Construction Lending: Compliance and Risk Management Monday, September 25 Moderator: Lynn M. Fisher, Ph.D., Vice President, Research and Economics Speakers: Kevin D. Smith Finance and Loan Analyst Single Family Housing Guaranteed Loan Division Rural Development United States Department of Agriculture Marsha L. Williams Attorney Mortgage Resources Group, LLC/MRG Document Technologies Single Family Housing Guaranteed Loan Program (SFHGLP) Single Close Construction to Permanent MBA s Risk Management QA & Fraud Prevention Forum September 25, 2017 Miami, FL 1
SFH Guaranteed Loan Program Rates, Terms & Conditions 100% LTV based on appraised value 30 year fixed rate 1% Guarantee Fee,.35% Annual Fee Moderate Income Families Property in Rural area https://eligibility.sc.egov.usda.gov/eligibility/welcomeaction.do New & existing dwellings for purchase, construction or refinance of existing RD loans SFH Guaranteed Loan Program Single Close Construction to Permanent Loan (CTP) Chapter 12 of HB 1 3555 https://www.rd.usda.gov/files/3555 1chapter12.pdf 2
SFH Guaranteed Loan Program Single Close CTP Program 100% Financing for New Construction Purchase of land and construct single family homes Stick built, Modular, Manufactured, Site condominiums Loan Note Guarantee issued at initial closing SFH Guaranteed Loan Program Single Close CTP Program Lender Requirement: Approved SFHGLP Lender with two years of construction experience (Construction Management Company) Documents builder s acceptance Responsible for construction drawl approval and disbursement 3
SFH Guaranteed Loan Program Single Close CTP Program Contractor/Builder Requirements: Licensed builder with two years of construction experience $500,000 general liability coverage No felony convictions No open judgements, collections, liens related to previous construction projects No contractor self builds SFH Guaranteed Loan Program Single Close CTP Program Construction Contract Construction Hard and Soft Costs Real Estate Agent Fees Interest Reserves Contingency Reserves (10%) for overruns or change orders 4
SFH Guaranteed Loan Program Single Close (CTP) Program Loan Process Standard eligibility criteria for applicant applies Loan Note Guarantee issued at closing 30 year fixed rate loan Interest only payments during construction SFH Guaranteed Loan Program Single Close (CTP) Program Loan Process, cont. Construction is completed Leftover reserves applied to principal balance Lender modifies the loan new principal and interest payments 5
SFH Guaranteed Loan Program Single Close (CTP) Program Enhanced CTP PILOT Enhanced CTP PILOT States Washington Oregon South Dakota Michig an New York California Colorado New Mexico Indian Ohio Missouri a Kentucky Tennessee Arkansas Mississippi South Carolina Louisiana Alabama Georgia Texas Florida Puerto 6
SFH Guaranteed Loan Program Single Close (CTP) Program Enhanced CTP PILOT Temporary higher interest rate allowed during construction Covers cost of warehouse lines Float down of interest rate after construction allowed 12 months of PITI can be financed, no reamortization option SFH Guaranteed Loan Program Single Close CTP Program BENEFITS OF THE CTP PROGRAM Reduced Risk to Lenders Loan Note Guarantee issued at closing, pre construction Reduced Risk to Builders Loan fully funded, reduces capital needed 7
SFH Guaranteed Loan Program Single Close CTP Program BENEFITS OF THE CTP PROGRAM Borrower benefits: Construction project is fully funded no worries about funding the construction Interest reserve account can fund monthly construction loan payments, won t have to pay both rent and loan during construction Reduced maintenance versus existing homes GovDelivery Sign up https://public.govdelivery.com/accounts/usdard/subscriber/new?qsp=usdard_25 Copyright 2015 Accenture All Rights Reserved. 16 8
Questions? Kevin Smith Finance and Loan Analyst kevin.smith@wdc.usda.gov USDA is an equal opportunity provider, employer, and lender. To file a program discrimination complaint, complete the USDA Program Discrimination Complaint Form, AD 3027, found online at http://www.ascr.usda.gov/complaint_filing_cust.html and at any USDA office or write a letter addressed to USDA and provide in the letter all of the information requested in the form. To request a copy of the complaint form, call (866) 632 9992. Submit your completed form or letter to USDA by mail at: U.S. Department of Agriculture, Office of the Assistant Secretary for Civil Rights, 1400 Independence Avenue, S.W., Washington, D.C. 20250 9410; by fax (202) 690 7442; or email at program.intake@usda.gov. Copyright 2015 Accenture All Rights Reserved. 9
CONSTRUCTION LENDING: COMPLIANCE AND RISK MANAGEMENT Marsha L. Williams Mortgage Resources Group, LLC 10
CONSTRUCTION LENDING 21 CONSTRUCTION LENDING Two Transactions: Two Closings o Possibly One Lender or Two Lenders o Two Closings o Advantages Less risk of builder/contractor and borrower issues Distinctive periods o Disadvantages 2 Closings greater cost for borrower 2 Lenders Involved 22 11
