I am plowing through all the compliance issues related to construction to perm loans and am stuck on an issue. Our product will have fixed rates for the both the construction phase and permanent phase. We will be disclosing both phases in one LE. We will know the rates for both phases at closing HOWEVER, my bank would like to give the borrower the option to float their fixed interest down to market rate for the permanent phase.

I have determined that the LE must disclose a "Step Rate" since the interest rate for both phases are known. What happens when the borrower has the option to request that the fixed rate in the permanent phase be modified prior to conversion? Is this still a step rate product? How is this disclosed?

It would be a subsequent event and not reflected. You would disclose the loan based on the legal obligation at the time of the loan closing.

Comply13 - Does the construction rate step down to a permanent rate when the float option is not exercised?