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| TRID Construction to Permanent Loan Disclosures |
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| The introduction of the new TRID rules has created some confusion with lenders on how to properly disclose a loan made for the construction and end loan financing of a consumer's home. These loans are more commonly known as "construction to perm" loans, or C to P. This has resulted in some lender's reluctance to offer this financing. |
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| To help clear up some of this confusion and assist lenders in disclosing these loans, CFPB recently issued their fact sheet outlining the available options for correctly disclosing these type loans under the new TRID rules (CFPB Guidance). This financing may be disclosed in one of two ways at a lender's option |
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| 1. As two separate transactions; one for the construction loan, and a separate loan for the end financing to take out that construction loan. |
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| 2. As a single transaction for the construction costs and end loan financing of the home. |
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| Either way is acceptable under the law. Let's take a quick look at each. |
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| Separate Loan Transactions: |
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| When the construction loan and the permanent loan are treated as two separate transactions, in disclosing the construction loan a lender may determine the interest payable, APR, finance charges and payment schedule over the life of the construction loan, in two ways. |
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A. |
When the interest is payable by the borrower on the amount of the construction loan advanced from time to time, the lender would use one half of the entire construction loan amount at the construction loan rate, over the term of the construction loan. |
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When using this method the APR is determined as a single payment loan that matures with the end of the initial construction period. In computing the finance charges for determination of the APR use one-half of the construction loan at the construction loan interest rate. The finance charges are the total of these construction interest charges plus any other prepaid finance charges, i.e. points. For disclosure purposes the "Amount Financed" would be the entire loan amount (full construction loan advanced) less any prepaid finance charges |
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A repayment schedule for the construction period may be omitted from the disclosure. However, that such payments are required, and the timing, must be disclosed. This may be done by taking the total of the projected interest payments, from the above interest calculation, divided by the number of months during the construction phase, with a final payment equal to the payoff of the entire advanced amount (balloon payment). |
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B. |
For constructions loans requiring the interest payment periodically on the entire loan amount, regardless of what is advanced, the lender uses the entire loan amount at the construction loan rate over the construction period. |
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The APR is based on a single payment loan maturing at the end of the construction loan term. In this case the finance charges are the sum of the estimated interest (as calculated above) plus any prepaid finance charges. For calculating the APR the interest due for the construction loan is calculated using one half of the construction loan amount less any prepaid finance charges. For disclosure purpose the total amount financed is the total construction loan amount less the prepaid finance charges. The payment schedule should reflect the interest payments due on the construction loan for the first year based on the total construction loan amount at the construction loan interest rate. |
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| The permanent end loan, used to take out the construction financing, should be disclosed as a separate standard mortgage loan based on the terms and conditions of such a loan. The APR, finance charges, payment schedule and total amount financed is disclosed as a standard amortizing loan based on the final loan amount, interest rate and repayment terms. |
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| Under this separate transaction option for each loan the consumer must receive the appropriate Loan Estimate(s) and Closing Disclosures(s) descriptive of that phase of the transaction. In such cases the construction loan will be treated as a balloon mortgage carrying certain restrictions/requirements under QM/ATR rules. Keep this in mind as these restrictions may come into play in the event the lender runs into a problem in transacting the permanent end loan to pay off the construction loan. |
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| A Single Loan Transaction |
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| As under the separate transaction process (outlined herein) a Lender may calculate the interest due on a single loan transaction during the construction phase one of two ways. |
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A. |
For loans with interest payable periodically on the amount advanced, it is based on one-half of the construction loan amount at the construction loan rate over the construction loan term, or |
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B. |
For loans requiring interest payments based on the full loan amount, regardless of the amount advanced, it is calculated on the entire loan amount at the construction loan rate over the term of the construction loan |
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| This interest due is used in the calculations to determine and disclose the loan's APR. The APR is disclosed based on the total interest due during the construction period plus the total of all principal and interest payments to be paid to amortize the final amount, less the final loan amount, plus any prepaid finance charges. This represents the estimated total finance charges. |
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| In making the disclosure the first payment period shall be reflected as one-half of the construction period plus the time between the end of the construction period and the date of the first amortizing payment is due. This payment will be disclosed at the amount determined based on the interest option chosen. The second payment phase is disclosed as the payments due under the amortizing phase of the loan beginning with the date of the first amortizing payment and ending with the end of the loan term (last payment due).The amount financed is then disclosed as the entire loan amount granted for the construction and end financing of the home, less the prepaid finance charges. |
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| For all intents and purposes, a single close construction to permanent loan is disclosed like a standard home mortgage transaction with a single set of Loan Estimates and Closing Disclosures reflecting the total loan amount, number of payments, prepaid finance charges and amount financed, along with other data required of these disclosures. |
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| For more information and assistance in determining how these C to P loans are to be disclosed properly, you may also go to Appendix D of the Truth in Lending Act (App D). This provides an outline for the disclosure and calculations for each option, with examples of the calculations used. |
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| This is provided for informational purposes only to assist lenders in a better understanding of the options available to them for transacting and disclosing a loan made to consumers for the construction and financing of a new home. This is not a legal opinion nor instruction. It is recommended that prior to offering C to P loans a lender consult with experienced legal counsel to review their intended process and disclosures to ensure compliance with all related rules and regulations. |
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| Hopefully in doing so you may become more comfortable with C to P financing which can open more options for lending. Please lend responsibly. |
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— Mike Vitali - SVP/Chief Compliance Officer
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Mike Vitali is SVP/Chief Compliance Officer for
LoanLogics. He has over 40 years of experience in all
facets of mortgage lending. Just prior to coming to
LoanLogics, he served for more than 12 years as an EVP
and Chief Risk Officer for a major national lender. He
also served as legislative chair for both the MBA of
Greater Philadelphia and MBA of Pennsylvania, and is a
member of several task forces dealing with compliance
issues for the National MBA.
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by LoanLogics, Inc. and its applicable subsidiaries and
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