Our borrower owns a lot. We are approving a loan for him to construct a barn & shop on the lot. Collateral is the lot that he owns. No residence on the lot now but will be built at a later date with a separate loan. Terms on this loan are monthly principal/interest payments and fully disbursed to the borrower at boarding. Is this considered construction or Home Equity under TRID? Thank you.

Not purchase, refinance or construction. That is all you have left.

The "waterfall" list of TRID purposes, in order, is:

(i) Purchase
(ii) Refinance
(iii) Construction
(iv) Home equity loan

If the loan doesn't fit in (i), you look at (ii). If it fits (ii), you use (ii), If it does not fit (ii), you go to (iii). And on until you either find a match or you end up with (iv), which the Bureau should have called "Other," because loans that end up here often don't involve a home.

In your case, the lot is already owned, so it's not a purchase. You haven't said whether there is already a loan secured by that lot, but the nature of your question suggests there is not. So, it's not a Refinance.

To use the Construction purpose, items (i) and (ii) must have not fit, and some part of the loan proceeds must be used to "finance the initial construction of a dwelling on the property." So, because the loan is not for construction of a dwelling, you can't use the "Construction" purpose to make the disclosure required by § 1026.37(a)(9) - Purpose.

And that drops you into the "Other" "Home Equity Loan" category, even though there's no home securing the loan. It's counterintuitive, in my opinion, but that's what you must disclose.

If I had to say which disclosure requirement in the TRID rules causes the most AVOIDABLE confusion, the Bureau's choice to use "Home Equity Loan" instead of "Other" here would be my pick.[quote][/quote]

Thank you both. I was missing the construction of 'a dwelling' in the TRID purpose! This has been a great help.

The other challenging part of applying this list is deciding when "Purchase" applies.

To use "purchase" (1026.37(a)(9)(i)), the credit must be extended to "finance the acquisition of the property [to secure the loan]. That can become confusing or raise questions if the loan is to be used to buy out other owners, for example, siblings who have jointly inherited their late parent's home, or buy out a former spouse's interest in a jointly-owned home after a divorce. Isn't the loan helping the borrower to purchase those interests?

Well, yes, of course, if we use the common definition of "purchase." But note the precise word used in the rule --- it's not "purchase." It is "acquisition." And, like all well-trained compliance nerds, we wonder whether "acquisition" is a defined term. So, where should we look? Let's start not in Merriam-Webster, but where the bulk of the definitions for Regulation Z are found, in section 1026.2. There are 27 terms defined there, each in its own numbered subsection of 1026.2(a). None of them is "acquire" or "acquisition."

Don't give up, yet! Do a search of the text of section 1026.2(a) and you will find "acquisition" used in the definition of residential mortgage transaction in paragraph 1026.2(a)(24). And if you're using the BOL Regulations pages, the next place "acquisition" shows up is in the Official Interpretation of that paragraph, in comment 2(a)(24)-5. There "acquisition" is contrasted with transactions where the consumer had previously purchased and acquired some interest to the dwelling, even though the consumer had not acquired full legal title. In paragraph 5-ii, we see that an example of previously-acquired property include an extension of credit made to a joint owner of property to buy out the other joint owner's interest.

My read of 1026.37(a)(9)(i), then, would not consider the use of the "Purchase" purpose when the consumer borrower already has a partial legal interest in the property and is financing a buyout of the other owners. In my view, if the regulation splits hairs over what qualifies as an acquisition when something as significant as the right to rescind is involved, we can certainly split those same definitional hairs over something as unimportant as the four loan "purposes" to be disclosed under the TRID rules.

This is the cheat sheet I provided our people for reference to the TRID purposes.

Loan Purpose Summary for TRID

Purchase:

The loan’s purpose is to be reported as “Purchase” on the Loan Estimate and the Closing disclosure if any of the loan proceeds will be used to purchase the real property that will secure the loan.

Construction loans where a portion of the proceeds from the construction loan will be used to purchase the lot will be classified as a Purchase for TRID.

Refinance:

The loan’s purpose is to be reported as a refinance if any of the loan proceeds will be used to refinance an existing obligation to the same borrower secured by the property that will also secure the new loan even if we are not the current creditor.

Construction:

The loan’s purpose is to be reported as construction when the loan proceeds will be used for the initial construction of a dwelling on the property disclosed on the Loan Estimate.

If any of the loan proceeds will be used to purchase the property disclosed on the Loan Estimate the loan’s purpose will be classified as a Purchase for TRID.

If any of the loan proceeds will be used to pay off the property disclosed on the Loan Estimate the loan’s purpose will be classified as a Refinance for TRID.

The permanent financing to pay off a construction only loan, and secured by that property, will be classified as a Refinance for TRID.

Home Equity Loan:
All loan purposes that do not fall within the classification of a Purchase, Refinance or Construction will be classified as a Home Equity Loan for TRID.

Thank you Dan

One clarification on initial construction loans: We are paying off the original construction loan and adding additional funds to finish the home. We still treat this as a construction loan internally, but for TRID it meets the definition of a refinance. Is refi [more] correct?

Yes, if you are extinguishing the initial construction loan with additional funds to complete construction, it's a refinance for TRID (assuming you are secured by the same property).

We are--thanks!

I'm not sure i really worded that 100% correctly....but yes, refi in your scenario.