If we have a construction loan with a term greater than one year and a variable rate, do we need an ARM disclosure?

Yes - no exemption for construction or temporary financing.

Yes - ARM disclosure & CHARM booklet is required when secured by primary residence & term is greater than 1 year.

I have to respectfully disagree. Unless he has a Construction/Permanent loan, then he does not have a RMT or a loan subject to RESPA.

RESPA 2602 (Definitions) (1) the term "federally related mortgage loan" includes any loan (other than temporary financing such as a construction loan) which –

Reg. Z 226.2(a) (24) Residential mortgage transaction means a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained in the consumer's principal dwelling to finance the acquisition or initial construction of that dwelling.

Commentary Section 226.19--Certain Residential Mortgage and Variable-Rate Transactions
Paragraph 19(a)(1) Time of disclosure.
1. Coverage. This section requires early disclosure of credit terms in residential mortgage transactions that are also subject to the Real Estate Settlement Procedures Act (RESPA) and its implementing Regulation X, administered by the Department of Housing and Urban Development (HUD). To be covered by this section, a transaction must be both a residential mortgage transaction under Sec. 226.2(a) and a federally related mortgage loan under RESPA. “Federally related mortgage loan” is defined under RESPA (12 USC 2602) and Regulation X (24 CFR 3500.5(b)), and is subject to any interpretations by HUD.

You may respectfully disagree but you are wrong. The requirement of a residential mortgage transaction subject to RESPA applies only to Sec. 226.19(a)(1) regarding the timing of the disclosure. That is not a requirement of section (b). The only requirement for section (b) which is the ARM disclosure is that it be secured by the consumer's principal residence with a term greater than one year. There is no requirement that it be either subject to RESPA or that it be a residential mortgage transaction.

I agree to disagree. Actually, I am with dpersfull with this one. If it's not a construction/permanent the provisions of 226.19(b) do not apply. Section 226.19(b) applies to transactions secured by the consumer's principal dwelling which it will not be until completion of the construction. You can have only one principal dwelling at a time. Unless you have agreed to provide end-financing the ARM program disclosure does not apply. I believe the entire section 226.19 applies to RMTs subject to RESPA. A construction only mortgage would not be subject to RESPA.

But Reg Z also states that when a consumer buys or 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. That is found in the commentary to section 226.23, which deals with the right of rescission rather than ARM loans, but it would be inconsistent for Reg Z to define a constructed dwelling as the principal residence under section 23 but not section 19.

Sections 19(a) and 19(b) both specify the types of loans that each section applies to. Section 19(a) only applies to RESPA loans, while section 19(b) doesn't make that distinction. Therefore, I agree that ARM disclosures are required.

Allan,

Then how do you reconcile the definition of a principal dwelling in the commentary (226.2(a)(24))that states:

"Principal dwelling. A consumer can only have one principal dwelling at a time. Thus, a vacation or other second home would not be a principal dwelling. However, if a consumer buys or 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."

226.19(b) says nothing about having to be subject to RESPA. Paragraphs (a) and (b) are two totally separate clauses.

Sorry - still need convincing that the ARMs rules would not apply.

In reviewing the commentary on the various sections mentioned, and researching other sites on this topic, I have to say that I was incorrect, and that rlcarey, ahou, lee s and anon are correct in saying that the disclosures are required in this transaction.

Being able to share the knowledge of others is what makes this forum so great.

The evidence and citations appear overwhelming to support the premise that 226.19(b) does apply to construction but only because they exceed one year. When Reg Z was drafted, the standard industry practice was to limit construction loans to less than one year. That has changed with the price and size of some homes built today that often take more than a year to build. Construction loans are still temporary loans. The CHARM handbook and the requirements of 226.19(b) have no relevence to the nature of a construction loan. I think that 226.17(c)(2) has some relevence where it states that "If any information necessary for an accurate disclosure is unknown to the creditor, the creditor shall make the disclosure based on the best information reasonably available at the time the disclosure is provided to the consumer, and shall state clearly that the disclosure is an estimate." The information in the CHARM handbook is certainly not the best information available. I guess I still have my neck out guys.

I certainly agree that the information in the CHARM handbook is certainly not the best information available in the nature and terms of a construction loan. And, if I hadn't gotten into this discussion, I would had advised our lenders that the disclosures were not necessary, but after looking over the regs again, it doesn't give an exemption for construction loans and I'm going to have to jump the fence and side with them.

It's a moot point for me, as we do not offer variable rate construction loans and limit the term to 6 - 9 months, with an option for an one time extension of 90 days if needed (basically to allow for inclimate weather, etc.).

You have a good point, however, the temporary financing exemption does not apply, regardless of the term of the loan, if the loan proceeds are used in whole or part to finance the transfer of title to the first user. For the purpose of the regulation, “first user” is the first person who will use the structure as a residence. Thus, a construction loan to an individual who will use the completed residence as a home is not exempt if part of the loan proceeds will be used to acquire the lot on which the home will be built.

Ahou, when I said it was a moot point for me, I was refering to the ARM disclosures. We do give the required disclsoures on our construction loans when part of the proceeds are to transfer title to the first user.

As with many regulations, this is another example of the failure of the regulators to keep up with industry practices. I am out on a limb here because I can't point to anything else in the Reg that supports my position that ARM program disclosures as defined in 226.19(b) have little relevence. God forbid, we should use common sense - a true dichotomy. Again BOL provides the greatest forum for free discussion of thoughts and ideas.

Allan, DITTO to your whole post.

Me too Allan - we are talking technicalities rather than logic here after all - as with most regulatory discussions at this level!

I always took a "I'd rather switch than fight" approach to this rule. Our lenders were told to keep the maturities down to a year, and if the project wasn't completed, extend the construction period with a modification agreement.