Help! I'm reviewing a TIL disclosure statement prepared by an attorney for a home improvement loan in the amount of $209,800. He prepared two disclosures (one for the construction phase and one for the permanent phase). I'm concerned about the Payment Schedule listed on the construction phase TIL statement. He wrote:

"One payment of principal of $209,800.00 is due three (3) months from the date shown below. Interest on the amount of credit outstanding is due monthly beginning one (1) month from the date shown below."

My problem is the payment of principal statement. It sounds to me that the customer is to make a payment of $209,800 in three months. I know we are only collecting interest during the constructon phase. After the third month the Permanent phase TIL disclosure goes into effect and the customer starts making payments. I was told that we have to mention a principal statement in the construction phase which is why the attorney worded it that way. I've read section 226.18(g)and 226.17(c)(6) and didn't find anything about having to list a payment for principal in the "payment schedule" section. I seems to me that this goes against the spirit of TIL and is confusing. That the customer won't have to make that principal payment and all he's basically paying during the first three months is the interest. What do y'all think?

How is the loan structured? Is it one loan - one note, with a construction phaswe and permanent phase, of is it a construction loan line of credit, which will be paid off by permanent loan.

If not one loan, this disclosure is probably ok. But if you are executing one note, with one loan, you are correct.

If one note, your TIL should reflect # of interest only payments, followed by number of principal and interest payments. So, if you have 3 month construction phase followed by 30 repayments, total term is 363 months.

It is one note with one closing.

Then one disclosure should reflect fact one note, and not call for a one time principal payment to end construction phase.

Sorry to rain on this parade, but you need to review Section 226.17( c)(6) and Appendix D. You are specifically authorized by the former to give one or more than one disclosure. Giving two is a good conservative practice--divide and conquer. The later part of Reg Z illustrates the way to disclose the CST payment schedule & the original post sounds like it was taken word-for-word from App. D.

I respectfully disagree. While .17(c)(6) does allow for two disclosures, I disagree that best practice is to issue two disclosures. Using two disclosures doubles the chances for a disclosure error, and I agree with the original posting that it might be confusing to the borrower.

I should have stated my prior post in my own opinion, rather than as a requirement.

Straw - I'm not sure Richard advocated that two disclosures was a "best practice". I think the question was if you use two disclosures, is this the correct method. As Richard is one of the most formost authorities on Reg Z in the nation, I wouldn't disagree with him too often and feel comfortable.

Richard makes Reg Z mistakes just like everyone else. (Maybe the resulting enforcement actions are one of the rites of passage in BECOMING an expert on a topic???)

I've made reimbursements on more than one occasion because construction lenders:
a. didn't give disclosures,
b. didn't classify the variety of fees correctly as PPFCs,
c. didn't use the correct maturity in their calculations,
d. didn't reflect their interest accrual method in their disclosures,
e. didn't take account of the fact that one or all of the advances were known (date plus amount),
f. didn't disclose a variable rate feature, and
g. more.

I have never made reimbursement on good-old 30-year mortgages because my lenders had good tools that we had validated prior to their use.

Here's the reason why I believe separate TILs ARE a "best practice."

Case 1. By disclosing these two deals separately, you end up with a CST disclosure that might be illegal for a variety of reasons plus a second disclosure for the perm that is almost certain to be legal. Since CST loans rarely run longer than a year, your exposure to lawsuits ends when the one year statute of limitations expires. Your perm disclosure is unaffected by your sins during the CST period.

Case 2. Should you combine the two phase deal into a single TIL, the odds that it is free of errors and potential liability are no better than your chances of getting the CST disclosure correct. Your exposure to lawsuits now lasts for 30 years plus the CST period because judges routinely allow consumers to use TIL defects as a defense (i.e., you sue for collection, customer counterclaims TIL damages, and judge allows offset of that amount.)

Case 2a. You follow Case 2 and then sell the loan into the secondary market. In additon to the consumer, you are now on the hook to the purchaser of the paper. Should something blow up, you have agreed to repurchase the loan (probably with a trading loss) from the investor. You now have a lawsuit AND a defaulted loan.

I know one piece of paper looks simpler than two, but experience dictates otherwise.

Thanks Richard--That answers my question! I knew Appendix D had calculations for APR and I didn't look at it closely to see the word for word disclosure. Still sounds confusing to me but that's what Reg Z says. Have a good weekend.

OK I am sold. Your outstanding time argument is compelling and you are correct that the perm disclosure should be solid.

Now I have to go back and review procedures to change our practice

You still have two chances to get it wrong, so this strategy doesn't eliminate the need to validate new software, train the troops, and perform plenty of QC to catch & correct emerging problems as early as possible. It simply cuts down on the duration of your exposure.

Another interesting thing I've noticed about CST disclosure problems is that they run with the economy. When rates go up, owner-financed construction dries up and lenders forget all the lessons they learned. Later, when rates drop again, all the same problems show up again!