If the loan meets the definition of a RMT it is exempt from rescission.

1026.2(a)(24) - OSC

4. Construction financing. If a transaction meets the definition of a residential mortgage transaction and the creditor chooses to disclose it as several transactions under §1026.17(c)(6), each one is considered to be a residential mortgage transaction, even if different creditors are involved. For example:

i. The creditor makes a construction loan to finance the initial construction of the consumer's principal dwelling, and the loan will be disbursed in five advances. The creditor gives six sets of disclosures (five for the construction phase and one for the permanent phase). Each one is a residential mortgage transaction.

ii. One creditor finances the initial construction of the consumer's principal dwelling and another creditor makes a loan to satisfy the construction loan and provide permanent financing. Both transactions are residential mortgage transactions.


1026.23(f):

(f) Exempt transactions. The right to rescind does not apply to the following:

(1) A residential mortgage transaction.

In my "Operation" days as a loan closer, if a borrower moved into the property before it was finished being constructed, we made sure there was an ROR. But, on the other hand, why would anybody rescind a loan if it meant they were paying off a construction loan--the only answer I can come up with is: If I was the borrower and found out I could get a loan with a lesser interest rate, I would want to rescind and take the cheaper loan. Shouldn't the borrower be given that option if they are using the property as principal residence?

I understand that RMTs are exempt....but then again...not ALL RMTs are exempt.....because when the special rule about 2 primary residences applies, what would otherwise be exempt as an "RMT" loses it exemption, right?

You were unnecessarily providing a right to the consumer they were not entitled to.

In a purchase, or an initial construction loan for the consumer's primary residence they do not have the right to rescind the Residential Moartgage Transaction. Them moving into the property before converting the construction loan to a permanent financing does change the loan status from a RMT and it does not give them rescission rights.

The special rule applies when there is an existing primary residence being used as collateral to purchase or construct a new primary residence.

It does not apply to a loan that is only secured by the purchased or constructed primary residence. If that was the case then you would have to give rescission on every permanent loan regardless if the consumer occupied the property because of the following comment in section 3 just above the "special rule" because the dwelling is considered the consumer's primary residence.

. . . When a consumer buys or builds a new dwelling that will become the consumer's principal dwelling within one year or upon completion of construction, the new dwelling is considered the principal dwelling if it secures the acquisition or construction loan. . . .

But this loan isn't only secured by the purchased or constructed primary residence......it's also secured by the "guest house" that is now (temporarily) their primary residence. There IS an existing primary residence being used as collateral...isn't there?

As i asked before...i guess i need to understand whether the perm loan counts as "acquiring" or "purchasing" the dwelling or not. Maybe it doesn't....maybe it's the HMDA side of my brain that wants to think of it as still "purchasing" the dwelling.

Dan, i hope you don't think i'm arguing for the sake of argument.

My understanding is that the guest house was built as part of this construction loan, so it was not "existing" at the outset.

This is your key. The special rule only pertains to existing PR's taken as collateral for an otherwise exempt loan.

That's how i understood it too Kathleen, but i'm struggling with why we have to go back to the construction only loan for when the "existing" makes a difference. Yes, it wasn't existing then, but it exists now, and we have a new loan now. I understand that this new loan would normally be an RMT and exempt from ROR, but the fact that we are now encumbering their "primary residence" and the fact that to me this perm loan is still "acquiring or purchasing" the soon-to-become primary residence makes me want to apply the special rule about 2 primary residences.

It all boils down for me to whether or not the perm loan counts as "acquiring" or "purchasing" the home or not. If it does, then "when the consumer is acquiring or constructing a new principal dwelling, any loan subject to Regulation Z and secured by the equity in the consumer's current principal dwelling (for example, a bridge loan) is subject to the right of rescission regardless of the purpose of that loan" would seem to have to kick in.

You didn't take an ownership interest in a current PR when you made the CL. By the time they built and moved in the guest house, it was already encumbered by the fact that it was built, thus no new money involved an existing PR.

But if the perm loan "acquires" the (later to be) primary residence, how do you discard the special rule and the parts i bolded above?

The permanent loan is part of the acquisition financing and would be considered a loan for the acquisition of the property. That is why the conversion loan is included in the definition of a RMT.

Even if you want to argue the conversion is a refinancing there would still be no rescission. You are not advancing new funds and there is already a lien on the property so it would be a no cash out refinancing which is also exempt from rescission.

If the original loan rolled over to perm financing, with no new loan needed, i could see that (the guest home wasn't the primary residence when that loan closed). But this scenario is 2 distinct loans: the temporary construction loan followed by (the weird scenario) of the new perm loan being secured by the current primary residence and the intended for the future primary residence.

