Approximately two months ago, our commercial loan department made a construction loan to an individual borrower for the purpose of combining two condominium units (one of which the borrower currently resides in) and paying off the mortgage on the borrower’s unit. The construction loan has a nine-month term, payments are interest-only, and the loan will be paid off with a new residential mortgage loan. We treated the loan as a commercial loan and did not provide TILA/RESPA Integrated Disclosures (TRID) to the borrower. The borrower was charged the typical commercial loan fees, including a documentation fee and an origination fee. Can this problem be fixed, and do we owe the borrower restitution? Also, are we correct that this construction loan is not HMDA-reportable because it is temporary?

Aug 10, 2020

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We do not believe you can cure your bank’s failure to deliver the TRID disclosures; however, you may wish to reimburse your customer for the undisclosed closing fees charged in connection with the loan (here, because the borrower received no disclosures, this approach would require a refund of all closing fees, including the documentation and origination fees). Additionally, we agree this loan is not HMDA-reportable.

TRID Disclosures

TRID disclosures are required for closed-end consumer-purpose construction loans secured by real property or a cooperative unit. Consequently, your bank could potentially be subject to significant liability due to its failure to provide the required disclosures. For example, your bank could be liable for up to twice the amount of the total finance charge for the loan, or a penalty of $400–$4,000 for closed-end mortgage loans, plus costs and reasonable attorney’s fees, for violations of the Truth in Lending Act’s disclosure requirements.

Additionally, the borrower’s right to rescind the transaction would run for three years, rather than three days, if you failed to provide notice of the borrower’s right to rescind the loan.

Although it is unlikely that your bank would be found to have willfully and knowingly failed to provide these disclosures, in such a case your bank could even be subject to criminal liability.

Home Mortgage Disclosure Act (HMDA) Requirements

Closed-end mortgage loans obtained for temporary financing are not HMDA reportable. Under Regulation C, financial institutions are not required to report data on temporary financing (such as construction loans) that are designed to be replaced by permanent financing at a later date. As such, we do not believe your construction loan, which is intended to be replaced with a new mortgage loan, is HMDA reportable.

For resources related to our guidance, please see:

TILA-RESPA Integrated Disclosures for Construction Loans (December 2019) (“Both construction-only loans (i.e., usually shorter term loans with several fund disbursements where the consumer pays only accrued interest until construction is completed) and also construction-permanent loans (i.e., construction loans that convert to permanent financing once construction is completed in which the loan amount is amortized just as in a standard mortgage transaction) can be covered by the TILA-RESPA Rule (TRID Rule) if the general TRID coverage requirements are met.”)

Regulation Z, 12 CFR 1026.19(e)(1)(i) (“In a closed-end consumer credit transaction secured by real property or a cooperative unit, other than a reverse mortgage subject to § 1026.33, the creditor shall provide the consumer with good faith estimates of the disclosures in § 1026.37.”)

Regulation Z, 12 CFR 1026.19(f)(1)(i) (“In a transaction subject to paragraph (e)(1)(i) of this section, the creditor shall provide the consumer with the disclosures required under § 1026.38 reflecting the actual terms of the transaction.’”)

Truth in Lending Act, 15 USC 1640(a) (“Individual or class action for damages; amount of award; factors determining amount of award. Except as otherwise provided in this section, any creditor who fails to comply with any requirement imposed under this part, including any requirement under section 1635 of this title [right of rescission], subsection (f) or (g) of section 1641 of this title, or part D or E of this subchapter with respect to any person is liable to such person in an amount equal to the sum of

(1) any actual damage sustained by such person as a result of the failure;

(2) (A) (i) in the case of an individual action twice the amount of any finance charge in connection with the transaction, . . . or (iv) in the case of an individual action relating to a credit transaction not under an open end credit plan that is secured by real property or a dwelling, not less than $400 or greater than $4,000; . . .

(3) in the case of any successful action to enforce the foregoing liability or in any action in which a person is determined to have a right of rescission under section 1635 or 1638(e)(7) of this title, the costs of the action, together with a reasonable attorney’s fee as determined by the court; and

(4) in the case of a failure to comply with any requirement under section 1639 of this title, paragraph (1) or (2) of section 1639b(c) of this title, or section 1639c(a) of this title, an amount equal to the sum of all finance charges and fees paid by the consumer, unless the creditor demonstrates that the failure to comply is not material.”)

Regulation Z, 12 CFR 1026.23(a)(3)(i) (“If the required notice or material disclosures are not delivered, the right to rescind shall expire 3 years after consummation, upon transfer of all of the consumer's interest in the property, or upon sale of the property, whichever occurs first.”)

Truth in Lending Act, 15 USC 1611 (“Whoever willfully and knowingly (1) gives false or inaccurate information or fails to provide information which he is required to disclose under the provisions of this subchapter or any regulation issued thereunder, . . . or (3) otherwise fails to comply with any requirement imposed under this subchapter, shall be fined not more than $5,000 or imprisoned not more than one year, or both.”)

Regulation C, 12 CFR 1003.3(c)(3) (“The requirements of this part do not apply to: . . . Temporary financing . . .”)

Regulation C, Official Interpretations, Paragraph 3(c)(3), Comment 1 (“Section 1003.3(c)(3) provides that closed-end mortgage loans or open-end lines of credit obtained for temporary financing are excluded transactions. A loan or line of credit is considered temporary financing and excluded under § 1003.3(c)(3) if the loan or line of credit is designed to be replaced by separate permanent financing extended by any financial institution to the same borrower at a later time. For example:

* * * * *

(ii) Lender A extends credit to a borrower to finance construction of a dwelling. The borrower will obtain a new extension of credit for permanent financing for the dwelling, either from Lender A or from another lender, and either through a refinancing of the initial construction loan or a separate loan. The initial construction loan is excluded as temporary financing under § 1003.3(c)(3).”)

Regulation C, Official Interpretations, Paragraph 2(j), Comment 3 (“A home purchase loan includes both a combined construction/permanent loan or line of credit, and the separate permanent financing that replaces a construction-only loan or line of credit for the same borrower at a later time. A home purchase loan does not include a construction-only loan or line of credit that is designed to be replaced by separate permanent financing extended by any financial institution to the same borrower at a later time or that is extended to a person exclusively to construct a dwelling for sale, which are excluded from Regulation C as temporary financing under § 1003.3(c)(3).”)