How are you determining the interest rate on a construction-perm loan? My understanding is our mortgage department states they won't know what the rate will be a year from now when the construction period ends, so they are disclosing the rate for the whole loan at the construction rate, which is often high enough to trigger HPML requirements. When the construction period ends, they modify the loan to the current rate offered on permanent loans, which is lower than the construction rate.

This is really a business decision. Banks should not be discussing pricing decisions due to OCC regulations and anti-trust issues.

I wasn't asking what other banks' rates are. What I want to know is how other banks decide what to disclose as the permanent rate on a construction-perm loan 12 months ahead of time.

We don't do one time construction/perm loans but how you price those are going to be dependent on the size of the FI, their location, their rate risk appetite, their local competition and if the loan will be kept in-house or sold on the secondary market.

My suggestion would be to do a rate survey of your local market for construction/perm loans and then discuss a rate strategy with your CFO.

Do you charge for the modification? Personally, I think not setting an actual permanent rate and making the customer come back for modification defeats the purpose of a one time close (If I am understanding you correctly, I apologize if I am not). We have a c/p product that converts to a 5/1 ARM after the construction period. The first 5 years of the ARM is the same rate as the initial construction period.

There are apparently areas of the country where it's long-standing practice to modify the construction-only loan rather than refi when the lender ends up with both pieces of the transaction. I am told that at one time several years back, the Fed was pondering whether to prohibit the practice, since the borrower never got TiL disclosures on the perm phase, but apparently dropped the proposal.