The TILA-RESPA Integrated Disclosure Rule (TRID) consolidated four disclosure forms that were required under the Truth In Lending Act and the Real Estate Settlement Procedures Act into two forms: (i) a Loan Estimate that must be delivered or placed in the mail no later than the third business day after receiving the consumer’s loan application; and (ii) a Closing Disclosure that must be provided to the consumer at least three business days prior to consummation.
The rule, which generally took effect on October 3, 2015, applies to most closed-end consumer credit transactions secured by real property. While it has always been clear that TRID does not apply to HELOC’s, reverse mortgages, or mortgages secured by a mobile home or by a dwelling not attached to real property, the Consumer Financial Protection Bureau (CFPB) has provided clarification regarding the rule’s application to construction related loans.
Construction-only loans are typically short-term loans with multiple fund disbursements by which the consumer pays only accrued interest until construction is completed. Construction-permanent loans are those loans that convert to permanent financing once construction is completed and in which the loan amount is amortized in a manner akin to a standard mortgage transaction. The CFPB has now clarified that both types of these construction loans are covered by the TRID rule.
Specifically, construction-only loans and construction-permanent loans are subject to TRID if the following requirements are met:
- The loan is made by a creditor as defined in Regulation Z, 12 CFR § 1026.2(a)(17).
- The loan is secured in full or in part by real property or a cooperative unit. Notably, a construction loan can be secured by both real and personal property.
- The loan is a closed-end consumer credit transaction as defined in 12 C.F.R. § 1026.2(a)(12). Consumer credit refers to credit offered or extended to a consumer primarily for personal, family, or household purposes.
- The loan is not a reverse mortgage. See 12 C.F.R. § 1026.33.
Based on the above, it is clear that certain types of loans that were previously subject to TILA, but not RESPA, are now subject to TRID’s integrated disclosure requirements and that includes construction related loans. A Loan Estimate and Closing Disclosure must therefore be issued, but a question of timing exists in a construction-permanent loan.
In this regard, the CFPB has clarified that if the
creditor chooses to disclose the construction-to-permanent financing as one
transaction, a single set of disclosures (Loan Estimate and Closing Disclosure)
can cover both phases of the transaction. Alternatively, if the creditor
chooses to disclose the construction-to-permanent financing as two separate
transactions, the construction phase must have its own Loan Estimate and
Closing Disclosure, and the permanent phase must have a separate Loan Estimate
and Closing Disclosure.
 Common exempt transactions under 12 C.F.R. § 1026.3 are loans made for business, commercial, agricultural or organizational credit, loans made pursuant to an employer-sponsored retirement plan, student loans, and credit extended for transactions in securities or commodities accounts.
Scott M. Drucker, Esq., a licensed Arizona attorney, is General Counsel & Assistant CEO for the Arizona REALTORS® serving as the primary legal advisor to the association. This article is of a general nature and reflects only the opinions of the author at the time it was drafted. It is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.