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When are construction loans exempt from RESPA disclosures, and how is the term “first user” defined? Are bridge loans to first users exempt from RESPA? – IBA Compliance Connection

IBA Compliance Connection

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When are construction loans exempt from RESPA disclosures, and how is the term “first user” defined? Are bridge loans to first users exempt from RESPA?

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Construction loans are generally exempt from RESPA disclosures except if the loan is for construction or rehabilitation of a 1-4 family residence and:

  1. May be converted to permanent financing by the same lender; or
  2. Is being used to finance a sale or transfer of title to the first user (12 CFR 1024.5(b)(3).

There is not a specific definition of “first user” or agency guidance on the requirements for a “first user.” However, we believe the term refers to a situation in which a builder uses a construction loan to build a 1-4 family residence and then resells the building. The first owner to live in the constructed house would be the first user. 

Based on 12 CFR 1024.5(b)(3), if a loan is truly a bridge loan, it is exempt from RESPA regardless of any other circumstances. That includes situations in which the bridge loan is being used to construct a new residence. Therefore, if the loan is a bridge loan, it is still exempt from RESPA even if the borrower is the first user. Unfortunately, there is not an official definition of a bridge loan from a regulatory agency, but they are typically defined as “a temporary loan, used by issuers to bridge the time between redemption of one debt security and issuance of another.” They are typically used by home buyers who need financing between the purchase of a new home and the sale of an old home.