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#2042719 - 10/06/15 01:04 PM Re: Construction Only Loan Product & Pmt Change Dan Persfull
Dan Persfull Offline
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Dan Persfull
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Bloomington, IN
Saal, I agree with Randy's above statement. If you use Appendix D to disclose the construction phase as a separate transaction then you must follow the requirements of Appendix D and disclose the product as a balloon product.
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#2042730 - 10/06/15 01:33 PM Re: Construction Only Loan Product & Pmt Change Dan Persfull
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o.k. thanks Dan. I think I need to walk this back through step by step for the two products my bank offers.

We offer a construction only loan and a one time close construction loan that we disclose as a single transaction. Initially, I thought you were attempting to disclose a construction only loan but it sounds like you're also doing or may be doing the perm and disclosing the two separately? Not sure if disclosure of a construction only vs. construction portion of construct to perm differs under Reg Z and App D.
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#2042735 - 10/06/15 01:40 PM Re: Construction Only Loan Product & Pmt Change Dan Persfull
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I don't see why it would differ, to be honest. Whether the bank is only doing the construction loan or whether they will do both, but disclosed separately, I believe the balloon product will apply. It doesn't meet the typical definition of what you think of as a balloon, because technically, it's a single-pay transaction...but Appendix D is treating it in a specific manner and Z has always considered (disclosed) that one payment as a balloon in my experience.
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#2042757 - 10/06/15 02:31 PM Re: Construction Only Loan Product & Pmt Change Dan Persfull
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From Appendix D:

7. Relation to §§ 1026.37 and 1026.38. A creditor must disclose a projected payments table for certain transactions secured by real property, pursuant to §§ 1026.37(c) and 1026.38(c), instead of the general payment schedule required by § 1026.18(g) or the interest rate and payments summary table required by § 1026.18(s). Accordingly, some home construction loans that are secured by real property are subject to §§ 1026.37(c) and 1026.38(c) and not § 1026.18(g). See comment app. D-6 for a discussion of transactions that are subject to § 1026.18(s). Under § 1026.17(c)(6)(ii), when a multiple-advance construction loan may be permanently financed by the same creditor, the construction phase and the permanent phase may be treated as either one transaction or more than one transaction. Following are illustrations of the application of appendix D to transactions subject to §§ 1026.37(c) and 1026.38(c), under each of these two alternatives:

i. If a creditor uses appendix D and elects pursuant to § 1026.17(c)(6)(ii) to disclose the construction and permanent phases as separate transactions, the construction phase must be disclosed according to the rules in §§ 1026.37(c) and 1026.38(c). Under §§ 1026.37(c) and 1026.38(c), the creditor must disclose the periodic payments during the construction phase in a projected payments table. The provision in appendix D, part I.A.3, which allows the creditor to omit the number and amounts of any interest payments “in disclosing the payment schedule under § 1026.18(g)” does not apply because the transaction is governed by §§ 1026.37(c) and 1026.38(c) rather than § 1026.18(g). The creditor determines the amount of the interest-only payment to be made during the construction phase using the assumption in appendix D, part I.A.1. Also, because the construction phase is being disclosed as a separate transaction and its terms do not repay all principal, the creditor must disclose the construction phase transaction as a product with a balloon payment feature, pursuant to §§ 1026.37(a)(10)(ii)(D) and 1026.38(a)(5)(iii), in addition to reflecting the balloon payment in the projected payments table.

ii. If the creditor elects to disclose the construction and permanent phases as a single transaction, the repayment schedule must be disclosed pursuant to appendix D, part II.C.2. Under appendix D, part II.C.2, the projected payments table must reflect the interest-only payments during the construction phase in a first column, followed by the appropriate column(s) reflecting the amortizing payments for the permanent phase. The creditor determines the amount of the interest-only payment to be made during the construction phase using the assumption in appendix D, part II.A.1.
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#2042839 - 10/06/15 05:00 PM Re: Construction Only Loan Product & Pmt Change Dan Persfull
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To summarize Dan's original post:

No AP
Use of APP D trumps
Use of Balloon Pmt.

Do we mark the 11 int. pmts with an "E" for estimate as per APP. D?

