Single Transaction Combined Construction LE

We participated in the Know Before You Owe webinar on Construction Loans and I came away somewhat more confused than before. For instance, it was stated that per appendix D the projected payments table must reflect the interest-only payments during the construction phase in the first column, followed by the appropriate columns reflecting the amortizing payments.....The next slide indicated per 1026.37(c)(1)(iii)(B) that if the interest only feature is less than one year then a range of payments reflecting the interest only period and the subsequent P&I payment should appear in the first column.

So, we do not follow appendix D in this case?

I think they meant the Year 1 column will show payments ranging from the estimated interest-only payment (still following Appendix D) to the fully-advanced P&I payment.

I'm hoping the ABA will provide a transcript of the webinar, so we can read and re-read what was said.

You follow appendix D to calculate the initial interest only payment. In the example provided (Const to Perm one time close), the interest only phase converts to P&I in the first year; therefore, you must disclose a range of payments. Low end being the interest only payment (calculated via appendix D) and the high end being the maximum P&I payment.

I love how they didn't provide any examples of the tables - just the reg...

clear as mud

Darth, during the webinar, we sent in questions requesting examples, and also asked for them in the post-webinar survey. Really hoping they come through with some.

I agree Darth.....would appreciate some samples. My LOS is no set up for a range of payments for our 6 month interest only construction perm. I dread the upcoming battle to get it resolved!

Thanks all. Just wanted to be certain I understood what was said as it took me by surprise. UGH!

So do you split the year one column into two sub-sections, one for the Appendix D calculation and one for the full due payment? Our institution listened in to this as well and we were also taken by surprise by this portion of the presentation. Since the Reg only permits for full years to be disclosed in the payment columns we don't understand how to show months only in the first year column. Any information would be appreciated. Our LOS is Easy Lender. THANKS!!

Banker we are on the same LOS. I have requested our IT dept request a PR immediately. They will probably request a quote from the regulation to make the change. I suggest you also put in a request for the change so it has more teeth to it than just one bank making the request.

Will do. I will follow up with our Easy Lender coordinator. Thanks!

The instructions delivered during the webinar indicate that the first column will include a range of payments, with the low amount being the interest only payment amount during the construction phase and the high amount being the highest amortization payment amount during the first year. You don't split the column.

ssooooo.....Let's say the payment range would be $446.97-$1243.13. Would the words "only interest" follow the range of payments.

$446.97 - $1243.13 "only interest" even though $1243.13 represents the onset of P&I payments in month 7?

The words "only interest" would follow the payment they described. $446.97 (only interest) - $1243.13.

WFIW -- There's no place in the rule that explains my response -- but it seems to explain the range better and doesn't suggest the whole range is interest only.

We are struggling with how to disclose a range when our interest only payments during the construction phase are monthly and the principal & interest payments after are biweekly. Not sure how to make that clear, does anyone have any advice to offer?

Advice? Sure -- split the disclosure into one for construction and the other for the permanent phase. I know that's not what you wanted, but it's the best I can come up with.

Thank you for your guidance John!

One thing I can't find clearly stated is what "Year 1" exactly encompasses. Is it from the Closing Date, or is it based on when payments are made? So, let's say you have a 9 month interest only construction phase on a 1 set of disclosures C-P loan with a 30-year perm phase, but the first payment doesn't start until the 6 month (just trying to get a concept down here). Is "Year 1" from the Closing Date, or does it kick in with the 1st Payment in the 6th month? If the latter, then do you apply the same range mentioned above regarding the P & I with the column for Year 2 to reflect where you have both the interest only payments and the P & I payment. And, then you go with just the P & I in another column for Years 3-31?

I am confused. Why would you not have a payment until month 6 and why would there be a range in Year 2, unless the permanent loan was an ARM and the interest rate changed annually.?

As far as payment until month 6, this is just an imaginary scenario. I am trying to understand a concept with timing for the Projected Payments table. The Range in Year 2 would be because you would have Interest Only payments for the first 3 months or so of Year 2 and then you would have P & I payments for the remaining 9 months of the year. This would be if the table starts from the closing date and not when payments begin.

Payments on a construction loan is usually based on Appendix D, which would call for monthly interest only payments based on half of the loan amount outstanding. With as little guidance as there is for disclosing construction loans, doing anything different is just going to open you up for potential disclosure errors and likely your LOS will not support it. I am not sure how you would have interest only payments in the first three months of the second year. That would mean that the construction interest only period was 15 months and it would disqualify the loan for QM status.

Granted, I understand your points. Again, just trying to get a feel for the Projected Payments table here. You would have a total period of 15 months, but only making 9 payments. So, is your understanding then that the "Year 1" is from the Closing Date and not when the payments start? If the Interest Only payments do carry over into Year 2, then do you have a range in the Year 2 column? A real world example could be 12 monthly payments with a somewhat delayed first payment. For example, let's say you close on 5/4/2021. The first IO payment is due 7/1/2021. The 12th payment would be due 6/1/2022. This would be in Year 2 if the Year 1 is determined to end on 5/3/2022. So, you would have the IO payment on 6/1/2022 and then you kick into the P & I payment afterwards. This would seem to result in two separate payment streams for Year 2.

