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#287686 - 12/10/04 11:31 PM note renewals
Auditjg Offline
Member
Auditjg
Joined: Sep 2004
Posts: 67
I am reviewing a construction loan that was written in March of 2000. This note has been renewed 8 times. This loan is still classified at a construction loan. The last renewal, the lender required 2.5% of the principal in cash and now it is on a balloon payment in 6 months. Every time this note has been extended it's payment terms are the full principal balance in the 6 months it has been extended. What are the issues, if any? Should this be rewritten on a different term, such as a conventional mortgage since the property has now been constructed for about 5 years. The issue is they haven't been able to sell the house and is being rented now. Any help would be greatly appreciated!!

Thanks

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Lending Compliance
#287687 - 12/10/04 11:57 PM Re: note renewals
Dan Persfull Offline
10K Club
Dan Persfull
Joined: Aug 2002
Posts: 47,016
Bloomington, IN
I assume since you refer to a balloon payment, that a payment schedule of P&I has been established. If so, you no longer have a construction loan, but short term permanent financing. If you are a HMDA reporter, this loan is subject to reporting because it appears you have a non-owner occupied rental dwelling.
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The opinions expressed are mine and they are not to be taken as legal advice.

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#287688 - 12/11/04 12:07 AM Re: note renewals
Anonymous
Unregistered

No, a payment schedule has not been established. They don't have p&i payments, except on a few of the notes, the lender has written that the full accrued interest and 2.5% principal payment was required. Then, the last 10 renewals have all just had a maturity as a one principal payment plus interest amount payable in the 6 months that is would mature. We are not HMDA reportable...yet.

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#287689 - 12/11/04 12:17 AM Re: note renewals
Dan Persfull Offline
10K Club
Dan Persfull
Joined: Aug 2002
Posts: 47,016
Bloomington, IN
Well it appears then you may still have temporary financing if the repayment source is to be the sale of the house.

However, from a safety and soundness perspective how long is the bank willing to let him ride this out? He has rental income from the property, I would think the bank would want their portion of the rental income to reduce the debt.

There's nothing preventing continually renewing this loan, but it definitely is not in the best interest of the bank, and in all probability not the best interest of the borrower either.
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The opinions expressed are mine and they are not to be taken as legal advice.

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#287690 - 12/13/04 05:55 PM Re: note renewals HMDA?
Anonymous
Unregistered

I have a situation where the bank made a bridge loan to a customer on his current residence. Proceeds from the sale of this property will be used to payoff our loan. This loan was renewed as a balloon (6 interest only and 1 final balloon payment). The kicker is that the branch had the borrower sign a new note using the same loan number and referencing the purpose of the loan as a "renewal." They indicate internally they did not payoff the loan but extended the maturity date. Is this a separate transaction that should be HMDA reported? Or not reported since it is considered temporary financing and has already been reported once?

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#287691 - 12/13/04 06:30 PM Re: note renewals HMDA?
GreatBlue Offline
Diamond Poster
GreatBlue
Joined: Feb 2003
Posts: 2,362
Colorado
It doesn't sound like either loan should have been reported, regardless of whether the 2nd was a refi or a renewal. Both were temporary financing.
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