Pub. 4 2016 Issue 1

Issue 1. 2016 11 The CFPB suggests that by factoring the construction holdback amount as one of the payments to third parties not otherwise disclosed in the Loan Estimate, there is an effect on the remainder of the cash to close table, which will result in an accurate disclosure. Here are some common questions we have received and our analysis based on what we learned using the waterfall approach: 1. What purpose is disclosed when a consumer finances the purchase of land and construction costs? If the loan will be used to both purchase the land and finance construction costs, the loan purpose must be disclosed as Purchase on the Loan Estimate. 2. What purpose is disclosed when a consumer owns the land and finances only the construction costs? If the loan will be used to finance the initial construction of a dwell- ing and not for the purchase of land or the refinance of an existing mortgage, the loan purpose must be disclosed as Construction on the Loan Estimate. 3. When separate sets of disclosures are provided for the construction phase and permanent phase, what purpose is disclosed for the permanent phase? The creditor must disclose Refinance for the purpose of the permanent phase. When each phase is disclosed and considered as a separate transaction and the proceeds of the permanent transaction satisfy the outstanding balance due at the conclusion of the construction phase, the credit meets the definition of a Refinance purpose. How to Disclose Construction Holdbacks Compliance Alliance has received multiple questions from members asking us how construction holdbacks are handled and how they should be disclosed on the Loan Estimate. There is no direct guidance on this issue in the rule or any commentary, but the CFPB provided an analysis during the webcast. A construction holdback is referred to in the webcast as a portion of the loan proceeds that is placed in or designated to a reserve or other account at consummation. Based on the CFPB’s analysis of the rule, a construction holdback amount can be separately itemized in Section H (“Other”) of the Loan Estimate and labeled “Construction Holdback” if that is what it is called under the terms of the legal obligation. If the amount to be dis- closed is not given a specific label in the legal obligation, it may be labeled using some other term that clearly and conspicuously reflects the purpose of the proceeds. Construction Holdbacks Can Also Be Disclosed in Cash to Close as an Alternative If the creditor does not disclose construction holdback amounts in Section H (Other) of the Loan Estimate, the entire construc- tion cost--including the holdback amount--can be factored into the Calculating Cash to Close table in accordance with 1026.37(h)(1)(ii). Let’s look at the commentary to 37(h)(1)(ii), which advises how to calculate “closing costs financed”: Comment 37(h)(1)(ii)-1 1. Calculating amount. The amount of closing costs financed disclosed under §1026.37(h)(1)(ii) is determined by subtracting the estimated total amount of payments to third parties not otherwise disclosed pursuant to §1026.37(f) and (g) from the total loan amount disclosed pursuant to §1026.37(b)(1). If the result of the calculation is a positive number, that amount is disclosed as a negative number under §1026.37(h)(1)(ii), but only to the extent that it does not exceed the total amount of closing costs disclosed under §1026.37(g)(6). If the result of the calculation is zero or negative, the amount of $0 is disclosed under §1026.37(h)(1)(ii).” (Emphasis added.) The CFPB suggests that by factoring the construction holdback amount as one of the payments to third parties not otherwise disclosed in the Loan Estimate, there is an effect on the remain- der of the cash to close table, which will result in an accurate disclosure. The calculation of the closing costs to be financed affects the calculation of the “Funds for Borrower.” The end result, according to the CFPB, is that the Calculating Cash to Close box will accurately reflect the amounts the parties are ac- tually responsible for at closing as a result of the loan agreement and the parties’ legal obligations. If you have any questions about construction loans and TRID disclosures, please don’t hesitate to contact us, and as mentioned above, if you wish to check out the webcast yourself, it is now available at ConsumerComplianceOutlook.org. We strongly recommend reviewing the presentation slides for questions of particular interest, and then fast-forwarding to that slide for further explanation. n Jennifer Kirby serves as a compliance specialist for Compliance Alliance. Jennifer has over 15 years’ experience in the financial services industry. She began her career with a national bank in San Antonio, Texas while receiving her Bachelor of Business Administration degree in Finance. She continued her interest in finance through law school and focused her course work on creditor and transactional issues. While in law school Jennifer worked at a commercial litigation law firm with a specific focus on creditors’ rights and collection litigation matters. Since 2011, Jennifer has been part of a leading team of attorneys and compliance experts who assist all levels of bank personnel with a wide range of compliance issues. To learn how to put Compliance Alliance to work for your bank, call (888) 353-3933, visit compliancealliance.com , or email info@compliancealliance.com .