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#35274 - 10/01/02 04:05 PM Construction Loan Disclosures
jmd Offline
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Joined: May 2002
Posts: 233
This question relates to proper disclosing of PMI premiums and hazard ins premiums on construction loans where the initial note is for the construction phase only. At the end of the construction phase, a loan modification is done to convert to permanent financing. Hazard insurance premiums and pmi ins premiums are not collected up front, but are collected when the loan becomes permanent. How and when should these items be disclosed. Only one GFE is given. Should these items be listed there even though they are not paid until permanent financing is done? We do give a second HUD-1 and TIL when the loan is modified for permanent financing. At that time, the items are listed on the HUD-1. Would it be a violation of RESPA to list them on the GFE in anticipation of payment at the end of the construction period?

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Lending Compliance
#35275 - 10/01/02 04:53 PM Re: Construction Loan Disclosures

I had a similar question and posed it to the FDIC in Chicago. Ours was concerning hazard insurance. It's not required during the construction phase since the builder carries builders risk. It is, however, required when the loan converts to permanent financing. The FDIC said to use an 'estimate' on the HUD-1 since it is a required fee for the home. I would 'assume' yours to be the same.

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#35276 - 12/28/02 02:04 PM Re: Construction Loan Disclosures
Ross A Offline
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Ross A
Joined: Dec 2002
Posts: 20
Did you get this in writing?
The opinions expressed here are my own and may not represent the views of my employer.

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#35277 - 12/31/02 04:27 PM Re: Construction Loan Disclosures
PJM1 Offline
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Joined: Jun 2002
Posts: 12
As you probably know, construction-permanent loans can be disclosed separately, or as a combined transaction under Reg. Z. It looks like you have chosen the combined disclosure approach; i.e., only one disclosure given at the initial settlement, and reflecting both the disbursement (construction) phase and the permanent phase that follows. A second GFE or HUD-1 is not required by RESPA. However, I think the PMI premiums should be disclosed as POC items on the initial GFE and HUD-1 at settlement. The PMI premiums are finance charges under Reg. Z, but in this case they are not prepaid finance charges, because they are not collected at settlement. Since they are only collected at the start of the permanent phase, they should be disclosed in the payment schedule section of the TIL disclosure and included in the total finance charge and total of payments figures. For example: (for a loan with a 12-month construction phase) 11 payments of interest on credit outstanding during construction due monthly beginning [date of first payment] followed by one interest payment plus [dollar amount] private mortgage insurance premium on [due date of the payment]. The remaining payments should be disclosed as they normally would be for the remaining (permanent phase) term of the obligation. All numerical disclosures should be marked as estimates for this type of transaction. I know this approach has been reviewed and accepted by the FDIC during compliance examinations. That doesn’t mean, however, that it is the only acceptable approach. I have heard that lenders disclosing the initial PMI premiums as prepaid finance charges even though they were not collected at settlement have also “passed inspection” by the same regulator. (Go figure!)

The opinions expressed here are my own and may not represent the views of my employer.

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