CFPB TRID Sec. 14.7 - How is the Loan Product disclosed for construction loans when the interest rates for both phases are known?

Compliance > Regulation Z - TILA / TRID Specific > General Info
Q:  How is the Loan Product disclosed for construction loans when the interest rates for both phases are known?
 
A:  When the loan is disclosed as one transaction, the construction and permanent 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 as the Loan Product for this combined, single transaction is the same as it would be for any other single transaction. For example:
  • 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 Loan Product as “step rate.” This is because the interest rate will change after consummation, and the rates and the periods for which the rates will apply are known at consummation. (§ 1026.37(a)(10)(i)(B))
  • When a single disclosure is used for both the construction and permanent phases and one phase of a construction- 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 is disclosed as “adjustable rate” because the interest rate may increase after consummation, and one or more of the rates that will apply are not known at consummation. (§ 1026.37(a)(10)(i)(A); Comment 37(a)(10)-1.i)
 
When the loan is disclosed as two separate transactions, the creditor discloses the Loan Product that describes each phase. For example, when separate disclosures are used for the construction and permanent phases and each phase has a different fixed rate, the creditor would disclose the product for each phase as “fixed rate,” even if each phase has a different rate. Regardless of whether the construction-permanent loan is disclosed as one or two transactions, each disclosure must follow the requirement that if a transaction has more than one loan payment feature, the creditor only discloses the first feature in the order that the features are listed in the TILA-RESPA Rule. (§ 1026.37(a)(10)(iii)). For example, when separate disclosures are used for the construction and permanent phases, both an interest only feature and a balloon payment feature may be present in the construction phase. Because the interest only feature is listed before the balloon payment feature in the TILA-RESPA Rule, the creditor must disclose the interest only feature but not the balloon payment feature. (§ 1026.37(a)(10)(ii))
 
 
 
This information can be found in the CFPB's TILA-RESPA Integrated Disclosure rule compliance guide - http://www.consumerfinance.gov/regulatory-implementation/tila-respa/
 

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