[JGo9]

I’m looking for some guidance on construction-to-Perm (one-time closing) loans [Consumer RE].

1) If you have a construction phase of 9 months and the actually construction time frame needs to be extended say another 3 months or if the construction phase takes less time say 7 months. How would you need to address these situations with a construction-to-perm loan? Would you need to do some kind of modification?

2) How is escrow handled with a construction-to-perm loan? Do you wait till the permanent financing phase to begin collecting the escrow payments? Do you estimate your escrow items (Haz Ins & Taxes, etc) at closing for what they will be at the time of completion? When do you collect the initial escrow deposit?

3) If more funds are needed to complete the construction of the house would you just do a modification increasing the loan amount?

4) Any recommendations as to if disclosing both the construction and perm phases in one set of disclosures or in separate disclosures is best?

Topic

[MCCompliance]

We have done a few construction-perm loans and this is what we have done.

1) We have had one need to extend the construction phase and had been told by legal that we could accomplish this through a modification. (Please don’t take this as advice as to what to do, it’s just what we had been told we could).
2) We do not escrow at this time.
3) Have not had this one, but we would probably do a modification.
4) We will disclose as one set of disclosures. I don’t know which would be best, but it’s what we decided to do.

[rcooper]

1. This is largely a contract issue. You may choose to refinance or modify the existing contract. You could require the borrower to start making the full amortizing payments or you could refinance or modify the original transaction. A refinance is a new transaction that requires new disclosures. A modification generally does not create a need for new disclosures. (This is how we answered a similar question on QA document).

2. This is really a procedural type question for the bank to decide. The escrow may be collected beginning at the time of consummation or the bank may wait until the permanent phase of the loan occurs. A one-time close transaction can be disclosed with a single LE and a single CD or can be disclosed with separate LEs and CDs for the construction and permanent phases. If a single LE and CD are used, then the disclosures reflect the escrow. If separate disclosures are used for the construction and permanent phases, and do not collect the escrow deposit until the permanent phase, then the LE and CD for the permanent phase reflect the escrow deposit.

You would need to disclose the estimated property taxes based on your best estimate of the value after construction based on the best information reasonably available. Regulation Z, 1026.37(c)(5) states, for purposes of paragraphs (c)(2)(iii), and (4)(ii) estimated property taxes and homeowner’s insurance shall reflect:
• The taxable assessed value of the real property securing the transaction after consummation, including the value of any improvements on the property or to be constructed on the property, if known, whether or not such construction will be financed from the proceeds of the transaction, for property taxes; and
• The replacement costs of the property during the initial year after the transaction, for amounts identified in § 1026.4(b)(8).

3. You could do a modification; however, you will need to consider the ATR rules and whether they would apply.

4. We really don’t have a recommendation. You will want to analyze your system capabilities.

[Author]

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