When we have a 12 month, fixed rate, interest only construction loan I'm confused about what shows in the projected payments table. Do we show a single payment in the first column based on one half of the loan proceeds, or do we show it as a range of payments? I get that there will be a final payment column showing the final balloon payment.

Because we answer YES to "Can this amount increase after closing?" it seems odd to show a single payment rather than a range, but I think that's what Appendix D says to do.

Currently, we show one payment based on 50% outstanding. With the changes effective later this year, it will change. Currenlty, our answer is "No", however.

The projected payment column will show the initial payment.

How the payment can change will be shown in the AP Table.

Adjustable Payment (AP) Table
Interest Only Payments? YES For your first 8 payments Yours would say the first 11 months.
Optional Payments .... NO
Step Payments? ..... NO
Seasonal Payments? ..... NO
Monthly Principal and Interest Payments
First Change/Amount .......... $220,473 at 9th payment Yours would say at 12th payment.
Subsequent Changes .......... No subsequent changes
Maximum Payment .............. $220,473 starting at 9th payment Yours would say starting at 12th payment.

The product can be described as "11 mo. Interest Only Fixed Rate" (if, of course, the rate won't change during the construction loan term). [Reg D comment 7.ii.A.]

You answer "YES" as the answer to "Can this amount increase after closing?"
You will show the single payment amount calculated as the monthly payment for one-half of the loan amount at the applicable interest rate.
Then in the bullet items explaining the YES answer, you say

• Adjusts ever mo. starting in mo. 1
• Can go as high as $[max periodic P&I payment -- in this case interest payment] in year 1. You base this number on the max possible balance that could be outstanding in the construction phase. [comment AppD-7.iv.B.]
• Includes only interest and no principal
• See AP Table on page 2 for details

Yes, you will have an AP table under the rules with a mandatory compliance date of 10/1/18.

In that AP table you will complete it as an interest only loan, omitting the First Change/Amount dollar amount or range, but indicating "at 1st payment". You'll insert "Every month" to the right of "Subsequent Changes" and the maximum payment amount will be the same as the maximum interest payment disclosed ("Can go as high as $ _________") disclosed on page 1.

Thanks John for the additional information.....I had that piece copied but failed to paste it.

Thanks, so the Projected Payment Table will not show a range even though we say the payment can change. The explanation to the YES answer and AP Table give more detail about how the payment can change.

Just to follow up on this. The correct AP Table would be the following for the 10/1/18 changes:

Adjustable Payment (AP) Table
Interest Only Payments? YES For your first 11 payments
Optional Payments .... NO
Step Payments? ..... NO
Seasonal Payments? ..... NO
Monthly Principal and Interest Payments
First Change/Amount .......... at the 1st payment
Subsequent Changes .......... each month
Maximum Payment .............. $220,473 (balloon amount) starting at 12th payment

The maximum payment would be the highest potential interest only payment with the loan fully drawn, not the balloon payment.

4. Maximum payment. The disclosure required by § 1026.37(i)(5) must state the larger of the maximum scheduled or maximum potential amount of a regular periodic principal and interest payment under the terms of the legal obligation, as well as the payment number of the first periodic principal and interest payment that can reach such amount.

The balloon payment is not a regular periodic principal and interest payment.

• Can go as high as $[max periodic P&I payment -- in this case interest payment] in year 1. You base this number on the max possible balance that could be outstanding in the construction phase. [comment AppD-7.iv.B.]

Does this mean the entire construction loan amount, not one half of the loan amount?

Yes. What is the interest only payment when fully advanced.

I have started working at a new bank and they had me review their 12 month construction interest only LE.

Under loan terms it states Monthly P&I - $299.48 - "yes" the amount can change. Then it states "Can go as high as $299.48." So, it's the same in both places and does not appear to increase to be based on a fully advanced construction loan amount for the highest payment.

Is this correct? The software is stating that they are only calculating it on 1/2 the commitment amount and do not have to increase it in the loan terms table to reflect the highest amount possible.

Doesn't seem right to me, especially after reading this thread and rlcarey's response above.

Thank you.

They are wrong.

Appendix D - Comment 7.(iv) B.

The calculation of the maximum possible periodic principal and interest payment disclosed is based on the maximum principal balance that could be outstanding during the construction phase.

No, it's not correct. Read the revised comment AppD-7. Pay particular attention to comment AppD-7.iv.B. You will see there this sentence: "The calculation of the maximum possible periodic principal and interest payment disclosed is based on the maximum principal balance that could be outstanding during the construction phase."

What's so funny is that the same exact citation they sent us! LOL! Something is not right, so we'll get to the bottom of this. Thank you for the clarification!

If your software provider is citing that comment, perhaps they should read it and implement it.

Our software provider is also listing in the Loan Terms section Can go as high as... the payment based on 1/2 the commitment amount. Their response to me was: per comment in Appendix D 7 (iv) B with the following

""the commentary specifically references "maximum possible periodic principal and interest payment". So the payment to be disclosed cannot be a "balloon Payment", but must meet the definition of "maximum possible periodic principal and interest payment". Since a construction only loan does not have a regular periodic principal and interest payment, Software name uses the maximum regular periodic interest payment based upon the Appendix D assumptions that apply if interest is payable only on the amount advanced for the time it is outstanding, which assumes 1/2 commitment amount in order to calculate the periodic payment."

How can I make the software company understand they are defaulting their Max Payment amount incorrectly on an interest only construction loan?

Find a new vendor and then maybe they will eventual get the hint when enough clients leave. Of course if they are providing you a compliance warranty - take advantage of it when your examiners or auditors criticize you. Or tell them to call/e-mail the CFPB and get back to you. Or show them the commentary I quoted above and ask them how 1/2 the loan amount equates to the maximum principal balance that could be outstanding during the construction phase.

I am dealing with this issue now and am confused. Dan's comment above states the Subsequent Changes should read - "No Subsequent Changes" and your response states " every month."

Which is correct?

Thank you!!!!

Every Month -

Dan - thank you for the clarification. We are being told no subsequent changes. Clearly, this is an area of confusion.