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#2141817 - 08/11/17 08:17 PM Construction Product Name, Project Payments, APR ?
mdosu Offline
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Registered: 12/15/16
Posts: 24
Hi, I have a questions regarding setting up the LE/CD for a construction-to-perm consumer loan.

My bank is setting up consumer purpose construction-to-perm loan. I need to design the LE/CD and figure out the computations and ultimately see if our LOS can handle the loan structure. Here are the features:

1. single disclosure, single note
2. 12 month-construction, fixed interest only, capitalized interest (borrower doesn't pay interest on $1,000,000 of draw by making periodic payments during construction, rather interest is capitalized back into the total loan amount, and that becomes the starting loan amount for the perm loan.)
3. Perm loan is a classic 5/1, 30-year ARM.

Product Question: After reading 1026.37(a)(10), I believe what I should display is a "Year 2 Negative Amortization, 5/1 Adjustable Rate" Is this correct?

I noted that "If a transaction has more than one of the loan features described in paragraph (a)(10)(ii), the creditor shall disclose only the first applicable feature in the order the features are listed in paragraph (a)(10)(ii) of this section." In my case, I have a negative amort and interest only triggers. Hence I call it a "Year 2 Negative Amortization".

Then I noted that "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)" Hence, I follow it with the "5/1 Adjustable Rate".

Project Payments Question:
Am I correct with this?: My Year 1 column has the interest only trigger and I will compute solely the interest, even if it is capitalized.

Am I correct with this?: My years 2-6 column is the next column, for the initial ARM P&I payment calculation. The loan now goes straight to a 5/1 ARM in year 2. However, I use the capitalized amount after year 1 (negative amortized amount after construction period ended) as my loan amount to compute the ARM's principal and interest. I am basing this off of Paragraph 37(c)(1)(i)(A)'s commentary #2.


APR Question:
Am I correct with this: To compute the APR in my case, I include all the capitalized interest as my construction interest-only payments portion of the APR, and then I use the P&I payments for the fully capitalized amount (negative amortized amount) of the ARM for my perm's payments. Further, I follow the standard ARM rules of using the fully indexed rate after my initial ARM fix rate.


thanks!


Edited by mdosu (08/11/17 08:56 PM)

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TRID - TILA/RESPA Integrated Disclosures Rule
#2141830 - 08/13/17 07:40 AM Re: Construction Product Name, Project Payments, APR ? [Re: mdosu]
rlcarey Offline
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Registered: 07/16/01
Posts: 64600
Loc: Galveston, TX
I think the first thing you need to do is sit down with your EIC for safety and soundness. They are going to tell you that allowing a construction loan to go a full year without any interest payments by the consumer is not going to be looked on favorably.
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#2142143 - 08/15/17 03:26 PM Re: Construction Product Name, Project Payments, APR ? [Re: mdosu]
Always In Training Offline
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Registered: 07/11/06
Posts: 1034
Loc: Where the Green Grass Grows
I'm here because a new suggested product is a one loan construction to perm -- we've only ever done this as two loans, two closings. All ours have been 9-12 months, single pay balloon. Now, this isn't possible with my LOS with the one loan, one closing construction to perm, and I'm now digging at the guidance. I hate when we switch things up that I know work from a compliance standpoint.

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#2142150 - 08/15/17 03:51 PM Re: Construction Product Name, Project Payments, APR ? [Re: mdosu]
mdosu Offline
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Registered: 12/15/16
Posts: 24
rlcarey - thanks for the suggestion, that's already in the works.

Always in Training- a single construction to perm loan with a single close benefits the borrower potentially in lowering closing costs. Let me know what you find or what questions you may have.

I posted this to see if other agreed with my point of using the fully amortized amount as the starting loan balance on the perm loan for the Project Payments and APR table.

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#2142156 - 08/15/17 03:57 PM Re: Construction Product Name, Project Payments, APR ? [Re: mdosu]
rlcarey Offline
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Registered: 07/16/01
Posts: 64600
Loc: Galveston, TX
using the fully amortized amount as the starting loan balance on the perm loan

Depends on your note, but interest is not typically capitalized into the loan amount midstream in any given loan.
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#2143337 - 08/23/17 03:24 PM Re: Construction Product Name, Project Payments, APR ? [Re: mdosu]
Soccer Offline
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Registered: 01/05/10
Posts: 753
Loc: Utopia
In a single close transaction what interest rate is reflected on the LE the construction rate or the end loan rate?
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#2143339 - 08/23/17 03:29 PM Re: Construction Product Name, Project Payments, APR ? [Re: mdosu]
rlcarey Offline
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Registered: 07/16/01
Posts: 64600
Loc: Galveston, TX
The interest rate at consummation. Any interest rate adjustments at the time the loan goes permanent would be handled through either the AIR or AP table, depending on whether this was a step-rate loan or an ARM..
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#2143345 - 08/23/17 03:48 PM Re: Construction Product Name, Project Payments, APR ? [Re: mdosu]
Soccer Offline
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Registered: 01/05/10
Posts: 753
Loc: Utopia
Perfect, that is what I thought and what we are doing, our LOS told us it was incorrect.
As always thank you!
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#2143346 - 08/23/17 03:52 PM Re: Construction Product Name, Project Payments, APR ? [Re: mdosu]
JPC Offline
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Registered: 10/22/15
Posts: 663
@Soccer - You basically have to go with the highest rate, which is usually the interest only phase. This creates potential HPML and High Cost issues. This single close, single disclose is also problematic from a points and fees standpoint for HC and QM testing.

@mdosu - Looks pretty good with the description without doing much research . . . interesting loan product, lol.

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#2143357 - 08/23/17 04:25 PM Re: Construction Product Name, Project Payments, APR ? [Re: JPC]
rlcarey Offline
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Registered: 07/16/01
Posts: 64600
Loc: Galveston, TX
Originally Posted By Justin C.
@Soccer - You basically have to go with the highest rate, which is usually the interest only phase. This creates potential HPML and High Cost issues. This single close, single disclose is also problematic from a points and fees standpoint for HC and QM testing.


I don't understand this statement as HPML/HC is based on the overall APR and has nothing to do with the interest rate on either the construction or permanent phase.
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#2143385 - 08/23/17 07:01 PM Re: Construction Product Name, Project Payments, APR ? [Re: mdosu]
mdosu Offline
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Registered: 12/15/16
Posts: 24
Justin, thanks...We've elected to veer away from negative amortization/capitalized interest on the construction portion. We elected to collect monthly interest.

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#2143391 - 08/23/17 08:36 PM Re: Construction Product Name, Project Payments, APR ? [Re: rlcarey]
JPC Offline
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Registered: 10/22/15
Posts: 663
Doesn't interest rate impact APR?

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