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#2042973 - 10/06/15 11:18 PM Re: Construction Only Loan Product & Pmt Change Dan Persfull
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Construction/Perm The construction part is 11 month int only with a balloon. We plan on using Year 1 Balloon Payment, Fixed Rate . Should it be be 11 mo. Balloon Payment, Fixed Rate, since the balloon pmt is the 12th pmt? Geez. (Randy & Dan....you are saving us all and have been very patient. We luv you guys)
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#2042983 - 10/07/15 12:41 PM Re: Construction Only Loan Product & Pmt Change Dan Persfull
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Loan Term - 12 mo.

Product - 11 mo Interest Only, Fixed Rate
Last edited by RR Joker; 10/07/15 12:43 PM. Reason: off by a month
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#2043007 - 10/07/15 01:39 PM Re: Construction Only Loan Product & Pmt Change Dan Persfull
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Construction/Perm The construction part is 11 month int only with a balloon.

This implies, or at least to me, that the construction phase is being disclosed as a separate transaction otherwise why would there be a balloon payment. If using Appendix D for the disclosures then you will follow it's requirements:

Term - 12 months

Product - Year 1 Balloon Payment, Fixed Rate
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#2043018 - 10/07/15 01:59 PM Re: Construction Only Loan Product & Pmt Change Dan Persfull
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Thanks Dan
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#2043055 - 10/07/15 02:48 PM Re: Construction Only Loan Product & Pmt Change Dan Persfull
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Curiously, Dan...where does it say that Balloon would trump the I/O feature based on Appendix D? I/O would normally trump balloon as a feature.
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#2043066 - 10/07/15 03:05 PM Re: Construction Only Loan Product & Pmt Change Dan Persfull
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i. If a creditor uses appendix D and elects pursuant to § 1026.17(c)(6)(ii) to disclose the construction and permanent phases as separate transactions, the construction phase must be disclosed according to the rules in §§ 1026.37(c) and 1026.38(c). Under §§ 1026.37(c) and 1026.38(c), the creditor must disclose the periodic payments during the construction phase in a projected payments table. The provision in appendix D, part I.A.3, which allows the creditor to omit the number and amounts of any interest payments “in disclosing the payment schedule under § 1026.18(g)” does not apply because the transaction is governed by §§ 1026.37(c) and 1026.38(c) rather than § 1026.18(g). The creditor determines the amount of the interest-only payment to be made during the construction phase using the assumption in appendix D, part I.A.1. Also, because the construction phase is being disclosed as a separate transaction and its terms do not repay all principal, the creditor must disclose the construction phase transaction as a product with a balloon payment feature, pursuant to §§ 1026.37(a)(10)(ii)(D) and 1026.38(a)(5)(iii), in addition to reflecting the balloon payment in the projected payments table.
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#2043070 - 10/07/15 03:10 PM Re: Construction Only Loan Product & Pmt Change Dan Persfull
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And before someone brings up the question about the balloon payment definition. From 1026.37(b).

(5) Balloon payment. A statement of whether the transaction includes a balloon payment, labeled “Balloon Payment.” For purposes of this paragraph (b)(5), “balloon payment” means a payment that is more than two times a regular periodic payment. “Balloon payment” includes the payment or payments under a transaction that requires only one or two payments during the loan term.
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#2043081 - 10/07/15 03:34 PM Re: Construction Only Loan Product & Pmt Change Dan Persfull
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Thanks Dan...I know we had already discussed it, but I could NOT put my finger back on it.

Too many exceptions to the exceptions...geez!!!

__(I shoulda looked at my emails on this very subject. crazy )_______________________
Last edited by RR Joker; 10/07/15 03:35 PM.
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#2043531 - 10/09/15 01:10 PM Re: Construction Only Loan Product & Pmt Change RR Joker
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Lost in a regulatory fog
Okay, to dredge this back up. We have a construction only (no purchase) 12 mo. int. only loan with variable rate based on WSJ prime.

The LE will show:
Term= 12 mo.
Purpose= Construction
Product= Year 1 Balloon, 0/Monthly Adjustable rate

No AP table but AIR table.

Is that correct?

