We have a consumer loan that is for the Purchase of property and then they will be constructing their home out of the proceeds also. On Construction loans since we no longer include the Construction portion of funds in the Cash to Close amount, would this still apply if the purpose of the loan is for a Purchase and the additional funds are for the construction amount. I may be overthinking this whole loan so help would be appreciated.

The entire construction contract should be listed, even in a purchase plus loan, under the new rules.

Ok my next question is what section of the Closing should it be listed, and then should be list that portion as "Held for Construction"?

"Held for Construction" - there is no requirement to show that on the LE or CD under the new rules. It is all about closing costs - not what happens later. If the purchase price is $20,000 and the construction contract is $100,000 and closing costs are $10,000 - and you are loaning them $100,000 - the bottom line is they need to bring in $30,000 - whether that is to the pay part of the closing costs or held in a construction escrow account for them.

I think it's just typical to label the amount of the actual construction funds as 'held for construction'. It's useful/helpful/plain English to the borrower that way.

Having said that, I forget y'all were talking about using the standard disclosure which I have rarely [maybe once] used in conjunction with a construction loan and that likely does make a difference!

Standard or alternative - it will all be the same come 10/01/18.

On a construction loan (land already owned)...Randy, are you saying that amounts withheld for construction won't be entered into Section K.....or they won't be called a "holdback"...or that you'll show all of the construction proceeds as "cash to borrower"...or something else? Just want to wrap my head around this.

On the standard CD, construction costs will be disclosed under Paragraph 38(j)(1)(v).

On the alternative CD, construction costs will be disclosed under Paragraph 37(h)(2)(iii).

In reality, disclosing an unfunded loan amount has never really been supported. You are required to disclose total costs that the consumer is obligated to pay in conjunction with the loan.

Ok....so (on the alternative CD scenario), if $100,000 is allocated for construction, instead of entering $100,000 into Section K. as "construction holdback", you're saying it should be entered in Section K (as an example) as $100,000 to "ACME Construction Company" (if there's a construction contract from ACME Construction Company for $100,000)?

OK - Let's take two scenarios. Say you are planning on $100,000 in unfunded loan proceeds.

The construction contract is $120,000 and that would be entered as Construction Contract to XZY Builders - $120,000.

If the borrower had already given or is giving the builder $20,000 directly, then a positive entry for $20,000 would be made as Down payment to XZY Builder by customer P.O.C.

37(h)(2)(iii) Payoffs and payments- Comment 1: Amounts that will be paid with funds provided by the consumer, including partial payments, such as a portion of construction costs, or amounts that will be paid by third parties and will be disclosed on the Closing Disclosure under § 1026.38(t)(5)(vii)(B), are calculated as credits, using positive numbers, in the total amount disclosed under § 1026.37(h)(2)(iii).

If you are establishing a construction escrow account for the $20,000 at closing - then that will become part of the cash to close.

The unfunded loan amount is not referenced in the disclosure.

I think I finally get it and Randy will let me know if I am way out in left field

The heading for section 'K' under the Summaries of Transactions in a purchase & construction deal is called 'Due from Borrower at Closing' and I (and others) are used to adding a phrase such as 'undisbursed construction funds' or 'construction holdback', etc. But, 'undisbursed construction funds' are not 'Due from Borrower at Closing' (they don't owe the construction funds) but the contract between the builder & the borrower is. Instead of calling it 'undisbursed construction funds' in section K it could be called 'Construction Contract (funds) to XYZ, Inc', right???? I am so excited right now.....I think I finally get it. Randy, don't bust by bubble (but if you have to....okay)!!!

On the standard CD, the construction contract would be entered under Contractual Adjustments in Section K.

Paragraph 38(j)(1)(v).
2. Other consumer charges. The amounts disclosed under § 1026.38(j)(1)(v) which are for charges owed by the consumer at the real estate closing not otherwise disclosed under § 1026.38(f), (g), and (j) will not have a corresponding credit in the summary of the seller's transaction under § 1026.38(k)(1)(iv). For example, the amounts paid to any holders of existing liens on the property in a refinance transaction, construction costs in connection with the transaction that the consumer will be obligated to pay, payoff of other secured or unsecured debt, any outstanding real estate property taxes, and principal reductions are disclosed under § 1026.38(j)(1)(v) without a corresponding credit in the summary of the seller's transaction under § 1026.38(k)(1)(iv). See comment 38-4 for an explanation of how to disclose a principal reduction under § 1026.38(j)(1)(v).

