Q: How does a creditor allocate costs between the disclosures for the construction and permanent phases when a construction-permanent loan is disclosed as two separate transactions?
A: If the creditor discloses a construction-permanent loan as two separate transactions, the creditor must allocate to the construction phase amounts for finance charges and points and fees that would not be imposed but for the construction financing. Finance charges and points and fees are those defined in Regulation Z, 12 CFR 1026.4 (finance charge) and 1026.32(b)(1)(points and fees).
For example, inspection and handling fees for the staged disbursement of construction loan proceeds must be included in the disclosures for the construction phase and may not be included in the disclosures for the permanent phase because they are not charged “but for” the construction financing.
If the creditor charges separate finance charges and points and fees for the construction phase and the permanent phase, such fees and charges must be allocated to the phase for which they are charged. All other finance charges and points and fees not imposed but for the construction financing are included in the permanent financing disclosures.
For example, if the finance charges and points and fees for construction-only financing are $750, but are $1,000 for the construction-permanent financing, $750 is allocated to the construction financing (the amount charged for construction-only financing) and $250 is allocated to the permanent financing.
Fees that are not finance charges or points and fees may be allocated between the construction phase and permanent phase in any manner the creditor chooses. For example, an appraisal fee, if excluded from the finance charge and points and fees, may be allocated to either phase, even if the appraisal is used for both phases.