Construction Loans FAQ from CFPB
Big News: One of the great things about SCA is the range of issues we get to see, and the wealth of knowledge we get to tap into while working with dozens of clients on a monthly basis. Today, we'll share some important news about Construction Loans.
By: Gregg Oberg
Last week, the CFPB updated their TILA-RESPA Integrated Disclosures FAQ (FAQ) to address common misconceptions and errors in the construction lending space. This week, we found time to read and digest the FAQ, and are now bringing this thrilling content to you in our weekly newsletter.
This iteration of the FAQ addresses two questions about TRID for construction loans:
Are Construction-Only (CO) or Construction-Permanent (CP) Loans TRID Subject?
Are There Special Disclosure provisions for CO or CP Loans Under TRID?
As an initial matter, we need to pay attention to these “informal” releases by regulators to test our assumptions regarding propriety of procedure. Perhaps more importantly, we also need to evaluate these statements for their predictive ability in examinations; if the CFPB thinks this is a “frequent question,” they probably mean “things EVERYONE is missing routinely.” You can reasonably expect to see topics highlighted in upcoming exams when they are addressed in informal documents by the regulator (and even if CFPB doesn’t raise it, doesn’t it feel better to know you’ve prepared as much as possible before an exam?). With that, we’ll move onto summarizing the info released in the updated FAQ.
1. TRID Coverage for Construction Loans
If only the answer was “No,” we’d be done with this topic. But alas—CFPB makes clear that “most closed-end consumer mortgage loans to finance home construction that are secured by real property are covered by the TRID rule.”
This includes both construction-permeant and construction-only loans (more on this in question 2). Specifically, the FAQ defines the following five-point coverage requirements applicable to construction loans—evaluate each question in order by asking whether the loan:
Is made by a creditor as defined in 1026.2(a)(17) (pretty much all of us, you’d likely know by now if you weren’t a statutory creditor);
Is secured in part or full by real property or cooperative unit;
Is a closed-end, consumer credit transaction;
Is not exempt for any reason listed in 1026.3; and
Is not exempt as a reverse mortgage.
* Be careful not to conflate HMDA, ECOA, and TRID definitions unless you’re certain you understand the minor variance in scope; it doesn’t always line up nicely.
2. Special Disclosure Rules for Construction Loans
In case my header didn’t give it away—there certainly are provisions within TRID that apply exclusively in the construction lending space. Three(ish) requirements you should be aware of:
a. Separate or Combined Disclosures?
b. Estimating Disclosures for Construction Loans
c. Optional Disclosure for *NEW* Construction Loans
2.a One Transaction or Two?
Completely up to you! Under 12 C.F.R. 1026.17(c)(6), creditor(s) are given freedom in a CP loan to treat the transaction as either one combined transaction, or to treat each phase as one distinct transaction. What this means in practice is that any CP loan can be disclosed as one or multiple LE/CD disclosure processes.
2.b Estimates for Construction Loans
The preexisting Appendix D to TILA was (lightly) modified during the rollout of TRID; but remains largely unchanged. That said, I treat the current rules as a separate entity and try not to focus too much on what changed, as it often can be counterproductive to understanding the true legislative intent underpinning the rules. Some of us predate TRID, and some of us entered the industry under its shadow. If you’re a member of the former, take caution not to let legacy knowledge improperly influence assumptions under currently-evolving rules. The rest of us, we don’t know how it “used to work” so we don’t have such a concern.
Rather than dissect Appendix D (an article for another day if somebody requests it…), let’s focus on maxims universally applicable within TILA and highlighted in the FAQ. To me, this entire question/answer boils down to a reminder of three interrelated facts.
First, disclosed estimates are evaluated on a “good faith” basis, where use of “the best information available at the time” will meet your burden. A Court in Ohio recently reaffirmed this concept to us in the first ATR/QM ruling handed down in the five plus year history of the regulation.
Second, and closely related, the utility and quasi-safe harbor status of procedural appendices is highlighted through a brief discussion of Appendix D to Part 1026. Just as CFPB did under the ATR standards, the Appendix D lays out “special procedures and assumptions creditors may use to provide consistent and compliant disclosures.” These assumptions relate heavily to the more judgement-based/subjective disclosures, including situations in CP loans where timing or amount of advances is unknown at the time of disclosure.
Third, I was struck by the usage of “consistent and compliant.” Within the HMDA context—which is a decent representation of the rollout strategy used for large regulatory changes like TRID 2.0—CFPB often stressed the need for consistent application of judgment and assumptions within the process. To me, this is akin to license to “make a call and stick with it” when there is no clear “right” answer to complying with ambiguous regulation. I’m laboring under the theory that this language generally means “we don’t know the answer yet either, but if you lock yourself into one reasonable interpretation, you’ll get at least partial credit for the effort.”
2.c Optional Disclosure Applicable to New Construction Loans (only)
First, what is a “new construction?” A new construction is defined as a loan for the purchase of a home that is not yet constructed OR the purchase of a new home where construction is currently underway. One clean objective measure for determining if we have a “new” construction is to look at occupancy permits. If an occupancy permit is issued prior to issuance of Loan Estimate, this is NOT a new construction.
This element gives lenders the freedom to issue an LE at any time prior to 60 days before consummation IF you state such on the LE in a clear and conspicuous manner. If the creditor reasonably expects the settlement will occur more than 60 days after the original LE was provided, the creditor may provide revised disclosures at any time prior to 60 days before consummation.
In conclusion, construction loans are still hard! CFPB knows that; and they’re trying to educate us (in line with Dir. Kraninger’s remarks on the educational nature of CFPB). But it’s not all academic. I’m willing to bet you’ll see significantly stricter examination on construction loans—particularly in the context of Appendix B. When the professor says something’s important, it’s fair to assume it’s going to be on the exam.
LINK TO FULL CFPB FAQ PDF:
Spillane Consulting Associates has served the residential mortgage lending business since 1991. We have specialized in mortgage banking consulting services and provided quality control reviews, risk management and process consulting and employee training to credit unions, community banks and non-depository institutions. We are a thought leader on the strategic growth of residential mortgage lending. You can learn more by visiting our website, or scheduling a meeting with me or one of my colleagues.
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