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#1886823 - 01/15/14 02:51 PM open end/construction??
scottb Offline
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Under Reg Z, why is a construction loan not considered "open ended"? Is it because the customer is not contractually required to make principal payments? What if the customer pays principal from time to time, but still takes draws on the construction loan? We had a customer do that once.

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#1886836 - 01/15/14 02:59 PM Re: open end/construction?? scottb
RR Joker Offline
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A construction loan could be done as an open-end LOC, but typically is closed-end. It's how it's set up.

Closed-end allows for draws up to a specific amount. If you pay it down, it should not allow for draws back up to the limit contractually.

Open-end is structured as a revolving LOC...it can roller-coaster (just like a HELOC or Credit Card) throughout the entire term.
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#1886839 - 01/15/14 03:01 PM Re: open end/construction?? scottb
rlcarey Offline
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There usually are no provisions in construction loan contracts for the amount of credit to revolve. If you are allowing that to happen (i.e., payment of principal and then re-draw) I suggest reviewing your loan contract with your legal counsel as it most likely is not addressed. Your mortgage or deed of trust may also not support that action.
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#1886883 - 01/15/14 03:46 PM Re: open end/construction?? scottb
scottb Offline
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Suppose a customer mortgages their residence in order to do some home improvements and the loan is set up so that the customer can make draws on the loan...is ROR required each time a draw is made?

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#1886913 - 01/15/14 04:20 PM Re: open end/construction?? scottb
Richard Insley Offline
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Toano, VA
Read the definition of "open-end credit"--Section 1026.2(a)(20). The key difference between open-end and closed-end with multiple advances is replenishment of the available credit triggered by principal payments.
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#1886916 - 01/15/14 04:22 PM Re: open end/construction?? scottb
Richard Insley Offline
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Toano, VA
With regard to your ROR obligation, see Official Interpretation #6 on Section 1026.23(f).
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#2041491 - 09/30/15 03:46 PM Re: open end/construction?? scottb
morirse de risa Offline
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Can you tell me why the majority of construction loans are typically set up as closed-end loans? I have lenders asking why this product is used instead of an open-end product, and I'd like to give an informed response.

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#2041697 - 09/30/15 08:48 PM Re: open end/construction?? scottb
Richard Insley Offline
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Toano, VA
This is a credit risk and pricing issue, not regulatory. I've never been a lender, but don't much like the idea of extending evergreen credit secured by a home that's still on paper.
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#2041761 - 09/30/15 10:22 PM Re: open end/construction?? morirse de risa
Rocky P Online
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Florida
Besides the comments by the others -

A person needs to borrow $XXXXX to build a home. Once the home is built, the loan is changed from drawing to a permanent loan for repayment. Usually, during the construction phase, only the interest on the outstanding balance is repaid, so the likeliness of open credit is usually not built into the notes.

If it were open ended, if there were a principal reduction, then the customer could borrow the money again. The purpose of the limit, is: that is what the customer requested, which would cover the cost of the home, which will be converted into an amortizing mortgage (repayment) loan and the payments would be affordable.

Your chief lender and loan committee sets your bank's policies in compliance with state and federal laws. If they feel it necessary, they could create any loan product not in violation of laws. .
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#2042168 - 10/02/15 03:58 PM Re: open end/construction?? scottb
morirse de risa Offline
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Thank-you both for your input, much appreciated.

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