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#2180454 - 06/01/18 05:27 PM HPML Exemptions - To build on Land Loan
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Kind of a strange scenario that doesn't fall neatly into the HPML cookie-cutter decision. Say a Bank does a land loan with a 10-year maturity/AM structure. Borrower intends to use loan funds and personal savings to construct a home on the property. The loan is not being handled like a CP loan, but rather just directly getting equity funds from the land value. Property is secured by a mortgage deed, which I would assume would also include any dwelling built on said land.

Is this subject to HPML? Is it not secured by a primary dwelling at closing, and who knows when/if that will actually be completed, and therefore inapplicable? Or, does it apply, but exempt from the appraisal and escrow rules because it basically finances the initial construction of the dwelling? The thing with that is there is really no point when a "permanent" phase separately kicks in.

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#2180457 - 06/01/18 05:38 PM Re: HPML Exemptions - To build on Land Loan Compliance NABW
raitchjay Online
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I wouldn't treat such a loan as being subject to any part of HPML--it is not secured by the borrower's primary residence at the time of consummation, and it can't even be treated as a construction loan, since the bank isn't funding any construction.
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#2180463 - 06/01/18 06:09 PM Re: HPML Exemptions - To build on Land Loan Compliance NABW
Dan Persfull Online
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Borrower intends to use loan funds and personal savings to construct a home on the property.

How is this loan not for the initial construction of the consumer's primary residence? Nothing that I am aware of states a construction loan can not be 100% funded at closing.

IMHO this is a RMT.

1026.02

(24) Residential mortgage transaction means a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained in the consumer's principal dwelling to finance the acquisition or initial construction of that dwelling.

3. Principal dwelling. A consumer can have only one principal dwelling at a time. Thus, a vacation or other second home would not be a principal dwelling. However, if a consumer buys or builds a new dwelling that will become the consumer's principal dwelling within a year or upon the completion of construction, the new dwelling is considered the principal dwelling for purposes of applying this definition to a particular transaction. ( See the commentary to §§1026.15(a) and 1026.23(a).)
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#2180467 - 06/01/18 06:16 PM Re: HPML Exemptions - To build on Land Loan Compliance NABW
raitchjay Online
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I totally missed the "loan funds" portion. I would have to agree with Dan. I was reading it as being all their own money going toward building a home.....at some later date.
Last edited by raitchjay; 06/01/18 06:19 PM.
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#2180520 - 06/01/18 09:40 PM Re: HPML Exemptions - To build on Land Loan Dan Persfull
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Originally Posted By Dan Persfull
Borrower intends to use loan funds and personal savings to construct a home on the property.

How is this loan not for the initial construction of the consumer's primary residence? Nothing that I am aware of states a construction loan can not be 100% funded at closing.

IMHO this is a RMT.

1026.02

(24) Residential mortgage transaction means a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained in the consumer's principal dwelling to finance the acquisition or initial construction of that dwelling.

3. Principal dwelling. A consumer can have only one principal dwelling at a time. Thus, a vacation or other second home would not be a principal dwelling. However, if a consumer buys or builds a new dwelling that will become the consumer's principal dwelling within a year or upon the completion of construction, the new dwelling is considered the principal dwelling for purposes of applying this definition to a particular transaction. ( See the commentary to §§1026.15(a) and 1026.23(a).)

So, would you consider it exempt from the escrow and appraisal requirements because it finances the initial construction of a dwelling?

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#2180521 - 06/01/18 09:41 PM Re: HPML Exemptions - To build on Land Loan Compliance NABW
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My issue with that though, is there is no point when the permanent phase kicks in. Do you establish the escrow when/if you find out the construction is complete? Remember, there is no monitoring going on here. The funds are out the door.

It would seem to be exempt then from the special appraisal and escrow requirements from what I can tell.
Last edited by JPC; 06/01/18 09:44 PM.
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#2180526 - 06/01/18 10:08 PM Re: HPML Exemptions - To build on Land Loan Compliance NABW
Dan Persfull Online
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The exemption only applies to a construction only loan or the construction phase of a const/perm loan.

This loan is neither a construction only loan nor does it have a construction phase. It is the permanent financing for the construction of the consumer's primary residence. They simply chose not to control the construction proceeds.

What would you base any exemption on?
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#2180528 - 06/01/18 10:18 PM Re: HPML Exemptions - To build on Land Loan Compliance NABW
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My exemption would be based off of 12 CFR 1026.35(b)(2)(B): A transaction to finance the initial construction of a dwelling;

When you read further into the commentary it talks about that HPML "may apply" to the permanent financing that replaces a Construction loan. It also says, "If the transaction is determined to be a higher-priced mortgage loan, only the permanent phase is subject to the requirement of § 1026.35(b)(1) to establish and maintain an escrow account, and the period for which the escrow account must remain in place under § 1026.35(b)(3) is measured from the time the conversion to the permanent phase financing occurs." However, there is no separate permanent phase and there is no permanent financing that replaces the construction loan. This just doesn't seem to be a scenario imagined by the CFPB.

This transaction is financing the initial construction of the dwelling. There is no separate permanent phase. The funds are already disbursed. When per se would you expect the Escrow requirement to kick in? How do you estimate when the permanent phase kicks in to trigger the requirement to establish and maintain the escrow account, when there is no such phase?

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#2180551 - 06/04/18 12:41 PM Re: HPML Exemptions - To build on Land Loan Compliance NABW
Dan Persfull Online
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When per se would you expect the Escrow requirement to kick in?

At closing.

There is no separate permanent phase.. . . . . . . . How do you estimate when the permanent phase kicks in to trigger the requirement to establish and maintain the escrow account, when there is no such phase?

I think you have this backwards.

There is no construction phase to this loan nor is it a temporary construction only loan. It is the permanent phase financing of the construction from the loan's beginning and the escrow requirement kicks in with the permanent financing.
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#2180563 - 06/04/18 02:31 PM Re: HPML Exemptions - To build on Land Loan Compliance NABW
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Well, it's both. I agree there is no construction phase, nor is it a temporary construction only loan. However, it does fund the "initial construction of a dwelling." There is nothing really to escrow for at closing.

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#2180568 - 06/04/18 03:09 PM Re: HPML Exemptions - To build on Land Loan Compliance NABW
Dan Persfull Online
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You are putting all your eggs in the basket that it is funding the initial construction.

The exemption in .35 for the initial construction clearly identifies it applies to a construction only loan or the construction phase of a construction/permanent loan.

Where is the construction phase for this loan to exempt?

There is nothing really to escrow for at closing.

The real estate taxes.

Since the loan is based on the value of the land alone then I would assume you will, or can, waive the homeowner's insurance on the dwelling. If you are not requiring homeowners insurance then you don't have to escrow for it
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#2180869 - 06/06/18 03:00 PM Re: HPML Exemptions - To build on Land Loan Compliance NABW
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If the numbers make this an HPML, it's an HPML and it's been determined here that there is no exemption available for "initial construction" because there is no "construction phase." You have to impose the escrow requirement starting with the first periodic payment. The escrow will be for real estate taxes and hazard insurance, as applicable. If there is no hazard insurance requirement at the start, you do a short-year escrow analysis when you start requiring insurance (presumably when construction starts) and add the premiums to escrow then.
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#2180942 - 06/06/18 07:52 PM Re: HPML Exemptions - To build on Land Loan Compliance NABW
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Thank you both for your input.

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