Construction - Funds Held for Draw

I could swear I have seen this topic discussed but I performed a search of the TRID forum, using "construction" as the search word and came up with four pages of nothing.

Where on the LE should the funds held for draw be disclosed?

I can't find the answer in the small entity guide either.

I put them in payoffs and payments.

Not sure I follow.

On the LE. If you put the construction funds in payoffs and payments [as in a refinance transaction] it will net out the correct money the borrower actually needs [if any] at closing.

You put in the total construction contract amount as a payment that is due. The difference between that + closing costs and the loan is the amount due from the borrower at closing or if they have paid that amount outside of closing, then that would show as a adjustment or additional entry in the payoff table is using the alternative forms. Unfunded loan amounts do not show on the LE or CD - it is all about cash to close.

That's what I said.

Ditto.....payoffs and payments. We show ours as 'undisbursed construction funds'

We show ours as 'undisbursed construction funds.

Show it where? There is no such thing on a LE/CD, especially under the new TRID amendments. You show the full construction contract amount which offsets the loan amount and other borrower contributions.

I see no difference in the way I disclose now and the way the TRID amendments read.

On the LE you show it in Payoff's and Payments [using the optional LE, which I think MOST of us do, at least when no purchase is involved].

On the CD, again, you show it in payoff's and Payments and label it "Held For Construction" or something similar.

Under the new rules: The total construction contract amount is entered into the Payoffs and Payments table (first underline). If the borrower is to bring additional cash to the table to give to the lender at closing to fulfill the total contract amount, that will be reflected as necessary cash from borrower in the Cash to Close table. If the borrower has paid an amount to the contractor already (their contribution), then you would show that as a separate credit in the Payoffs and Payments table (second underline).

The amount of any unfunded loan commitment does not appear on the form.

37(h)(2)(iii) Payoffs and payments.

1. Examples. Examples of the amounts incorporated in the total amount disclosed under § 1026.37(h)(2)(iii) include, but are not limited to: payoffs of existing liens secured by the property identified under § 1026.37(a)(6) such as existing mortgages, deeds of trust, judgments that have attached to the real property, mechanics’ and materialmen’s liens, and local, State and Federal tax liens; payments of unsecured outstanding debts of the consumer; construction costs associated with the transaction that the consumer will be obligated to pay in any transaction in which the creditor is otherwise permitted to use the alternative calculating cash to close table; and payments to other third parties for outstanding debts of the consumer, excluding settlement services, as required to be paid as a condition for the extension of credit. Amounts that will be paid with funds provided by the consumer, including partial payments, such as a portion of construction costs, or amounts that will be paid by third parties and will be disclosed on the Closing Disclosure under § 1026.38(t)(5)(vii)(B), are calculated as credits, using positive numbers, in the total amount disclosed under § 1026.37(h)(2)(iii).

So Randy....help me understand this please.....if $100,000 is to be withheld by the bank for construction....and there is $0 that the borrowers will have to bring to the closing table, what will the cash to close be? (Have i given you enough info?)

Randy, perhaps we are slightly talking two different concepts. We rarely deal with 'construction contracts'. Our construction loans are typically for a specific amount. We may add closing or they may pay closing costs, or there may be some split involved. But if I did have a contract and I was loaning less, all it would end up affecting is the amount I show as the 'hold back'.

Regardless, the following is how I've done it and will continue to do it as it is in line with how I've always done it. [ I'm really glad they didn't go with their first draft because that was very convoluted and mis-leading]. This has always made absolute sense to me.

From the Summary:

The 2017 Rule explains where the costs of construction or amounts held in reserve for the construction loan (holdbacks) are disclosed:

On the Loan Estimate, these amounts are factored into the Funds for Borrower calculation (or the Payoffs and Payments calculation, if using the optional alternative Loan Estimate) as existing debt being satisfied in the transaction.

On the Closing Disclosure, these amounts are disclosed in the Summary of Borrower’s Transactions table (or the Payoffs and Payments table, if using the alternative Closing Disclosure), and factored into the Funds for Borrower calculation (or the Payoffs and Payments calculation if using the alternative Closing Disclosure).

The 2017 Rule does not specifically define holdbacks, but refers to a portion of a construction loan’s proceeds that a creditor places in a reserve or other account at consummation and clarifies that such an amount may be disclosed separately or as part of the other construction costs. The amount may be labeled with any accurate term, so long as any label the creditor uses is in accordance with the “clear and conspicuous” standard. If the amount is disclosed separately, it may be separately itemized, but the other construction costs must not include the amount of the holdback so as to avoid double counting in the Calculating Cash to Close calculations.

Joker - You mean there is not a third party contractor - you just give the customer the money and they do it themselves or there is no construction contract with a third party for which the borrower is legally obligated to pay as a condition of the loan? The entire construction contract has to be included in the calculation - not just the portion that bank is funding.

37(h)(2)(iii) Payoffs and payments.