Any payment directly to the contractor either before or after closing, would be entered into Section L.

Paragraph 38(j)(4)(i).
1. Charges not paid with closing funds. Section 1026.38(j)(4)(i) requires that any charges not paid from closing funds but that otherwise are disclosed under § 1026.38(j) be marked as “paid outside of closing” or “P.O.C.” The disclosure must identify the party making the payment, such as the consumer, seller, loan originator, real estate agent, or any other person. For an example of a disclosure of a charge not made from closing funds, see form H-25(D) of appendix H to this part. For an explanation of what constitutes closing funds, see § 1026.38(j)(4)(ii). See also comment 38-4 for an explanation of how to disclose a principal reduction that is not paid from closing funds.

Can we discuss the alternate form for just a minute and rather than regulatory citations, lets look at a real deal? When I studied the changes, I came to the conclusion that my process would not change and I'd kinda like to confirm [or destroy] that conclusion!

I have a total loan of $267,757.
A total construction contract of $310,044

I have broken down section K as follows:

$275,000 Held for construction/ABC Builders, LLC
$33,044 ABC Builders, LLC

Cash to close = $35,044 [which does not necessarily get paid at closing, just a result of what the full contract represents]

Calculating cash to close Total Payments and Payoffs [k] = $310,044, which is the entire contracted amount to build.

If this changes, I may well go to Washington and punch someone in the nose because doing it this way has always made the most sense...It's clear and represents a true picture of the deal. I was never one for showing the construction funds in 'due from borrower'. It never made any sense that way.

RR - You don't have enough information here. If the total construction contract is $310,044 and you are loaning $267,757 - where is the remainder of $42,287 coming from to satisfy the contract?

How can you hold more for construction than the loan amount?

Got it Randy - thank you! I finally get it.

Sorry, Randy, I probably should have left the loan amount off. That number included closing costs financed.

$275,000 is the principal amount
$33,044 is the remaining amount that makes up the total contract

Cash to close = $35,044 [which does not necessarily get paid at closing

I guess I am really confused. If they are not paying this at closing, then how is it cash to close??

Well, that's a good question, but if you put in a total contract and you are not lending the entire amount and you don't care when it's paid...how or where else WOULD you put it?

It would show POC either to the contractor or to the bank if you were requiring them later to establish a construction escrow account (but not sure why you would allow that to happen outside of closing). The bottom line is the cash to close table equals either the check the customer is handing you or you are handing the customer at the closing table. How you manage the remaining loan funds for construction is handled in the construction loan agreement not the LE/CD. The LE/CD is purely about fees and what the cash to close might be to get the loan.

How would you show money owed to a third party POC? It's not a loan fee. We don't escrow it...we really don't care!

What construction loan agreement? I might take an assignment of the contract, but I don't use an agreement on a consumer [they would never ever understand one of those ]. The money owed to the builder outside of our loan isn't our worry, but in order to show a full circle picture, if I HAVE a contract, I reflect the full deal.

My other choice is to ignore it and stick to our loan and only our loan without reflecting any additional funds involved.

That's actually how I'm reading your last sentence.

So you lend money for construction without a copy of the consumer's construction contract with the contractor, a copy of the budget, a construction loan agreement that addresses how draws, reserves, etc,, will be handled?

Randy......a good chunk of our construction loans, the borrower is their own contractor......how would that change things?

Good question

Since the funds are committed directly to the borrower - then maybe you would have an unfunded loan amount - might be a CFPB question. That can't happen in Texas - can't be your own contractor, so I need to think about that.

I don't think it would be much different. Even if the borrower was their own contractor, you have to know the projected construction costs going in, contract or not. I don't think it would be handled any differently based on 37(h)(2)(iii) - Comment 1: "construction costs associated with the transaction that the consumer will be obligated to pay in any transaction in which the creditor is otherwise permitted to use the alternative calculating cash to close table". The same would hold true for the standard versions.