Loan scenario:

John Boyfriend has a lot financed by Lot Loan Bank. The loan and deed of trust are under John Boyfriend's name only.

John Boyfriend and Jane Girlfriend go to Interim Construction Bank for an interim construction loan and get approved.

The interim construction loan will pay off the lot loan at Lot Loan Bank under John Boyfriends name and will also finance the new construction. John Boyfriend and Jane Girlfriend will be on the construction loan and the loan and deed of trust will now be under John Boyfriend and Jane Girlfriend.

Regarding "transfer of title to the first user", do we have that here?

Thank in advance for any responses!

I vote no.

What sayeth others?

Thanks for the response Swiggles.

I want to say no too, but I'm just not certain when it comes to Jane Girlfriend.

Regarding "transfer of title to the first user", do we have that here?

Well you have it for one of them.........

So if for one, then RESPA applies?

Well, I don't think you will find any guidance on this issue, but in this age of consumer protection, how would you proceed?

I wouldn't have to be asking the question, because we don't grant construction loans unless our mortgage department approves the perm. So ours will ALWAYS be subject to RESPA.

From 1024.5:

The exemption for temporary financing does not apply to a loan made to finance construction of 1- to 4-family residential property if the loan is used as, or may be converted to, permanent financing by the same lender or is used to finance transfer of title to the first user.

I understand Randy's concern under the current regulatory environment but in this case proceeds of the loan are not being used to transfer title to the first user (the existing owner is simply adding an additional owner) therefore I think one has a solid standing to exempt the loan from RESPA.

Dan, I guess I would have to agree now that you put it that way

Thanks for the responses swiggles, Randy and Dan!

As always Dan, thanks for providing an explanation to the exemption that makes sense.

I love you guys!!

I thought I had previously asked this question in here and it was answered, but I can't seem to locate the question. Perhaps it wasn't asked and I simply remembered this comment from Dan which reinforced my understanding of when the temporary financing exemption doesn't apply due financing transfer of title the first user.

Question...would the temporary financing exemption still apply in an interim construction loan scenario that involves financing the lot PAYOFF as in the example above?

Lot payoffs...not to be confused with lot purchases. My understanding has been that in a lot payoff scenario, the transfer of title has already occurred in a previous transaction...so even though part of the loan proceeds (first draw) in an interim construction loan will be used to payoff the lot loan, there isn't any transfer of title going on...correct? While in a lot purchase scenario, if the first draw is used to purchase the lot and therefore transfer title, then obviously the temporary financing exemption would be voided.

Sorry if this is a redundant question.

If you are paying off an exiting loan on the lot then it has already been purchased and the loan proceeds are not being used to transfer the title to the first user. That has already taken place.

if the first draw is used to purchase the lot and therefore transfer title, then obviously the temporary financing exemption would be voided.

Correct.

Thanks for the quick response as always Dan.

What brought up this question again here is that one of our lenders asked about doing a lot purchase loan as a standalone loan and then a few months down the road doing the interim construction loan that would include a payoff of the lot purchase loan the customer would already earlier taken out with us. They were asking if that was allowed.

While I was thinking about this, I thought well...technically transfer of title would have already occurred when you do the interim construction loan BUT it feels like or has the appearance in this scenario of trying to circumvent or avoid the "finance transfer of title" voiding of the temporary financing exemption of RESPA. Am I over thinking this?

As long as the transaction is not being purposely structured to circumvent the reg. then there would be no issue. It's not uncommon for someone to find that "perfect" lot to build on but it may be several months or years before they are ready to build their "dream" home on that "perfect" lot but they want to purchase the lot before someone else does.

It is really interesting that so much time is spent by lenders trying to figure out the implications of this single paragraph in Regulation X. It is admittedly a bone of contention, and one that has caused confusion for years.

Once August 1 has arrived, applications received won't have to go through this exhausting analysis. If it will be a closed-end consumer loan secured by real property (dirt, with or without a dwelling, construction or not, temporary or not) and it's not a reverse mortgage, it will be covered by the Integrated RESPA/TILA loan estimate and closing disclosure requirements in Regulation Z sections .19, .37 and .38.

Thanks for the responses Dan and John.

"As long as the transaction is not being purposely structured to circumvent the reg..."

That's my concern, in my particular scenario, I believe it is. Nothing frivolous, but a lender thinking out loud trying to get creative to help a customer purchase a lot and build a home where RESPA isnt' triggered due to the financing transfer of title issue (we currently aren't doing RESPA covered transactions)

The question was asked of me if our interim construction loans that include lot payoffs to other parties still meet the temporary financing exemption of RESPA because transfer of title is not occurring here, then why would that be any different if an interim construction loan includes a lot payoff to us if we were to do the lot purchase loan first and separately and then follow up with the interim construction loan that pays off the lot purchase loan 1-3 months down the road?

My response was "Uh...yeah let me think about that." I honestly hadn't thought about this scenario before and initially thought that technically we could do a lot loan first and then on a subsequent interim construction loan that pays this lot loan off, we'd still be able to apply the temporary financing exemption, but still doesn't feel right to me because it's circumventing any way you cut it although I'm not sure that RESPA covers structuring loans to avoid triggering RESPA they way BSA covers structuring of transactions to avoid CTR reporting. Does it? If so, can you point out where this is addressed?

John, you're exactly right, August 1 should clear this up!

Thanks again for your responses fellas!

When a transaction is "structured" to circumvent the regulation it is generally referred to as evasion, however as you pointed out I'm not aware of a evasion clause in RESPA as there are in Reg. Z.

We have on several occasions made a short term loan to purchase a lot knowing full well it would be anywhere from 2 months on before the borrower would begin construction but they needed to purchase the lot either to keep someone else from purchasing it or the seller would not wait the 60 days or so for the borrower to get a construction loan. Those cases, IMO, are not structured to evade the regulatory requirements. However if the loan officer is wanting to do this simply to avoid a RESPA loan because your FI does not make RESPA covered loans then I would have to opine the transaction is being structured for the purpose of evasion.

As always, thanks for the feedback Dan!