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#2233603 - 03/24/20 08:46 PM What Requirements Apply?
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Joined: Nov 2008
Posts: 1,062
In the mountains
A consumer has had a loan with us for some time for land they purchased. They are financing the remaining $25,000 balance. The customer marked the application as refinance primary residence. The appraisal shows that there is a tiny home on the property now (owned by the consumer's parent) and they are in the process of building a primary residence. The home is not very far along and the consumer is building it with their own monies. The value of the land only is $75,000, more than sufficient as collateral.

Can this loan still be considered a land loan or must it be considered a loan secured by a dwelling?

If secured by a dwelling, must it be considered as being secured by a primary residence even though they obviously have a primary residence elsewhere that they are living in?

If considered secured by a primary residence, based on the loan terms the loan is an HPML. The consumer does not yet have homeowners insurance because the home isn't very far along. Must we require insurance to be purchased at this time so that it can be escrowed or can we "waive" the escrow requirements?

If considered secured by a primary residence, is rescission required?

Thanks in advance.
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Lending Compliance
#2233617 - 03/25/20 11:53 AM Re: What Requirements Apply? Likes to Comply
rlcarey Online
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rlcarey
Joined: Jul 2001
Posts: 79,926
Galveston, TX
They can only have one primary residence at a time. If they have a current primary residence, then there would be no right of rescission unless you are doing a bridge loan.

The consumer's parents don't "own" that home on the property unless they are leasing the ground from the kids and it is a leasehold improvement.

A loan for initial construction of a dwelling is exempt from HPML escrow requirements.
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#2233626 - 03/25/20 01:37 PM Re: What Requirements Apply? Likes to Comply
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Diamond Poster
Joined: Nov 2008
Posts: 1,062
In the mountains
Thanks very much for the response. I'd like to elaborate a bit and hope that you'll provide some more guidance...

The loan is not for the initial construction of the dwelling. No loan funds have been given to the consumer for this purpose. Its a refi of a land only loan that is now complicated because there is a dwelling in the course of construction that the consumer intends to use as a primary residence when complete. There is no cash out, only the remaining $25,000 of the land loan is being refinanced.

The "tiny home" that is also on the property is not affixed to the property and is considered personal property. It will not be collateral on this loan (just found this out).

I was concerned that under 1026.2(a)(24)-3 we would have to consider it a principal dwelling since in addition to the statement that "a consumer can have only one principal dwelling at a time", it also says "if a consumer...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."

Are you saying that since the consumer cannot live in the dwelling that is in the course of construction, that where they currently live can or should be considered their principal residence?

If that is the case, my rescission and HMPL questions go away...

If it must be considered the principal dwelling based on that information above, then it seems like maybe rescission would apply based on the following:

1026.23(a): In a credit transaction in which a security interest is or will be retained or acquired in a consumer's principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind the transaction,…

1026.23(a)-3: ...When a consumer builds a new dwelling that will become the consumer's principal dwelling within one year or upon completion of construction, the new dwelling is considered the principal dwelling if it secures the acquisition or construction loan. In that case, the transaction secured by the new dwelling is a residential mortgage transaction and is not rescindable.

Since we are not funding the construction, this loan is not a residential mortgage transaction. It is also not a bridge loan. So wouldn't we then rely on the basic rule in (a)...that it is secured by a principal dwelling".

Then for HPML - if we have to consider it a principal dwelling, then that rule applies. But 1026.35(b) says - ...a creditor may not extend a higher-priced mortgage loan secured by a first lien on a consumer's principal dwelling unless an escrow account is established before consummation for payment of property taxes and premiums for mortgage-related insurance required by the creditor,...

But if we as the lender waive the need for property insurance, then we would only have to escrow for property taxes, right?

All of this hinges on if we must consider the dwelling in the course of construction as a principal dwelling even if the loan transaction is not for the construction. From what I understand, the application is already marked refi primary residence. But if we have the option to not consider this dwelling as the principal dwelling then would would like to do that.

Honestly, we don't mind so much if we over comply. It really is only that the consumer doesn't want to get property insurance yet and we want to waive it because the land value is much higher than the loan outstanding, so there really isn't any risk for us. We are hoping if HPML rules would apply, that we don't lose our right to waive the insurance.
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