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#2259057 - 08/31/21 08:14 PM Revolving Commercial LOC to Permanent Financing
Jen J Offline
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Joined: Dec 2015
Posts: 132
God bless commercial lenders.

Loan is a revolving line of credit to do home improvements. After 18 months, the loan will convert to permanent financing with principal and interest payments. One closing, two phases.

Two things at play here in my opinion:
1. Temporary financing: no exemption because it automatically converts to permanent financing.
2. Revolving line of credit: we are under the 500 revolving LOC threshold so we do not report any.

Because of the fact that we do not report any revolving lines of credit, we would not have to report this transaction, correct, even though it converts to permanent financing? I compared it to a scenario in which a HELOC converts from a draw period to a repayment period.

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#2259060 - 08/31/21 08:40 PM Re: Revolving Commercial LOC to Permanent Financing Jen J
rainman Offline
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rainman
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Are you sure it's revolving? (The note provides that it can be paid down then run back up again?) In most construction loans, the LOC is a "straight" LOC where once the limit is the total amount that can be advanced, ever. The borrower can't pay it down and then run it up again.
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#2259063 - 08/31/21 08:54 PM Re: Revolving Commercial LOC to Permanent Financing Jen J
Jen J Offline
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Joined: Dec 2015
Posts: 132
Yep. 100% revolving. I had the same thought when I started looking into it, (See my opening line regarding commercial lenders.)

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#2259073 - 08/31/21 11:47 PM Re: Revolving Commercial LOC to Permanent Financing Jen J
rainman Offline
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Tough call, but I would probably err on the side of treating it as covered. The Reg. C definition of "open end credit" refers to the Reg. Z definition. That's a big rabbit hole, but one of the key features is that the lender reasonably contemplates repeated transactions. In this set-up, even though it's a revolving line of credit during the draw period, I think most neutral observers would bet that the borrower will take draws to pay for the construction, make the minimum payments required during the draw period and let it roll to permanent without ever paying down and re-borrowing. Or to put it another way, if you did 100 of these loans, how many would you expect to actually use the revolving feature? 1 or 2 at most, I'd bet. Under those circumstances I think it's safer treating it as closed end credit.

I get the HELOC comparison but: a) HELOC draw periods are usually longer than this and thus are more conducive to paydowns and re-borrowing; and b) even though the borrower may have a specific purpose in mind for the HELOC, the lender usually doesn't - the lender is allowing the HELOC for any purpose or no purpose.

On the other hand, if the borrower and loan officer have discussed it and the borrower's intent is to use the LOC for construction and also other purposes and plans to pay down and re-use the credit during the draw period, that would be different. But I'm betting that's not the case.
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