase. Secondary market investors pull credit etc just prior to their (potential) purchase and can refuse the purchase. If this were after Jan '14, we would not be able to do the perm financing and keep it in-house either, so we would have to call the loan.

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#1801249 - 04/03/13 10:50 PM Re: Construction only loan-what disclosures? kake
rlcarey Online
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Or treat is as a workout.
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