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#2043869 - 10/13/15 02:59 PM Re: Construction Only Loan Product & Pmt Change Dan Persfull
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If I receive a reply to the following I will report back.


There appears to be a potential for conflicting information for disclosing construction only loans on both the Loan Estimate and the Closing Disclosure when the loan has interest only payments. For example a 9 month construction only loan with 8 monthly interest only payments and the 9th payment is the final interest and principal payment.

From 1026.37(b)(5)

Balloon payment. A statement of whether the transaction includes a balloon payment, labeled “Balloon Payment.” For purposes of this paragraph (b)(5), “balloon payment” means a payment that is more than two times a regular periodic payment. “Balloon payment” includes the payment or payments under a transaction that requires only one or two payments during the loan term.

Section 1026.37(a)(iii) states the following:

The disclosure of a loan feature under paragraph (a)(10)(ii) of this section shall precede the disclosure of the loan product under paragraph (a)(10)(i) of this section. If a transaction has more than one of the loan features described in paragraph (a)(10)(ii) of this section, the creditor shall disclose only the first applicable feature in the order the features are listed in paragraph (a)(10)(ii) of this section.

The following is from Regulation Z, Appendix D:

7. Relation to §§ 1026.37 and 1026.38. A creditor must disclose a projected payments table for certain transactions secured by real property, pursuant to §§ 1026.37(c) and 1026.38(c), instead of the general payment schedule required by § 1026.18(g) or the interest rate and payments summary table required by § 1026.18(s). Accordingly, some home construction loans that are secured by real property are subject to §§ 1026.37(c) and 1026.38(c) and not § 1026.18(g). See comment app. D-6 for a discussion of transactions that are subject to § 1026.18(s). Under § 1026.17(c)(6)(ii), when a multiple-advance construction loan may be permanently financed by the same creditor, the construction phase and the permanent phase may be treated as either one transaction or more than one transaction. Following are illustrations of the application of appendix D to transactions subject to §§ 1026.37(c) and 1026.38(c), under each of these two alternatives:
i. If a creditor uses appendix D and elects pursuant to § 1026.17(c)(6)(ii) to disclose the construction and permanent phases as separate transactions, the construction phase must be disclosed according to the rules in §§ 1026.37(c) and 1026.38(c). Under §§ 1026.37(c) and 1026.38(c), the creditor must disclose the periodic payments during the construction phase in a projected payments table. The provision in appendix D, part I.A.3, which allows the creditor to omit the number and amounts of any interest payments “in disclosing the payment schedule under § 1026.18(g)” does not apply because the transaction is governed by §§ 1026.37(c) and 1026.38(c) rather than § 1026.18(g). The creditor determines the amount of the interest-only payment to be made during the construction phase using the assumption in appendix D, part I.A.1. Also, because the construction phase is being disclosed as a separate transaction and its terms do not repay all principal, the creditor must disclose the construction phase transaction as a product with a balloon payment feature, pursuant to §§ 1026.37(a)(10)(ii)(D) and 1026.38(a)(5)(iii), in addition to reflecting the balloon payment in the projected payments table.

1026.37(a)(10)(ii) lists Interest Only ahead of Balloon Payment. 1026.38(a)(5) references the applicable sections in 1026.37(a)(10) for disclosing the product on the Closing Estimate.

Would the CFPB please advise which section of the regulation would take precedence in disclosing the product on the Loan Estimate and the Closing Disclosure, 1026.37(a)(10)(iii) or Appendix D?

Should the product for a 9 month interest only construction only loan be disclosed as:

Product – 8 mo. Interest Only, Fixed Rate

Or should it be disclosed as:

Product – Year 1 Balloon Payment, Fixed Rate

You guidance on this issue would be greatly appreciated.
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#2044290 - 10/14/15 09:06 PM Re: Construction Only Loan Product & Pmt Change Dan Persfull
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I, for one, am checking this thread periodically to see if Dan receives any kind of response from the CFPB! (We do interest-only construction loans with a balloon payment so I'm anxious to hear.)