1. Examples. Examples of the amounts incorporated in the total amount disclosed under § 1026.37(h)(2)(iii) include, but are not limited to: payoffs of existing liens secured by the property identified under § 1026.37(a)(6) such as existing mortgages, deeds of trust, judgments that have attached to the real property, mechanics’ and materialmans’ liens, and local, State and Federal tax liens; payments of unsecured outstanding debts of the consumer; and payments to other third parties for outstanding debts of the consumer (but not for settlement services) as required to be paid as a condition for the extension of credit.


A reserve or holdback has nothing to do with unfunded loan amounts. It is an amount that lender legally requires the consumer to maintain on reserve with the bank in addition to the construction contract and can be used to pay interest during the course of the construction project, etc. The lender has the option of combining a construction holdback with the actual construction contract amount or itemizing it as a separate item.

raitchjay - OK let's take a very simple example.

The customer has a $100,000 construction loan contract with the third party contractor. The bank is lending the borrower $80,000 and the total closing costs are $5,000.

Cash to Close on the Alternative LE would show

Loan Amount: $80,000
Total Closing Costs: - $5,000
Estimated Total Payoffs and Payments: -$80,000

Estimated Cash to Close From Borrower: $5,000

On the CD - the Payoffs and Payments table would show.

Construction Contract Payable to XZY Construction: $100,000
Borrower Down payment to XYZ Construction: -$20,000
Total Payoffs and Payments $80,000

Cash to Close on the CD

Loan Amount: $80,000
Total Closing Costs: - $5,000
Total Payoffs and Payments: -$80,000

Cash to Close From Borrower: $5,000

On the payoffs & payments section we show the construction funds on this page with the description 'undisbursed construction funds'. This $ amount is the difference between the loan amount minus any fees financed.

After reading RRJoker's post, we do ours the way he is describing as well.

While there is not a whole lot of guidance on construction loans in the original TRID regulation and creditors could basically get away with whatever they wanted too, the amendments clearly state the disclosure requirements for construction loans.

The unfunded loan amount is not a factor in the disclosing of the total cost of the transaction to the borrower and accounting for where all the funds are coming from and going too.

The transaction you are financing is the satisfaction of the total construction contract. Focusing on the unfunded loan amount on a construction loan is like saying that the purchase price of a new house is not important. All we have to do is focus on the amount of money we are lending the borrower. Who cares where their down payment is coming from, etc. It is the same concept - you have to balance back to the total construction contract just like you have to balance back to the sales price on the purchase of a house.

I totally agree with what Randy is saying and in many ways we are saying the same thing, but from a different perspective.

As Randy asked above, yes...typically [rare exceptions do exist] we don't take a contract assignment, see any contract and quite often it's just a handshake deal and our borrower is actually acting as general contractor [I did this with my own home construction]

If there IS a contracted amount and it is higher than the loan, then yes...that difference must be accounted for because it is a part of the total obligation. However, in that case, on the CD, under payoffs and payments I would have to itemize the two features out.

$20,000 to John D. Builder
$80,000 "Held for Construction

My bottom line would then end up with the closing costs of $5000 as we would control the payment to John D. Builder more than likely.

But the fact is, the amount being "held" [as opposed to a hold back/reserve] would be listed in payoff's and payments and I think this is what is confusing everyone by saying it's not shown anywhere as a line-type item. It is, it's in Payoffs/Payments.

And the reason they have further elaborated on the reserves is to make certain a lender doesn't double count and show a loan of say, $100,000 of which $5000 is to be held in reserves.

In that case, you could itemize [for clarity] but you would need to be careful that you laid it out as follows:

$5000 "held in reserves"
$95,000 "held for construction"

If you put the entire $100,000 held for construction, along with $5000 reserves, you would skew the bottom line. But you would think that would be obvious! smile

$20,000 to John D. Builder
$80,000 "Held for Construction

How does this comply with:

"payments to other third parties for outstanding debts of the consumer (but not for settlement services) as required to be paid as a condition for the extension of credit."

If you don't show it this way, how will you expect to ever have a correct cash to close amount?

The 2017 Rule explains where the costs of construction or amounts held in reserve for the construction loan (holdbacks) are disclosed:

On the Loan Estimate, these amounts are factored into the Funds for Borrower calculation (or the Payoffs and Payments calculation, if using the optional alternative Loan Estimate) as existing debt being satisfied in the transaction.

On the Closing Disclosure, these amounts are disclosed in the Summary of Borrower’s Transactions table (or the Payoffs and Payments table, if using the alternative Closing Disclosure), and factored into the Funds for Borrower calculation (or the Payoffs and Payments calculation if using the alternative Closing Disclosure).

[and construction funds held are not settlement services]

I just ran a sample through my LOS. This is how it falls out based on a builder's contract [300,000] that exceeds the construction loan [250,000]:

LE: I'm financing the loan fee, borrower is paying an attorney fee of $500.00

I listed $300,000 in payoffs and payments. My LE shows a loan amount of $250,187.00 with cash due of $50,500 at closing.