CONSTRUCTION LENDING One Time Close Construction-Permanent Loan o One Closing o Advantage Fewer costs for borrower One lender responsible o Disadvantage Greater risk of builder/contractor and borrower issues More complicated 23 CONSTRUCTION LENDING Types of One Time Close Construction-Permanent Loans o Conventional GSE s purchase after completion. o FHA Maximum mortgage amounts = LTV percentage of the lesser of appraised value or documented acquisition cost. o VA Borrower pays only guarantee fee and lender fee at closing. Builder/contractor pays interest and other fees during construction. o USDA Types of Construction o Stick-Built o Manufactured Housing Mobile Home Segments of House 24 12
ONE-TIME CLOSE CONSTRUCTION-PERMANENT LOAN 25 ONE-TIME CLOSE CONSTRUCTION-PERMANENT LOAN Regulation Z Section 1026.17(c)(6) o A series of advances under an agreement to extend credit up to a certain amount may be considered as one transaction o When a multiple-advance loan to finance the construction of a dwelling may be permanently financed by the same creditor, the construction phase and the permanent phase may be treated as either one transaction or more than one transaction. Appendix D o Method of calculating the APR and other disclosures for construction loans, which may be used, at creditor s option, in disclosing construction financing. 26 13
TRID RULE EFFECTIVE OCTOBER 1, 2017 WITH MANDATORY COMPLIANCE OCTOBER 1, 2018 CONSTRUCTION LOAN PROVISIONS 27 FINAL TRUTH IN LENDING ACT ( TILA ) REAL ESTATE SETTLEMENT PROCEDURES ACT ( RESPA ) RULE (82 Federal Register 37656, August 11, 2017) Effective Date: October 10, 2017 Mandatory Date: October 10, 2018 Applications received on or after October 10, 2018 Compliance may begin October 10, 2017 October 1, 2018 for Escrow Closing Notice and Partial Payments Disclosures regardless when application received 14
OPTIONAL COMPLIANCE PERIOD Early compliance allowed. Application received prior to October 1, 2018, optional compliance continues to apply to transactions after October 1, 2018. Example of optional compliance period: o If prepaid interest has a negative value, prepaid interest must be included as a negative value to calculate Total Interest Percentage ( TIP ). o Creditor may: Include negative prepaid interest into TIP calculation as negative value; or Not include negative prepaid interest in the TIP calculation because current regulation and commentary did not restrict how creditor factors negative prepaid interest in TIP calculation. 29 OPTIONAL COMPLIANCE PERIOD Rule can be implemented all at once or phased in over optional compliance period. Cannot phase in if violative of Regulation o Example: Good Faith Estimate for cooperative unit but Closing Disclosure at closing. 12 CFR 1026.38(i) 30 15
CONSTRUCTION LOANS 31 ALLOCATION OF COSTS WHEN SEPARATE DISCLOSURES ARE USED FOR THE CONSTRUCTION PHASE AND PERMANENT PHASE If the creditor discloses a construction-permanent loan as two separate phases, the creditor must allocate to the construction phase amounts for finance charges and points and fees that would not be imposed but for the construction financing. Example: Inspection and handling fees for staged disbursement of construction loan proceeds must be included in the disclosures of the construction phase and not in the disclosures for the permanent phase. Fees that are not finance charges or points and fees may be allocated in any manner the creditor chooses. 32 16
TIMING OF THE LOAN ESTIMATE WHEN A CONSTRUCTION- PERMANENT LOAN ARE TWO SEPARATE TRANSACTIONS A creditor must provide a LE for a particular phase within 3 business days of receiving an application for that phase. o LE for construction phase provided within 3 business days of receiving the application for the construction phase. o LE for permanent phase within 3 business days of receiving application for permanent phase. 33 TIMING OF THE LOAN ESTIMATE WHEN A CONSTRUCTION- PERMANENT LOAN ARE TWO SEPARATE TRANSACTIONS If creditor receives a single application for both phases and choses to conduct separate closings and provide separate disclosures for the construction phase and permanent phase, the creditor provides the Loan Estimate for the permanent phase within 3 business days of receipt of the application, and may proceed with a separate closing and CD for the permanent phase upon completion or near completion of the construction phase if a revised LE is not needed. 34 17
DISCLOSURE OF SALES PRICE For construction loans where no land is being purchased, the disclosure of the property value: On the LE, may, at the creditor s option, include the estimated value of the improvements on the property. On the CD, must be the value of the property used to determine the approval of the credit transaction, including improvements to be made on the property, if those improvements were used to determine the approval of the credit transaction. 35 DISCLOSURE OF LOAN TERM The loan term for a construction-permanent loan: If disclosed as a single transaction, Loan Term is total combined term of both phases. If disclosed as separate transactions, Loan Term of permanent phase is counted from the date the interest for the permanent phase periodic payment begins to accrue. 36 18
