On January 12, the CFPB released a Construction Loans Fact Sheet reviewing the basics of construction loan disclosures under the TILA/RESPA Integrated Disclosure (“TRID”) Rule. This resource briefly summarizes the TRID requirements for construction loans.
As closed-end consumer credit transactions secured by real property, most construction loans are covered by the TRID Rule. Construction loans subject to mortgage disclosure requirements include those where the creditor extends credit to finance only the cost of the initial construction (construction-only loan), not renovations to existing dwellings, and in transactions where a multiple advance loan may be permanently financed by the same creditor (construction-to-permanent loan). A construction loan that is an open-end transaction or a loan for a commercial purpose is not covered.
In the Construction Loans Fact Sheet, the CFPB noted that the TRID Rule reaffirmed Regulation Z’s provisions covering construction-only loans and construction-to-permanent loans – § 1026.17(c)(6)(ii) and Appendix D.
Disclosing Construction-to-Permanent Financing as One Loan or Two Loans
Under § 1026.17(c)(6)(ii), when a multiple-advance loan to finance the construction of a dwelling may be permanently financed by the same creditor, the construction financing and the permanent financing may be treated as either one transaction or more than one transaction.
According to the CFPB, the creditor can use either one combined disclosure for both the construction financing and the permanent financing, or a separate set of disclosures for the two phases. The creditor can choose whether the construction phase and the permanent phase are both closed at the same time or there are separate closings for the two phases.
If the creditor elects to disclose the construction-to-permanent financing as one transaction, only one set of disclosures (Loan Estimate and Closing Disclosure) is required. If the creditor chooses to disclose as separate transactions, the CFPB requires the construction phase to have its own Loan Estimate and Closing Disclosure, and the permanent phase to have a separate Loan Estimate and Closing Disclosure.
Other Principles of Construction Loan Disclosures
The CFPB directed the mortgage industry to Appendix D of Regulation Z for assistance in estimating and disclosing the terms of a construction loan with multiple advances. Appendix D also aids in calculating the interest portion of the finance charge.
As noted in the Construction Loans Fact Sheet, the TRID Rule added comment 7 to Appendix D. Comment 7 provides guidance on how the projected payments table may be disclosed when the construction phase and permanent phase are disclosed either as separate loans or as a single loan.
The CFPB noted that additional guidance – including possibly a webinar on construction loan disclosures – may be released to facilitate compliance with the TRID Rule.