My CD shows payoffs and payments:

$50,000 to John D. Builder
$250,000 held for construction

Cash due from borrower = 50,500 which is the money due to the builder and the attorney fee being paid in cash. My total loan is $250187.00 which consists of the construction proceeds and a loan fee.

This all matches my disbursement and is a true and correct representation of the transaction.

If I were to have a reserve, the only difference would be that if I chose to itemize it, as allowed, I would subtract the reserve from the $250,000 and show it labeled clearly as to what it is for.

$50,000 John Doe Builder
$225,000 "Held for Construction"
$25,000 "Held in Reserve for whatever reason one does this"

$250,000 held for construction

The creditor has to show that this amount is payable to the builder - I.e. third party - I keep trying to get across that "held for construction" or "unfunded loan amount" has no place on an LE or CD. It is to fulfil the contract, i.e. " construction costs associated with the transaction that the consumer will be obligated to pay in any transaction in which the creditor is otherwise permitted to use the alternative calculating cash to close table"

Just like anything else, if the payment is not going to the creditor, the creditor has to show the payee that is ultimately receiving the funds.

I think the hang up is on how the loan operates and a failure to focus on the fact that the LE and CD is to reflect the costs of the transaction and who at closing or is eventually going to get the funds involved in the transaction. The fact that this is a multiple advance loan and the full amount is not being advanced at closing is irrelevant to the LE and CD other than using that information when calculating the payment streams, APR, etc,

Oh - and this is not criticism - we have actually also been doing it a similar way - but with the new guidance it has become exceedingly clear what the proper approach has to be.

Randy..so you're saying we would still show the amount that we are withholding for construction (again, say $100,000), but we are not showing it as "construction holdback" or the like, but as "payable to ___________" whomever the contractor is?

Sorry if i'm missing a key piece....trying to get something done and also follow this thread.

I think the difference may actually or possibly be regional.

I have a feeling that many of us that are scratching our heads are doing so because we are making a loan to a consumer borrower who is building a house. The loan is to them. The draws are paid to the customer. Not a contractor. The customer controls the payments and payouts to contractor, sub-contractors, supply houses, etc.

If I don't show the cost of construction [construction ] loan in the payoff's and payments, as described, it's going to have an incorrect bottom line.

Could this be the 'disconnect' we are experiencing here? Or, is it Friday the 13th [in October, at that!!!] effect?

For the record, Joker's 2nd paragraph does indeed describe our construction loans.

[if it were a loan where draws were paid to the builder, it would be handled as a pre-sold and of course we wouldn't be discussing it because it wouldn't be TRID]

Raitch - Yes - you show the entire third party contract amount payable to whoever the consumer has already contracted with to complete the construction. That could be one or more contractors. They are going to be getting the money based on the legal obligation involved with the loan transaction.

Joker - yes- it might be somewhat regional, if you are letting the consumer run the show and there are no contracts involved that the bank is requiring to be paid as a condition of the loan. How you preserve your lien position and avoid mechanics liens - well that might be a regional issue also. Not too many bank in regions in which I am familiar operate in that manner when it comes to construction loans.

Right. You have to have your DSD recorded prior to start of construction to perfect your interest. If you were to fund a loan post start, you have to go through a ton of measures to prevent potential materialman's lines from taking precedence, and can still be a carp shoot!

At any rate, I think that solves the discord and I'm really glad this came up on the chance we do have any set up differently! We just LOVE for our customer's 'round here to run the show.

Just want to pipe in that we started disclosing construction loans this way (with the entire amount the borrower is obligated to pay for construction in the Payoffs and Payments section), and it has been both helpful and enlightening. To use Joker's example:

$300,000.00 due for construction costs (we list as payable to builder or construction company), plus
$500.00 due in attorney fees, plus
$187.00 due in closing costs, less
A loan of $250,187.00,

Shows $50,500 cash due from borrower at closing.

More than once we've done this LE for a customer who applied for a construction loan and had them say, wait, I have to come up with that much cash to close? I don't have that right now!

Not sure how they figured they would complete construction . . .

Exactly. I think we were actually all on the same page, but with different ways of how different bank's in different areas handle/deal with construction loans to the consumer.

I want my bottom line to show the consumer what they actually will need. One of the old ways of disclosing construction loans inflated the bottom line and was virtually useless. I never did understand that method.

Another thing a lot of folks don't think about, or at least I feel this way, is that when preparing disclosures for two phase construction and then separate permanent, the estimated payoff needs to include that full last payment, including the estimated interest, and not just a principal balance in an effort to give a better forecast of final out of pocket expenses.

***Bump***

In this scenario, how would you account for a general builder credit towards closing costs in the calculating cash to close table and in the payoffs and payments table?

Closing Cost Credit Provided by "Builder Name" $-$xx,xxx on the P&P Table

Thanks Randy.