DISCLOSURE OF PRODUCT The duration of the Interest Only feature for the construction loan or construction phase of a construction-permanent loan: If there is a final balloon payment that includes principal, it is not counted for purposes of determining the duration of the Interest Only payment period. o For a combined construction-permanent disclosure, the Interest Only payment period is disclosed as the full term of the construction phase, plus any additional interest only period in the permanent phase. There is no balloon payment at the end of construction. 37 DISCLOSURE OF PRODUCT If the interest rate for the permanent phase is not known at consummation or will increase from the interest rate for the construction loan: For construction-permanent loans with a single consummation (whether combined or separate disclosures) and the permanent interest rate is not known at consummation, the Product is an adjustable rate product, since the interest rate may increase after consummation. If permanent phase interest rate is known and is different from the interest rate of the construction phase, the product of the permanent phase is a Step-Rate product since the interest rate will change after consummation and the change is known. 38 19
DISCLOSURE OF PRODUCT Any disclosures that would accompany the applicable Product disclosure also apply such as disclosure of the duration of the introductory rate period, the Adjustable Payment Table, or the Adjustable Interest Rate table. 39 DISCLOSURE OF THE INTEREST RATE If the permanent phase is disclosed at the same time as the construction transaction and the interest rate is unknown at consummation: If permanent loan has an adjustable rate and separate disclosures are provided, rate disclosed for permanent phase is fully-indexed rate. If permanent loan has a fixed rate that is not known at consummation, it is treated as an adjustable rate, and if separate disclosures are provided, the rate disclosed for the permanent phase is fully indexed rate. If permanent loan has a fixed rate that is known and will not be adjusted upon conversion from the construction phase and separate disclosures are provided, that rate is disclosed. 40 20
DISCLOSURE OF THE INTEREST RATE If creditor may modify the interest rate for the permanent loan when the construction phase converts to the permanent phase, the creditor must provide ARM disclosures required under 12 CFR 1026.20(c), regardless of whether permanent phase is fixed or adjustable rate. 41 DISCLOSURE OF INCREASES TO PERIODIC PAYMENT For the construction loan or separate construction phase of construction-permanent loan, even though Appendix D produces interest-only period payments equal in amount, YES is disclosed in the Can this amount increase after closing? disclosure. 42 21
DISCLOSURE OF INCREASES TO PERIODIC PAYMENT The increase in periodic payment disclosures in the Loan Terms table and First Change/Amount in the Adjustable Payments table for separate disclosures or combined construction-permanent disclosures where interest is payable on amount advanced and Appendix D is used to calculate the periodic payment: The increase in periodic payment disclosures is disclosed using months or years. Maximum possible payment in Loan Terms table and Adjustable Payments table is calculated based on maximum possible principal balance that could be outstanding during construction. 43 DISCLOSURE OF INCREASES TO PERIODIC PAYMENT Creditor can omit and leave blank the amount in the First Change/Amount disclosures of the Adjustable Payment table, but not the timing of the first changes. For loans that are adjustable rate where interest is payable only on the amount advanced and Appendix D is used to calculate the periodic payment. o Increase in periodic payment disclosures are based on changes in interest rate and total amount advanced. o The Adjustable Interest Rate Table is disclosed. 44 22
PROJECTED PAYMENTS Projected Payments table for construction phase of constructionpermanent loan using Appendix D to calculate periodic payments. Construction and permanent phases disclosed as separate transactions. o Construction phase disclosed according to the requirements for the Projected Payments table, including disclosure of the number and amounts of any interest payments. o Construction phase does not account for repayment of entire principal; balloon payment must be disclosed. 45 PROJECTED PAYMENTS Construction and permanent phases disclosed as single transaction: o Projected Payments table must reflect interest-only payments during construction phase in first column. o If construction phase is not full year, first column must also reflect amortizing payments, and mortgage insurance and escrow payments, if any, for the permanent phase. o If construction phase is a full year and does not include mortgage insurance or escrow, first column should reflect projected payments for construction phase, 0 for mortgage insurance and a hyphen or dash for escrow, as applicable. o If construction phase is not a full year and does not include mortgage insurance or escrow, first column also reflects amortizing payments and mortgage insurance and escrow payments, if any, for the permanent phase. 46 23
