I understand that a closed-end loan for an initial construction is a Residential Mortgage Transaction (RMT) under Reg Z and is exempt from rescission.
My bank is originating a construction-to-perm loan (A single loan whereby construction loan is converted to a permanent financing upon completion of construction). The borrowers lives in house A which they own, and wants to “rebuild” house B which they also partially own.
House B exists as a dwelling today and is currently designated as the primary residence and has another lender’s lien on it (it’s a refinance). At this stage, we’re not quite sure what “rebuild” means as we haven’t inspected their construction plans.
Question 1: If B ends up just being “gutted”, i.e. roof and façade is retained, is this an “initial construction” and if not, is it indeed a rescindable loan?
Question 2: If B is demolished (but they retain parts of the foundation), and then rebuilt, is this an “initial construction”, and therefore a RMT and exempt from rescission?
The only place I found the term “initial construction” defined is in 1026.37(a)(9) commentary which identified it as simply a construction-only loan.

House B exists as a dwelling today and is currently designated as the primary residence.

If they are living in House A, how is that possible. Maybe for tax purposes but not for Regulation Z.

rlcarey: yes, either for tax purposes, or they started moving into house A to prepare for construction.

In any case, do you have an opinion on whether Question 1 and Question 2 are RMTs?

wants to “rebuild” house B which they also partially own.

Rebuilding a home that they already have an interest in is not a RMT. You need to give the right of rescission. Even if you don't agree, give it anyway. It will only be settled in court if the borrower gets in trouble and claims later that they should have had a RofR.



Official Interpretation

2(a)(24) Residential Mortgage Transaction5. Acquisition. i. A residential mortgage transaction finances the acquisition of a consumer's principal dwelling. The term does not include a transaction involving a consumer's principal dwelling if the consumer had previously purchased and acquired some interest to the dwelling, even though the consumer had not acquired full legal title.

Thanks for your opinion.

I think in my case here, it's unclear what "initial construction" means. I cannot find any commentary or examples that define the concept. Another place I found the "construction" concept discussed here, where a home can only be built once.:

https://www.bankersonline.com/forum/ubbthreads.php/topics/1525145/Construction_HMDA_Reportable

I am not really sure how, if there is already a house there, unless it is completely removed, which would include foundation and all, it could be considered initial construction.