If we are making a loan to purchase a home and part of the proceeds on the loan will be used to improve the property, will the ROR apply on the portion used for improvements? We want to make one loan (first lien) on the purchase and the improvements...close and fund all proceeds at the same time including the amount to be used to pay for the improvements.

No. This is a RMT and ROR won't apply.

Yes, the lien position does not matter. Your loan will be secured by the principal dwelling and for consumer purpose, therefore subject to the ROR requirements. Remember everyone with an ownership interest (principal dwelling) gets the 2 copies of the ROR and a copy of the material disclosures (TIL).

Sorry, I did not pick up that it was a purchase money. ROR does not apply.

Thank you so much for your prompt response. This was what I thought but our attorney said different. Good to know that he is not always right. Thanks again

But there is nothing wrong with providing the ROR when it's not required. So your attorney was not causing you to violate Reg Z if you followed his/her advice.

So in a sense, he/she may not be wrong, just not quite right. (I think I've been talking to examiners too long.)

The right of rescission is regularly misunderstood by attorneys who do not handle a lot of consumer compliance (and Reg. Z) work.

However, he may be right as far as Texas law is concerned because as I found out later, is that the portion of the loan funding the improvements is not going to be funded at closing but when the improvements are completed. So then will the ROR apply or should I treat it strictly as a RMT? Seems that the borrower has a problem, as ususal, with the rescission period. Closing was set by the lender without consideraton given any compliance issues (sound familiar?). When I looked at the transaction I did not think it was going to be ROR issue because I thought all funding was going to be completed at closing, therefore I did not think that ROR applies. I am really confused now!

You have one loan that is primarily for the purchase. It is an RMT which is an exception to the ROR. I still don't believe it is needed. If they rescinded, the whole loan would be subject to it, not an unfunded portion.

Because I'm cautious I'd verify there are no state quirks as we haven't done a deal like this, but I believe you're still OK. Zaibatsu may have a few words of wisdom???

Andy is right. This is a RMT and not subject to ROR. You are conducting one closing for one loan. The fact that some of the proceeds will be disbursed at a future date has no bearing on FRB Regulation Z definition of a RMT. The entire loan is a residential mortgage transaction. Section 226.2 defines a RMT as a loan to finance the acquisition or initial construction of that dwelling. Your loan is for both.

No ROR in this case. Since it is not yet their primary residence rescission can't apply. You might want to check the appraisal "when completed" as it sounds like you are headed for an LTV violation and this loan will need to be tossed into the exception pool, the aggregate of which can't exceed capital.

Thanks everyone for the great info. This was a new one on me and could not find any old thread discussing this type of transaction. You guys are terrific.