In the meantime, we have a problem. Our LOS vendor is still working on getting construction loans right. Well, what should happen but we have a construction loan customer. I just spoke with the lender and this is day three of application so we really need to send the LE. Can we send a LE that we KNOW isn’t fully correct but we aren’t SURE how to properly complete it (see Dan’s thread above)? The costs are correct - we do know that but that first page....oh boy. We’re doomed no matter what we do I’m thinking. Should I polish my resume?

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#2044297 - 10/14/15 09:14 PM Re: Construction Only Loan Product & Pmt Change Dan Persfull
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Examiners will expect supervised entities to make good faith efforts to comply with the TRID Rule's requirements in a timely manner. Specifically, examiners will consider the institution's implementation plan, including actions taken to update policies, procedures, and processes, its training of appropriate staff, and its handling of early technical problems or other implementation challenges.


As long as you are making a good faith effort to comply in the beginning (and it being well documented of course) I don't think you have much to worry about.
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#2044400 - 10/15/15 03:33 PM Re: Construction Only Loan Product & Pmt Change rlcarey
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Originally Posted By rlcarey

As long as you are making a good faith effort to comply in the beginning (and it being well documented of course) I don't think you have much to worry about.

Except for the lawyers. I don't think the lawyers are going to show any leniency for our good faith efforts.

if using the Appendix D assumption that 1/2 of the loan amount is outstanding for the entire term of the loan, in a 12-month fixed rate interest only loan, my understanding is we would disclose product as a 1 yr balloon, fixed rate loan. In my projected payments table for the first 11 payments, would I show a range of payments based on interest on 1/2 of the amount outstanding for a range of 28 days to 31 days, or can I disclose a single payment amount based on 30 days? Also, for the final balloon payment, would that be for 1/2 of the loan amount plus interest, or would it show the full loan amount?

By way of example:
$200,000 loan amount 5.00% fixed rate

Yr 1 Final Payment
Monthly P&I $383.56 to 424.66 $100,410.96

OR

$200,000 loan amount 5.00% fixed rate

Yr 1 Final Payment
Monthly P&I $410.96 $100,410.96
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#2044437 - 10/15/15 05:08 PM Re: Construction Only Loan Product & Pmt Change Dan Persfull
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A lawyer would need a cause for action. APR or finance charge violation - sure. Some other technical completion error on the form that the consumer still does not understand, I don't see it.


Final payment would be the full loan amount plus interest.
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#2044705 - 10/16/15 05:31 PM Re: Construction Only Loan Product & Pmt Change rlcarey
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In a construction loan, the LE page 3, "In 5 years" should this be completed and the TIP is "0%". The software does not seem to be filling these fields correctly. Any ideas?? Do we manually calculate this for TIP?

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#2044709 - 10/16/15 05:35 PM Re: Construction Only Loan Product & Pmt Change Dan Persfull
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Well 0 is not correct that is for sure.
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#2044714 - 10/16/15 05:43 PM Re: Construction Only Loan Product & Pmt Change rlcarey
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Since a construction loan is based upon App D. and the amount of interest on a construction loan is an estimate do we place a label of "E" meaning estimate on the TIP? The true amount of interest paid on a construction loan is unknown at the time of the LE! Weird that the bureau leaves us hanging on a construction loan.

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#2044752 - 10/16/15 07:23 PM Re: Construction Only Loan Product & Pmt Change Dan Persfull
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Yep...it seems 'estimate' has gone out the window all around on Appdx D calcs.
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#2044756 - 10/16/15 07:50 PM Re: Construction Only Loan Product & Pmt Change RR Joker
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What are you using to calc TIP? The App D estimated interest? or other amount?

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#2044796 - 10/16/15 10:41 PM Re: Construction Only Loan Product & Pmt Change ccman
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I had the same question today when I was reviewing our first construction only one year balloon loan. I spoke to an FDIC examiner and asked her this same question on which feature to use for my Product on the LE. I had seen in Appendix D where it seemed to say something different than the regulation. To make a long story short, I pointed out the difference and after we went back and forth on it, her final comment to me was to use Interest Only and to follow the regulation instead of the Appendix D. I kept questioning her why and what was the purpose of the Appendix D if not to follow it for construction only loans. She would, or could not give me an answer. I have documented my call to her but I still question that.

I will be very interested to hear what Dan finds out. Thanks!

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