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#34030 - 09/23/02 05:52 PM Construction Loan Question

I just discovered something that my bank does for construction loans. Everything may be fine but it's raising red flags to me. When a consumer closes a construction/permanent loan, they bring a check to the closing for the portion of the construction costs that they are going to pay out of pocket. The balance of the loan is showing a negative number at this point.

Case in point, we have a customer building a home for $610,000. Their construction loan is only for $300,000. The customer brought a check for $310,000 (plus closing costs) to closing and we hold those funds and disburse them first as disbursements are made. Everything is properly spelled out on the HUD-1, but it just sounds odd to me. Can anyone think of anything that I'm missing?

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Lending Compliance
#34031 - 09/23/02 06:04 PM Re: Construction Loan Question
Andy_Z Offline
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Joined: Oct 2000
Posts: 27,590
On the Net
Appendix D allows you to assume in your disclosures that one-half of the proceeds are outstanding throughout the construction term. Are you factoring into this or your disclosure otherwise that you first disburse the customers downpayment (based on what you said above) and your loan proceeds actually take awhile longer to be funded?
My opinions are not necessarily my employers.
Rules and Regs minus Relationships equals Resentment and Rebellion. John Maxwell

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#34032 - 09/23/02 06:06 PM Re: Construction Loan Question
JulieB Offline
Junior Member
Joined: Apr 2002
Posts: 38
I believe this should be discussed with you bank's CFO. It doesn't sound like it is in compliance with GAAP. Some type of escrow or deposit account should probably be set up to draw off.

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#34033 - 09/23/02 06:07 PM Re: Construction Loan Question

Thanks. I'll check into that. I'm still stewing over this since I just discovered it about 20 minutes ago. Do you know how other banks handle their construction loans and their customer's portion?

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#34034 - 09/23/02 06:11 PM Re: Construction Loan Question
Dan Persfull Offline
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Dan Persfull
Joined: Aug 2002
Posts: 47,016
Bloomington, IN
At a previous employer, I have seen this done. However, it was not a requirement. We usually made a construction committment and no funds would be disbursed until paid receipts were received showing he had depleted his reserves, and inspections done by the appraiser. On occasion the borrower would request us to disburse all funds and then we would go into your scenario. They would have a "completion escrow" account agreement signed by the borrower and the funds were disbursed as you described.

As long as you have a contractual agreement and proper disclosures, I see no problem. Our external auditors and our regulators never questioned the practice.
The opinions expressed are mine and they are not to be taken as legal advice.

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