Construction loan - > 2 yrs

Posted By: Many Hats

Construction loan - > 2 yrs - 09/13/12 01:04 PM

When I read in section 3500 regarding the exceptions, I see where it says "Any construction loan with a term of two years or more is covered by the regulation, unless it is made to a bona fide contractor."

This to me means that a loan (which is for the purpose of construction only), BUT is for greater than 2 years is covered and therefore RESPA disclosures (but not necessarily TILA) should be give. Am I right?????

Specifically, the scenario deals with a loan application for the purpose of renovating and adding onto an existing muti-family unit (in which the borrower resides in one of them) and the term was to be for 60 months.
Posted By: rlcarey

Re: Construction loan - > 2 yrs - 09/13/12 01:11 PM

If you mean by multi-family that it is more than four units, you are correct that it would not be covered Regulation Z:

"Credit extended to improve or maintain the rental property is deemed to be for business purposes if it contains more than 4 housing units."

You are correct that RESPA would still apply as it is secured by the consumer's primary dwelling.
Posted By: Many Hats

Re: Construction loan - > 2 yrs - 09/13/12 01:23 PM

For clarification, what I have learned is that is was a four unit property (she lived in one of the units).

The borrower rented out the other 3 units.

The purpose was to combine two of the rental units into one and add a pool.

So having said that, YES to RESPA and no to TILA still?
Posted By: rlcarey

Re: Construction loan - > 2 yrs - 09/13/12 01:30 PM

Well, in that case it does not qualify for the automatic exemption from Regulation Z as it does not involve more than four units, in fact it will be only three when the project is complete. You are going to have to apply the other business rules at this point to determine business or consumer purpose. If in doubt, disclose.
Posted By: Many Hats

Re: Construction loan - > 2 yrs - 09/13/12 01:43 PM

Apparently the plan was to turn one of the two unit buildings into one large unit and then construct a second floor on another unit with a pool, so the property would still have only 4 units.

So, again, YES to RESPA, but probably NO to TILA, (if we can rely on the intent being to enhance the rental property units and she was going to remain in the smaller unit0.
Posted By: rlcarey

Re: Construction loan - > 2 yrs - 09/13/12 01:51 PM

Regardless, it is not that simple as you are still only talking about 4 units. It does not get a automatic exemption (more than 4).

You are going to have to refer to the commentary 1026.3(a) Business, Commercial, Agricultural, or Organizational Credit and specifically focus on comment 3 in order to determine business verses consumer purpose and you should have it very well documented.