We do not believe that an initial construction loan secured by a borrower’s primary residence would fit into the current High Risk Home Loan Act’s definition of a “high risk home loan.” 815 ILCS 137/10. Currently, that definition would include any “home equity loan,” meaning “any loan secured by the borrower’s primary residence where the proceeds are not used as purchase money for the residence.” Id. If a construction loan is used to build the primary residence, then we believe that loan would be excluded from the Act’s coverage as a purchase money loan.

However, note that starting on January 10, 2014, an amendment to the Act becomes effective. Under the revised law, it will apply to any “consumer credit transaction, other than a reverse mortgage, that is secured by the consumer’s principal dwelling.” Senate Bill 1692, p. 4 (passed on May 30, 2012). While we are not aware of any cases interpreting this provision, we believe that the amended Act will apply to an initial construction loan. 

Our analysis is supported by analogy to federal law, as Regulation Z does interpret what it means to be secured by a principal dwelling. Under Regulation Z, an initial construction loan could be considered to be secured by the consumer’s principal dwelling under the “higher-priced mortgage loan” rules (which apply to any “consumer credit transaction that is secured by the consumer’s principal dwelling,” if the transaction is considered “higher-priced”). 12 CFR 1026.35(a). The rule commentary explains that under certain circumstances, a construction loan is considered to be secured by the consumer’s principal dwelling: 

“If a consumer . . . builds a new dwelling that will become the consumer’s principal dwelling within a year or upon the completion of construction, the new dwelling is considered the principal dwelling for purposes of applying this definition to a particular transaction.” Official Staff Commentary, Section 1026.2(a)(24), Comment 3.