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#2119539 - 02/24/17 09:41 PM Construction Loans - QM vs. Section 32
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My company is recently getting into Construction-Perm lending. They initially decided not to include the product in the Section 32 and QM compliance tests because of the exemption for the initial phase of a construction loan. The original analysis was based on doing 2 sets of disclosures and the analysis was not performed again after discovering they could only do a single set of disclosures. When I got involved I inquired as to why we were not including the product in the testing. This resulted in a series of discussions around the topic.

Everybody agrees now that under a single disclose, we must test the entire loan for Section 32 compliance based on the commentary to 1026.32(a)(2)(ii). However, some are trying to make the case that for the QM analysis (Section 43), we can still split off the two phases for QM testing purposes because this same commentary is not located anywhere in 12 CFR 1026.43. My belief is that QM is treated the exact same way as Section 32, especially as what is included in the points and fees comes specifically from 1026.32. The commentary on the testing based on disclosure methods is already found in 1026.32 and does not need to be repeated, in my opinion it is a clear decision to treat the QM in the same way as Section 32. Does anybody know of any literature that specifically lays out that when doing the QM analysis for points and fees that if a single set of disclosures is used, then you must perform the analysis based the points and fees of both phases (just like Section 32 specifically states)?

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#2119549 - 02/24/17 10:06 PM Re: Construction Loans - QM vs. Section 32 Compliance NABW
Dan Persfull Offline
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If you are asking what I think you are the construction phase, as long as it is 12 months or less, of a construction to permanent loan is exempt from sections (c) through (f). See 1026.43(a)(3)(iii).
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#2120266 - 03/02/17 05:29 PM Re: Construction Loans - QM vs. Section 32 Compliance NABW
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Yes, the construction phase itself is exempt, but the permanent phase is not. Therefore, when you do the calculations for the permanent phase it makes a difference whether you use a single set of disclosures or two separate disclosures.

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#2140286 - 08/01/17 01:59 AM Re: Construction Loans - QM vs. Section 32 Compliance NABW
mdosu Offline
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Justin, I'm coming up on this same issue that you have. Did you find your answer?

I'm also thinking that if you're doing 1 disclosure, the entire loan needs to be considered for QM and HOEPA tests with the same basis of computation for points and fees.

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#2140626 - 08/03/17 03:10 PM Re: Construction Loans - QM vs. Section 32 Compliance NABW
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I've never fully received confirmation on it, but I believe the entire loan needs to be considered for QM and Section 32 tests with the same computation for points and fees as well. I don't see how Section 43(e) [QM] would be separated out from Section 32.

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#2140925 - 08/04/17 09:04 PM Re: Construction Loans - QM vs. Section 32 Compliance NABW
mdosu Offline
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Justin, thanks for the reply.

Does your institution currently issue 1 disclosure and 1 note for these loans?

When I set up my points and fees test for QM/sec 32, its obvious that if you split the loan as 2 disclosures 2 loans, you're able to assign and segregate the points/fees for construction from the perm, increasing your chance of maintaining QM and non-Sec 32.

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#2141123 - 08/07/17 08:19 PM Re: Construction Loans - QM vs. Section 32 Compliance NABW
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Yes, unfortunately we have to do one set of disclosures because our LOS doesn't support doing two sets of disclosures for one loan. The one note is more of a business decision.

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#2141601 - 08/10/17 07:01 PM Re: Construction Loans - QM vs. Section 32 Compliance NABW
John Burnett Online
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I think that if you read comment 43(a)(3)-2 carefully, you'll see that the construction phase of a construction to permanent loan that's a single note, single closing transaction can be separated from the rest of the loan for 1026.43 purposes, and exempted from the requirements of paragraphs (c) - (f) of 1026.43.

"For such a loan, the construction phase and the permanent phase may be treated as separate transactions for the purpose of compliance with § 1026.43(c) through (f), and the construction phase of the loan is exempt from § 1026.43(c) through (f), provided the initial term is 12 months or less."