It is rather hard to talk about hypotheticals that I am sure you will not find a LOS to support. If you have a LOS system - plug in a test loan with the parameters you are proposing and see what it spits out. Regarding whether the projected payments tables are correct, you would compare the results to the requirements in 1026.37(c).

Yes, the issue is 1026.37(c) doesn't seem to be addressing my question. Forget the hypotheticals then. Does the table start from the Closing Date or from the 1st Payment Date? If you find no answer either, then just say you see nothing that provides a definitive answer.

If you have a 15 month construction phase, then your first column would be Years 1-2 and you would have the monthly interest only payment as the minimum and the monthly P&I payment as the maximum and you would also have the label "Only Interest" below them. Your second column would begin at Year 3. Since there was no payment change in Year 1, it would not be a separate column.

Thank you for the explanation. I'm still a little confused as to why Years 1-2 would be combined, but believe I mostly understand it. This is because the initial periodic payment stream would last through that time period? There is no hard Year 1 requirement? It is whatever the initial stream covers if greater than a year?

Correct - a 30 year fully amortizing loan has one column - Years 1-30. The first year is not a standalone requirement. It all depends on if there is a payment change.

This topic is still frustrating me. The point where the table starts would seemingly make a difference for certain scenarios. If it starts at closing, then that is going to result in a different range compared to if it starts with the first payment. For example, lets say there is a 11-month Interest Only Construction Phase with a loan that closes 2/15/2013. If you start the table based on the closing date with a normal 1st payment that would be due 4/1/2013, then your 1st stream would take you through February 2014. If permanent phase payments began 3/1/2014, then you would have a "Year 1" that encompasses just Interest Only payments, as the P & I starts after the 1 year range would end on 2/14/2014. However, if the 1 year period begins with when the 1st payment is made (4/1/2013), then you would have the 11 interest only payments and the 1st permanent phase P & I payment on 3/1/2014 both within the "Year 1" range. So, depending on which you use, the table would be different. Either "Year 1" encompasses the Interest Only payments and that's it, or it encompasses both.

Using the LE on the CFPB site as an example, they seem to utilize the date from when the 1st payment begins. https://files.consumerfinance.gov/f...ly-adjustable-rate-loan-sample-H24C.pdf. Otherwise (if using the closing date), assuming a 4/1/2013 first payment, based on the 2/15/2013 close, you would have the P & I phase kick in on 4/1/2018. Comparing 4/1/2018 to the close date of 2/15/2013 would put the former in Year 6, as 5 years would end on 2/14/2018. In that case the table should be "Years 1-6" in the 1st column and not "Years 1-5." But, I don't feel this jives with a literal understanding of "Year 1," which would more readily be understood as from the closing date.

I feel like the lag in closing date vs. when the 1st payment is due creates a lot of confusion here that I am not sure the CFPB accounted for properly. Perhaps this is something that has been expounded upon in more detail, but I haven't seen much "chatter" on this issue myself.

You are getting hung up on the first payment date on a construction loan, but that is not how monthly payments are calculated according to Appendix D. Normally however, the projected payments table is based on the anniversary of the initial payment due. Your link is for an ARM loan and not a construction loan.

I assume you have read this? https://files.consumerfinance.gov/f/documents/cfpb_trid-combined-construction-loan-guide.pdf

Paragraph 37(c)(1)(i)(D).
1. Anniversary of the due date of initial periodic payment. Section 1026.37(c)(1)(i)(D) provides that the anniversary of the due date of the initial periodic payment or range of payments that immediately follows the occurrence of multiple events described in § 1026.37(c)(1)(i)(A) during a single year is an event that requires disclosure of additional periodic payments or ranges of payments. Section 1026.37(c)(1)(i)(A) provides that a potential change in the periodic principal and interest payment is an event requiring disclosure of additional separate periodic payments. See comment 37(c)(1)(iii)(B)-1 for an example of the application of § 1026.37(c)(1)(i)(D).

I understand it is not how the payment amount itself is calculated, but it would generally be when the payment starts still. Yes, I used the ARM just to show an example of how the Projected Payments table seemed to be calculated. As you are likely well aware, there is no Sample Form LE or CD for construction loans. As a matter of fact, the guide you linked uses the same 5-year Interest Only ARM in the pictures. Yes, I have read the guide. It doesn't reference when the table begins, it just says "if the construction phase is less than one year." It doesn't say how this one year period is calculated, i.e. whether from closing date or first payment date.

The reference you quoted is not a "fun" read and would not quite seem to indicate a definitive answer. It seems to say, in more layman's terms, that the anniversary of the initial payment or range of payments is an event that requires another payment column if it follows the occurrence of multiple events that cause payment changes. If the closing date is used to establish the dates of the table, then there is no "multiple" events causing a payment change. There is solely the interest only payment stream.

All in all, what would your understanding be for an 11-Month Construction-Perm as I described? Sounds like you are pointing to having the Interest-Only and the 1st Payment of the Perm phase P & I in the "Year 1" column using the range disclosures.

Yes - on the true 11 month construction loan, year 1 would include both the estimated construction interest payment and the first P&I payment.