Construction loans have proven to be anything but simple under TRID. The CFPB gave very limited guidance for construction loans when applicable banking regulations (i.e. TRID) first came out and much of the guidance they have provided isn’t as clear as it should be. For this reason, many financial institutions still seem to struggle with TRID disclosures for construction loans.
For example, disclosing the correct “Product” for a construction loans can prove to be a confusing task. Fortunately, the CFPB has provided some guidance in disclosing the product on construction loans.
March 2016 CFPB Webinar
In March of 2016, the CFPB provided a webinar on construction loans. In this webinar, they addressed how a creditor discloses a product if a construction-to-permanent loan is disclosed with a single set of disclosures and has different fixed rates for the construction and permanent phases:
“When a single disclosure is used for both the construction and permanent phases and each phase has a different fixed rate, the creditor must disclose the product as a step rate. The product disclosure under Section 1026(a) -- 37(a)(10)(i) provides three possible categories that may be disclosed: adjustable rate, step rate or fixed rated. If a single disclosure is used for both the construction phase and the permanent phase as permitted under Section 1026.17(c)(6)(ii) and each phase has a different fixed rate, the two phases are considered a single transaction in which the contract terms of each of the phases are combined. The analysis to determine what the creditor must disclose for products for this combined single transaction is the same as it would be for any other single transaction.
In the question posed, we have a loan in which all three elements of step rate under Section 1026.37(a)(10)(i)(B) are met. First, the interest rates will change after consummation. We know the initial fixed rate that applies during the construction phase will change to the fixed rate that will apply during the permanent phase. Second, the rates that will apply at consummation are known. We know what the rate is for the construction phase, and we know what the rate is for the permanent phase. And, third, the periods for which the rates will apply are known at consummation.
We know what the construction period is and what the permanent period is. If, however, the creditor chooses to provide separate disclosures for the construction phase and the permanent phase, the product for each disclosure is fixed rate even if each phase has a different rate. For example, if separate disclosures are provided for the construction phase and the permanent phase and the construction phase has a fixed rate of 4.5 percent while the permanent phase has a fixed rate of 5 percent, the product disclosure would be fixed rate for both the separate construction phase disclosure and the separate permanent phase disclosure.”
In addition to this, the CFPB provided guidance in this webinar on how a creditor is to disclose the product if a construction-to-permanent loan with a single set of disclosures has an adjustable rate for one phase and a fixed rate for the other phase:
“When a single set of disclosures is used and one phase of a construction-to-permanent transaction has an adjustable rate and the other phase has a fixed rate, the creditor must disclose the loan product as adjustable rate. The loan meets the definition of adjustable rate under Section 1026.37(a)(10)(i)(A) because the interest rate may increase after consummation and the rates that will apply are not known as consummation. This is also consistent with the examples of loans in comments 37(a)(10)-1.i that have both a fixed and an adjustable rate and are disclosed as adjustable rate.”
Appendix D on the Product for Construction Loans
In addition to the CFPB webinar mentioned above, Appendix D to Regulation Z provides the following guidance on how to disclose the product for construction loans:
“If the construction financing is disclosed separately and has payments of interest only, the time period of the “interest Only” feature that is disclosed as part of the product disclosure under 1026.37(a)(10) and 1026.38(a)(5)(iii) is the period during which interest-only payments are actually made and excludes any final balloon payment of principal and interest. For example, the product disclosure for a fixed rate, interest-only construction loan with a term of 12 months in which there will be 11 monthly interest payments and a final balloon payment of principal and interest is ‘11 mo. Interest Only, Fixed Rate.’”
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