They're not talking about two separate notes here. They are talking about the two phases of the same loan. Analogous, I suppose to the revolving and repayment phases of a HELOC.
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#2141629 - 08/10/17 09:50 PM Re: Construction Loans - QM vs. Section 32 Compliance NABW
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John - That works if you can use two sets of disclosures, which the Regulation allows you to do even if there is only one note and one close. However, if you are only able to use one set of disclosures, then I believe you follow the same methodology for Section 43, as is required for Section 32. The requirements for Section 32 are:

12 CFR 1026.32(a)(2)(ii) Official Commentary 1:

Construction-permanent loans.

Section 1026.32 does not apply to a transaction to finance the initial construction of a dwelling. This exemption applies to a construction-only loan as well as to the construction phase of a construction-to-permanent loan. Section 1026.32 may apply, however, to permanent financing that replaces a construction loan, whether the permanent financing is extended by the same or a different creditor. When a construction loan may be permanently financed by the same creditor, § 1026.17(c)(6)(ii) permits the creditor to give either one combined disclosure for both the construction financing and the permanent financing, or a separate set of disclosures for each of the two phases as though they were two separate transactions. See also comment 17(c)(6)-2. Section 1026.17(c)(6)(ii) addresses only how a creditor may elect to disclose a construction to permanent transaction. Which disclosure option a creditor elects under § 1026.17(c)(6)(ii) does not affect the determination of whether the permanent phase of the transaction is subject to § 1026.32. When the creditor discloses the two phases as separate transactions, the annual percentage rate for the permanent phase must be compared to the average prime offer rate for a transaction that is comparable to the permanent financing to determine coverage under § 1026.32. Likewise, a single amount of points and fees, also reflecting the appropriate charges from the permanent phase, must be calculated and compared with the total loan amount to determine coverage under § 1026.32. When the creditor discloses the two phases as a single transaction, a single annual percentage rate, reflecting the appropriate charges from both phases, must be calculated for the transaction in accordance with § 1026.32(a)(3) and appendix D to part 1026. This annual percentage rate must be compared to the average prime offer rate for a transaction that is comparable to the permanent financing to determine coverage under § 1026.32. Likewise, a single amount of points and fees, also reflecting the appropriate charges from both phases of the transaction, must be calculated and compared with the total loan amount to determine coverage under § 1026.32. If the transaction is determined to be a high-cost mortgage, only the permanent phase is subject to the requirements of §§ 1026.32 and 1026.34.

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#2141818 - 08/12/17 12:36 AM Re: Construction Loans - QM vs. Section 32 Compliance NABW
mdosu Offline
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Justin C. I concur with your point.

So this is where my bank is at too. We want to launch construction-to-perm. One disclosure, one note. I'm designing the LE/CD now. A related question I have is, is your construction portion interest only? How does the borrower pay interest on the construction portion? We elected to capitalize interest, essentially making it a negative amortizing loan.

I created my own thread on my specific questions, if you can help me walk through my thought process here:
https://www.bankersonline.com/forum/ubbt...apr#Post2141817

Alternatively, can I message you my contact and may I call you to discuss some conceptual questions related to related to setting up my LE/CD?

thanks

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#2142243 - 08/16/17 03:33 PM Re: Construction Loans - QM vs. Section 32 Compliance NABW
John Burnett Online
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John Burnett
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Originally Posted By Justin C.
John - That works if you can use two sets of disclosures, which the Regulation allows you to do even if there is only one note and one close. However, if you are only able to use one set of disclosures, then I believe you follow the same methodology for Section 43, as is required for Section 32.


I agree that the Bureau mentioned the option in 1026.17 to disclose the hybrid construction-to-perm loan either as two transactions or as one, at the creditor's option. [see prefatory text on pages 6648-6649 in 1/30/13 FR] It then announces that the "Bureau is using its adjustment and exception authority to allow the construction phase of a construction-to permanent loan to be exempt from the ability-to-repay requirements as a temporary loan; however the permanent phase of the loan is subject to § 1026.43."

I read that analysis to look to 1026.17 to find a precedent for looking at the two phases separately. I don't see any suggestion that you have to disclose them separately to treat them separately for the purposes 1026.43.

The fact that you are able to disclose the two phases separately allows you to use the two separate disclosures for determining whether 1026.32 applies. That, IMHO, is a separate issue.
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