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Is a temporary bridge loan with a term shorter than one year subject to the higher-priced and high-cost loan provisions? Are there any other issues with the interest rate or escrow requirements? – IBA Compliance Connection

IBA Compliance Connection

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Is a temporary bridge loan with a term shorter than one year subject to the higher-priced and high-cost loan provisions? Are there any other issues with the interest rate or escrow requirements?

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A bridge loan is covered by the high-cost mortgage requirements, but not the higher-priced mortgage requirements, in Regulation Z.

A bridge loan secured by the borrower’s principal dwelling may qualify as a “high-cost mortgage” if the interest rate exceeds 6% or 8% over the average prime offer rate, or if it has points and fees exceeding applicable thresholds or prepayment penalties. However, a bridge loan would be exempt from the prohibition of balloon payments in the high-cost mortgage rules.

There are other provisions in Regulation Z that also could apply to a bridge loan. For example, bridge loans are covered by the new TILA-RESPA Integrated Disclosure (TRID) requirements in Regulation Z. Also, while bridge loans are exempt from many of the ability-to-repay (ATR) and qualified mortgage (QM) requirements in Regulation Z, they are subject to the prohibition on prepayment penalties.

For resources related to our guidance, please see:

  • Higher-Priced Mortgages, Regulation Z, 12 CFR 1026.35(b)(2)(i) (“An escrow account need not be established for:  . . . C. A temporary or ‘bridge’ loan with a loan term of twelve months or less, such as a loan to purchase a new dwelling where the consumer plans to sell a current dwelling within twelve months. . . .”)
  • Higher-Priced Mortgages, Regulation Z, 12 CFR 1026.35(c)(2)(v) (Exception from the higher-priced mortgage appraisal requirements for “a loan with a maturity of 12 months or less, if the purpose of the loan is a ‘bridge’ loan connected with the acquisition of a dwelling intended to become the consumer’s principal dwelling.”)
  • High-Cost Mortgages, Regulation Z, 12 CFR 1026.32(d)(1)(ii)(B) (A high-cost mortgage is not subject to the prohibition of balloon payments if it is a “loan with maturity of 12 months or less, if the purpose of the loan is a ‘bridge’ loan connected with the acquisition or construction of a dwelling intended to become the consumer’s principal dwelling.”)
  • TRID requirements, Regulation Z, 12 CFR 1026.19(e) and (f) (The TRID requirements apply to any “closed-end consumer credit transaction secured by real property . . . .”)
  • ATR and QM requirements, Regulation Z, 12 CFR 1026.43(a)(3) (“This section applies to any consumer credit transaction that is secured by a dwelling . . . other than: . . . For purposes of paragraphs (c) through (f) of this section [but not for purposes of paragraph (g), Prepayment penalties] . . . (ii) A temporary or ‘bridge’ loan with a term of 12 months or less, such as a loan to finance the purchase of a new dwelling where the consumer plans to sell a current dwelling within 12 months or a loan to finance the initial construction of a dwelling; . . .”)