I was reading the Q & A in the April 30 Compliance Action and was confused by an answer. Question #3 asked if you would lose the RESPA exemption on a construction loan if part of the loan proceeds was used to acquire title. The answer given was "no". This is contrary to most everything I have read/understood. Can someone clear this up for me??

I haven't received this issue yet, but it is also my understanding that if title is being acquired with a portion of the loan proceeds, the exemption does not apply (3500.5).

That's my understanding as well.

3500.5(b)(3)The exemption for temporary financing does not apply to a loan made to finance construction of 1- to 4-family residential property if the loan is used as, or may be converted to, permanent financing by the same lender or is used to finance transfer of title to the first user.

Just received my Compliance Action today.

The question stated "our loan will be used to acquire title to the lot." (Bank is making construction loan to a borrower who has permanent loan from another lender).

Response was "proceeds for bank in question is for land(no dwelling) and exempt from RESPA."

Quote:

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(Bank is making construction loan to a borrower who has permanent loan from another lender).

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I still haven't received my copy to read the full text of the question, but based on the above if the bank is making a construction loan to purchase the lot and to construct the dwelling, the loan IMO is not exempt even though another lender is taking out the construction loan.

OK, I just got my copy and by reading the full text of the question and answer, the answer is correct.

Please note from the answer: "A loan for less than 2 years is exempt from RESPA, no matter what. Most construction loans fall into that basket. HUD takes away this exemption if the loan will be used to acquire title to the property."

The answer then goes on to discuss possible other exemptions and in that discussion it states "A loan to purchase an empty lot is thus exempt." This is an absolutely true statement.

I knew there had to be some missing pieces. I just couldn't believe Lucy would be incorrect when it came to RESPA.

I agree with Dan and I believe the answer in ComplianceAction is incorrect. If the proceeds of a constuction loan are used to finance transfer of title to the first user, the exemption from RESPA does not apply. The exemption for a loan on vacant land doesn't apply if within two years from the date of the settlement of the loan, a structure or a manufactured home will be constructed or placed on the real property using the loan proceeds. It sounds to me like the loan in question would be covered by RESPA.

Dan, take another look at the question and answer. The question is "Do we lose that exemption if the borrower will use part of the loan proceeds to acquire title?". The answer given is "No." I don't believe this is true. I believe you DO lose the exemption in this case.

Deena, you are correct. The answer does appear to be wrong in that context. 3500.5(b)(3) makes it clear that the exemption for temporary financing does not apply if the bank is making a construction loan with a portion of the proceeds being used to purchase the lot.

Maybe Lucy will see this and explain the answer.

There's a big difference in:

"A loan for less than 2 years is exempt from RESPA, no matter what."

AND

"Any construction loan.........is subject to this part if its term is for two years or more."

The second statement is correct. If the loan is for two years or more, it cannot be exempt.

The first statement is incorrect. A loan for less than two years is NOT exempt from RESPA "no matter what." I can think of all sorts of examples of loans that could have terms of less than two years that would, indeed, be subject to RESPA.

Quote:

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I can think of all sorts of examples of loans that could have terms of less than two years that would, indeed, be subject to RESPA.

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So can I, but "temporary" loans less than 2 years are exempt. The key, and we've been down this road before in other posts, is if the loan is temporary financing.

I guess it helps to read the entire article (which I don't have access to). But the statement, by itself (taken out of context), is glaringly wrong.

Thanx, Dan.

See this thread where Lucy and I (and others too) debated this point.

SWIGGLES - - - I love your picture.......please tell me how to import something like that.......

I sent you a private email message.

It looks like the discussion on this topic died out without being fully resolved. It sounds to me like Lucy has a different interpretation of the coverage of RESPA than I have always understood.

In the question posed, the loan was a construction loan and included purchase of the lot. To me, that is clearly covered by RESPA.

In the second half of the answer, Lucy says: "But take a close look at other exemptions. If the loan does not have a dwelling on it, there is no connection to RESPA. The act's definitions hook onto dwellings. A loan to acquire an empty lot is thus exempt. RESPA can't come into play until there is a dwelling." (emphasis mine)

Reading the definitions in the regulation a "federally related mortgage loan" is:

"Federally related mortgage loan or mortgage loan means as follows:
(1) Any loan (other than temporary financing, such as a construction loan):
(i) That is secured by a first or subordinate lien on residential real property, including a refinancing of any secured loan on residential real property upon which there is either:
(A) Located or, following settlement, will be constructed using proceeds of the loan , a structure or structures designed principally for occupancy of from one to four families.

There is no dwelling when a construction loan is made, but nevertheless, RESPA does apply unless the temporary financing exemption applies, which it clearly did not in this case, since the loan also financed acquisition of the lot.

Ok, ok, so I've been missing in action, as Andy says. There have been several trips, a smashed car, and a few other interesting things that I could use to explain my MIA status. But RESPA calls louder.

Some time ago, I had a lengthy conversation with Bob Chamness about the RESPA exemptions. Bob's position is "any port in a storm." In the context of RESPA, that means any exemption that works is available to you.

There is a long tradition begun and carried on by enthusiastic examiners, that looks to find any way to bring in the transaction to RESPA coverage. This is also a fun way to find banks in violation of RESPA! Examiners enjoy this....

However, look at RESPA and its purpose. It is dwelling driven. No dwelling, no RESPA. Examiners have too often stretched the vacant lot exemption to claim RESPA coverage by saying "if ever you MIGHT build a dwelling..." This is not what RESPA means.

In the Q&A, the question was a simple lot purchase. That clearly involves transfer of title. But that transfer of title does NOT void the exemption because there is no dwelling.

Let's say there are three loans: Lot purchase, construction, and permanent. The lot purchase is exempt because although there is a transfer of title, there is no dwelling. The construction loan is exempt if they build fast enough. Title has already been transfered and the construction loan is exempt based on time. The permanent loan, however, is smack dab in the middle of RESPA and clearly covered.

In conclusion -- too many examiners have been excessive with conservative interpretations of RESPA. They aren't always right!

Ok, this has my head swimming......we are reviewing a construction loan (less than 2 years) and are trying to determine if we should have given an early TIL under Reg Z? The lot has already been purchased, this is a loan to construct the home (we are not doing the perm). If they own the lot, then would we be correct in saying transfer of title has already occurred? If so, then would we be correct in saying this is temp. financing and would be exempt from RESPA, therefore the early TIL would not apply? Help!!

Exactly right.

Could someone explain in plain english "transfer of title to the first user"? Would the only time this occur is during construction of a new home? Thanks!

"Transfer of title to the first user" is the original purchase of the lot by the borrower. Some construction loans include the lot purchase, others do not.

One caveat: in some instances, a construction loan will include funds to refinance a loan to purchase the lot. I have always thought that makes the construction a RESPA loan.

Anyone have other thoughts?

If our first advance on a construction loan is to payoff an existing loan for the purchase of the lot, we do not consider this as a RESPA loan. There is no transfer of title. Property is already owned and we are just refinancing. No Title Transfer-No RESPA

I agree with pac..........