Ok, I see your point Dan. So, actually, in our system, this loan should not be coded as a refinance at the permanent financing stage, but rather as a purchase/RMT?

All our construction/permanent loans are 2 phase loans (2 very distinct loans) and not once have we given rescission for the permanent loan, and yes we have had several occasions where the consumer had moved into the dwelling. Usually to finish up some trim, kitchen cabinets, flooring covers, etc. Them taking up residence in the home does not transform the residential mortgage transaction into a refinancing.

Dan, this is 2 distinct dwellings though. I'm not arguing that in the case of a construction loan that is later replaced by perm financing and the customer has moved into the only home constructed that you should give ROR. I'm arguing that the presence of the 2nd dwelling that is currently a "2nd" primary residence is what causes ROR to be applicable.

So if you want to take that route then the dwelling that was constructed and is currently being occupied as the primary residence is the primary residence constructed with the loan proceeds and is therefore exempt under the RMT definition. The fact they may or may not move into the "main" house as the primary residence would not be a factor, or visa versa. Either way the primary residence they are occupying is a result of the construction loan. The conversion of that construction loan is exempt from rescission regardless which dwelling that was constructed they are occupying as the primary residence.

That's one way to look at it. The other way to look at it is that the house they built intending to be their primary residence secures the loan; the guest house (maybe they intended to move into it for a few weeks or months from the beginning; maybe they didn't......maybe it was their plan all along to live in it until their bigger, nicer primary residence was finished a few weeks or months later......maybe they never intended to live in the guest house, but their last real primary residence--not part of the security of this loan--sold quicker than they thought, so maybe it necessitated them moving into the guest house for a short time while their real primary residence was completed) also secures the loan.

Can one loan finance the construction of 2 primary residences? Can one loan have 2 RMTs at once in it?

I think you are getting too wrapped up in the vines.

I just think this is an extremely odd scenario not contemplated by sec. 23 at all really.

What if the first building completed was a garage and they moved in and slept on cots?

I don't see where you're going with that exactly. They didn't build a garage...they built a house (2 houses actually). But for the record, we made a loan recently to a couple who were living in their shop (i'm sure it has running water and electricity) while building their primary residence, with the loan secured by the land and improvements (so of course, we had the shop/'house' and the house under construction). We gave ROR.

From the REG: A loan secured by both A and B is, likewise, rescindable.

Does this not count when the guest house is A and the main house is B? There are two dwellings, the one completed first became their principle residence.

But for the record, we made a loan recently to a couple who were living in their shop (I'm sure it has running water and electricity) while building their primary residence, with the loan secured by the land and improvements (so of course, we had the shop/'house' and the house under construction). We gave ROR.

In this situation the shop was an existing structure, not one being built with proceeds from the construction loan (RMT), therefore it was the existing primary residence at the time the RMT was made therefore the special rule would be applicable.

As I've said 4 or 5 times the special rule applies to an existing structure being used as the primary residence, it does not apply to a structure being purchased or constructed that will become the primary residence.

If the loan meets the definition of a RMT and if an existing structure being occupied as the primary residence is taken as collateral the special rule applies, HOWEVER if there is no existing structure being used as the primary dwelling being used as collateral then the loan is exempt AND the permanent loan to pay off the existing construction loan to build the primary residence and/or any other structures on the property meets the definition of a RMT and is exempt from rescission.

4. Special rule for principal dwelling. Notwithstanding the general rule that consumers may have only one principal dwelling, when the consumer is acquiring or constructing a new principal dwelling, any loan subject to Regulation Z and secured by the equity in the consumer's current principal dwelling] (for example, a bridge loan) is subject to the right of rescission regardless of the purpose of that loan. For example, if a consumer whose principal dwelling is currently A builds B, to be occupied by the consumer upon completion of construction, a construction loan to finance B and secured by A is subject to the right of rescission. A loan secured by both A and B is, likewise, rescindable.

What's being lost, or not understood, in this conversation is that in the scenario being discussed there was no existing primary dwelling taken as collateral to construct the consumer's new primary dwelling therefore the "special rule" is not applicable.

The loan was for the construction of the consumer's primary dwelling, a RMT, the fact that a second dwelling was built at the same time does not change that fact and again the loan to convert the construction loan to permanent financing is also a RMT and is exempt from rescission.

Now I don't mean to be rude but I have no more time to spend on this topic. One will have to review the definition of a RMT in .02, the exemptions in .23, the "special" rule in .23 and draw their own conclusions.