CONSTRUCTION COSTS AND CONSTRUCTION HOLDBACKS Costs of construction or amounts in reserve for the construction loan (holdbacks) are disclosed: On LE, these amounts factored into the funds for the Borrower calculation as existing debt being satisfied. o On alternative LE, factored into Payoffs and Payments calculation as existing debt being satisfied. On CD, these amounts disclosed in Summary of Borrower s transactions table and factored into funds for Borrower calculation. o On alternative CD, in Payoffs and Payments table. 47 CONSTRUCTION COSTS AND CONSTRUCTION HOLDBACKS Portion of construction loan s proceeds placed in a reserve or other account at consummation may be disclosed separately or as part of other construction costs. o Labeled with accurate term. o If disclosed separately, may be separately itemized, but other construction costs must not include the holdback to avoid double counting in Calculating Cash to Close calculations. 48 24
DISCLOSURE OF INSPECTION AND HANDLING FEES Construction inspection and handling fees are subject to good faith tolerance standards and are disclosed: In Loan Costs table if collected before or at consummation. In an addendum if collected after consummation. 49 CONSIDERATIONS FOR COMPLIANCE AND RISK MANAGEMENT CHECKLIST 50 25
CHECKLIST Conditions Precedent for Permanent Loan. Permanent Loan Date = Date one month prior to date first P&I payment due. Work must be complete. All amounts due under the Note have been paid when due. Lender s receipt of: o As-Built Survey. o As-Built Appraisal or Recertification of Value. o Homeowner s insurance policy. o Evidence of flood insurance, if required. 51 CHECKLIST (cont d) Lender s receipt of (cont d) o Final lien releases or waivers. o Unconditional certificate of architect that Improvements have been completed in accordance with Plans and Specs. o Title Policy endorsement. o Affidavit of Borrower s intent to occupy Improvements as Borrower s principal residence. o If applicable, Certificate of Title to manufactured home reflecting Lender s lien. o Copy of recorded transfer of real estate. o Limited Power of Attorney. o Affidavit of Intent. 52 26
CHECKLIST (cont d) Title Endorsements: Future Advance Endorsement. Environmental Protection Lien Endorsement. Mobile Home Endorsement, if applicable. 53 Mobile/Manufactured Home Closing Instructions. Mobile/manufactured home affixed to land as permanent improvement and connected to utilities and sewer/septic system. Land is owned in fee simple. Is Certificate of Title or manufacturer s Certificate of Origin outstanding? Limited Power of Attorney. Closing protection letter. Mobile/Manufactured home description: o VIN/Serial Number o Make o Model o Size o Year 54 27
Construction Mortgage within meaning of state s commercial code. Conditions Precedent to Initial Advance: o Copy of deed certified to show recordation, if applicable. o Copy of mortgage certified to show recordation prior to execution of no work affidavit. o Copy of no work affidavit. o Title policy including mechanics and materialmen liens coverage and other coverage as required. o Plans and specs. o Copies of permits and government approvals. o Lot survey. o Foundation survey. o Endorsement to title policy approving foundation survey. 55 Certificate of licensed pest control company satisfactory to lender that foundation has been properly treated for termites. Builder s risk completed values insurance policy in full amount of contract price, containing loss payable clause in favor of lender. If applicable, flood insurance in the amount of 100% of replacement cost of property or maximum amount available. Certificate of insurance evidencing the Contractor s coverage under a comprehensive general liability insurance policy and under a policy of worker s compensation insurance. Borrower s affidavit of intent to occupy the improvements as Borrower s principal residence. If requested by Lender, an assignment of the Construction Contract by the Borrower in favor of the Lender with the consent of the Contractor. If the LTV>80%, evidence of mortgage insurance. 56 28
Conditions Precedent to Advances: Lien Waivers. Endorsement to title policy amending date of title policy to date of new advance. 57 Conditions Precedent to Final Advance: If property is served by well or septic system, inspection reports or certificate of appropriate governmental authority evidencing satisfactory condition of well or septic system. Borrower s certification that Borrower accepts the work, all surveys, all Title Policy exceptions and condition of property. 58 29
Conditions Precedent to Advance of the Retainage: Inspection report that Work is fully completed in good and workmanlike manner in accordance with Plans and Specs. Final lien waiver signed by Borrower and Contractor. 59 THANK YOU Marsha L. Williams Mortgage Resources Group, LLC 717 N. Harwood Street Suite 1600 Dallas, Texas 75201 214-220-6501 mwilliams@midrid.com 30
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