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Construction Perm Product & Upcoming TRID Rules

Question: 
I have recently learned about a rather unique construction perm product and have a question about it in regard to the new upcoming TRID rules. Here's how the product functions now. The loan is a one-time close, 30-year term, fully amortizing from the beginning. Only one LE/CD is issued. The rate is fixed at opening and does not change at all during the term. There is no interest-only period. At closing, the funds are put into an escrow/reserve account and disbursed to the borrower periodically over the construction period. At this time they do not charge any inspection fees but are considering changing their process to have the inspections conducted by a third party and charging for three inspections. If these fees are disclosed to be collected at consummation, what recourse is there if an event occurs that requires an additional inspection? Does the bank simply have to absorb that cost since this is a zero tolerance cost and the CD has already been issued and compared to the LE? If these fees are to be collected after consummation, disclosed on a separate addendum, and this event requiring the additional inspection occurs, can the bank simply collect the additional fee without violating the zero tolerance?
Answer: 

John Burnett: Whether the construction inspection fees are collected at closing or after closing, a post-closing event that triggers an additional cost does not create a TILA or Reg Z violation. All other things being equal, there is no tolerance violation in either case. Just be sure you have disclosed those costs (on the LE/CloD if paid at closing, on the addendum if charged and paid post-closing) based on the most current facts you have concerning the particular loan and your schedule of construction fees. For example, if you normally require five inspections during at the end of construction, but the property securing the loan in question involves some extra complexity and/or time that will require an additional inspection(s), build the extra inspections into the CloD or addendum. Then, if circumstances are such that you will need even more inspections, you are covered by the rule that says post-closing events don't affect the accuracy of the disclosures.

As an aside, you should include in your construction loan agreement or commitment letter language addressing the possibility of needing additional inspections and resulting added costs.

Answer: 

Randy Carey: You also need to sit down with your legal counsel as charging the borrower for the entire loan amount from day one when the consumer only gets the use of the funds gradually over time, whether held in a reserve/escrow account or not, could present State usury issues and smacks of a unfair and deceptive practice.

First published on 01/17/2021

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