January 31, 2019 at 5:42 pm #14429
Our construction to permanent loans are one-time close transactions and a single set of disclosures (Loan Estimate and Closing Disclosure) covers both phases of the transaction. At modification a modification agreement is executed (not a new note).
We currently report the loan on the HMDA LAR at modification/permanent financing. Since we choose to report at modification, we are having issues calculating rate spreads for loans when the rates decrease at modification. This is due to the fact that an updated CD (with an updated APR) is not issued at modification since the entire transaction was disclosed upfront.
1 – Would we calculate the APR according to the initial disclosures for HMDA reporting? Or would we calculate the APR according to the rate at modification?
2 – If we report from the initial documents, should we report the loan amount, am type, and term from the initial documents as well?
3 – If the answer to #2 above is yes – would we only be reporting the action date from the new note completed at the permanent phase?February 5, 2019 at 4:29 pm #14455
It is not completely clear exactly how your transactions are being handled.
In a typical one-time close the note provided at closing covers both the construction and permanent phases of the loan. If your note covers both phases then modification is not needed, unless, for example, the consumer requests a change in terms. The one-time close loan is HMDA reportable. The APR in the Closing Disclosure is used to calculate the rate spread. The loan amount, am type and term are pulled from the same document.
Some lenders provide construction financing and then refinance the construction note into permanent financing. In such a transaction, the construction phase is not HMDA reportable (temporary financing). The refinance transaction is HMDA reportable. The APR in the Closing Disclosure provided for the permanent phase is used to calculate the rate spread. The loan amount, am type and term are pulled from the same document.
Some lenders provide construction financing and then modify the construction note into permanent financing, which is a complicated task to accomplish using a modification agreement. In such a transaction, the construction phase is generally not HMDA reportable (temporary financing). However the planned modification of the construction might mean that the transaction will “automatically convert to perm” and because it is not designed to be replaced by separate permanent financing. In such a case the transaction is not excluded as temporary financing. Such a loan would generally have a balloon payment at the end of the construction term. A modification, which occurs after completion of construction, is not HMDA reportable, since a modification is not a loan. If a new note was used instead of a modification agreement the transaction would be HMDA reportable as a refinance. See the previous paragraph.
Does your original note provide information about the rate and payments due after the construction phase is completed?February 14, 2019 at 12:11 pm #14537
I apologize for any confusion that number 3 in my question may have caused. I referred to a “new note” when there is never a new note in our construction to permanent process.
To answer your question, “Does your original note provide information about the rate and payments due after the construction phase is completed?” – The original note (the only note) stipulates interest rate and payment information for the permanent phase which commences roughly 12 months from origination. The borrower also executes a Construction Loan Agreement to bridge the construction period. Upon completion of construction, the borrower may execute a modification of the original Promissory Note, if there has been a change in the loan amount or interest rate.
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