CFPB TRID Sec. 14.10 - What amount does the creditor disclose as the initial payment for the construction phase in the Loan Terms table of the Loan Estimate?

Compliance > Regulation Z - TILA / TRID Specific > General Info
Q:  What amount does the creditor disclose as the initial payment for the construction phase in the Loan Terms table of the Loan Estimate?
 
A:  When the loan is disclosed as one transaction, the initial monthly principal and interest payment disclosed in the Loan Terms table of the Loan Estimate will be the first payment made during the construction phase of the transaction.
 
Similarly, when the loan is disclosed as two separate transactions, the initial monthly principal and interest payment disclosed in the Loan Terms table of the Loan Estimate for the construction phase is also the initial payment made during the construction phase.
 
To disclose the initial payment for the construction phase, the creditor uses the interest rate that will apply to the transaction at consummation, and applies that interest rate to the principal that is owed at consummation. (§ 1026.37(b)(2); Comment 37(b)(3)-2)
 
However, with a construction loan, the creditor may not know the principal amount to which this interest rate is applied. This is because the actual draw schedule, which generally determines the amount on which the actual interest payment will be based, may not be known. The longstanding provisions of appendix D specifically address this situation, and provide special procedures that may be used to estimate interest and make disclosures for construction loans when the actual schedule of advances is not known.
 
Appendix D provides two options, based on the commitment amount on which interest is payable, for estimating the interest payable during the construction period.
 
Option one provides that if, under the terms of the legal obligation, interest is payable only on the amount actually advanced for the time it is outstanding, the creditor may assume one-half of the commitment amount is outstanding at the contract interest rate for the entire construction period. This option is available for loans disclosed as one transaction under Part II.A.1 and for loans disclosed as two separate transactions under Part I.A.1 of appendix D.
 
  • For example, assume the creditor originates a 12 month, interest only construction loan for $100,000 at 5 percent with interest payable only on the amount actually advanced for the time it’s outstanding. Under option one in appendix D, the creditor may assume $50,000 is outstanding (one-half of the $100,000 commitment) for the entire construction period, and after applying the interest rate by multiplying $50,000 by .05, would obtain a total estimated interest payment of $2,500. When divided by 12, this would yield an initial periodic payment of $208.33 for the 12 month, interest only construction loan phase.
 
Option two provides that if interest is payable on the entire commitment amount without regard to the dates or amounts of actual disbursement, the creditor may assume that the entire commitment amount is outstanding at the contract interest rate for the entire construction period. This option is available for loans disclosed as one transaction under Part II.A.2 and for loans disclosed as two separate transactions under Part I.B.1 of appendix D.
 
  • For example, assume the creditor originates a 12 month, interest only construction loan for $100,000 at 5 percent with interest payable on the entire commitment amount. Using option two in appendix D, the creditor would multiply $100,000 (the entire commitment amount) by the interest rate, producing a total annual estimated interest payment of $5000. When divided by 12, the initial periodic payment is $416.66 for the 12 month, interest only construction loan phase.
 
Minor variations in calculating the initial periodic payment can be disregarded when making the disclosure. For example, the effect of the fact that months have different numbers of days may be disregarded in making the disclosure. (§ 1026.17(c)(3)). Similarly, the creditor can disregard irregularity in the first payment period. (§ 1026.17(c)(4)). Finally, a creditor may use daily, or other, unit-periods for calculation purposes under appendix D, as long as the period used is not inconsistent with the terms of the legal obligation.
 
 
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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