We have a borrower with a contract to purchase a modular home from a manufacturer. The Loan Estimate indicated that the purpose of the loan was for a purchase. However, we recently learned that the borrower has already acquired title to the land where the modular home will be located from their parents by quitclaim deed. Both the modular home and the land will be collateral for the loan. No funds will be disbursed at the closing. The manufacturer will be paid as the units of the modular home are delivered. Can we change the stated purpose of the loan on the Closing Disclosure to “construction,” since the borrower is not purchasing the land?

In our view, the loan purpose should be identified as a purchase on the Closing Disclosure (CD).

The TRID rules require lenders to identify one of four possible loan purposes in the Loan Estimate (LE) and CD: (1) purchase, (2) refinance, (3) construction, or (4) home equity. A purchase loan is one made to finance the acquisition of the property securing the loan. A construction loan is one made to finance “the initial construction” of a dwelling, and a “construction” purpose should be listed only if the loan is not a purchase loan.

Consequently, regardless of how the loan is structured, we believe it was accurately identified as “purchase” on the LE and should be listed as “purchase” on the CD, since the loan will be used to purchase a modular home that will secure the loan.

For resources related to our guidance, please see:

Regulation Z, 12 CFR 1026.38(a)(5) (“For each transaction subject to § 1026.19(f) [closed-end consumer credit transactions secured by real property], the creditor shall disclose the information in this section: . . . Under the heading ‘Loan Information’ . . . (ii) Purpose. The information required to be disclosed under § 1026.37(a)(9), labeled ‘Purpose.’”)

Regulation Z, 12 CFR 1026.37(a)(9) (“For each transaction subject to § 1026.19(e) [closed-end consumer credit transactions secured by real property], the creditor shall disclose the information in this section: . . . The consumer’s intended use for the credit, labeled ‘Purpose,’ using one of the following terms:

(i) Purchase. If the credit is to finance the acquisition of the property identified in paragraph (a)(6) of this section, the creditor shall disclose that the loan is for a ‘Purchase.’

(ii) Refinance. If the credit is not for the purpose described in paragraph (a)(9)(i) of this section, and if the credit will be used to refinance an existing obligation, as defined in § 1026.20(a) (but without regard to whether the creditor is the original creditor or a holder or servicer of the original obligation), that is secured by the property identified in paragraph (a)(6) of this section, the creditor shall disclose that the loan is for a ‘Refinance.’

(iii) Construction. If the credit is not for one of the purposes described in paragraphs (a)(9)(i) or (ii) of this section and the credit will be used to finance the initial construction of a dwelling on the property identified in paragraph (a)(6) of this section, the creditor shall disclose that the loan is for ‘Construction.’

(iv) Home equity loan. If the credit is not for one of the purposes described in paragraphs (a)(9)(i) through (iii) of this section, the creditor shall disclose that the loan is a ‘Home Equity Loan.’)

Regulation Z, 12 CFR 1026.37(a)(6) (“For each transaction subject to § 1026.19(e) [closed-end consumer credit transactions secured by real property], the creditor shall disclose the information in this section: . . . The address including the zip code of the property that secures or will secure the transaction, or if the address is unavailable, the location of such property including a zip code, labeled ‘Property.’”)

Regulation Z, 12 CFR 1026.2(a)(19) (“Dwelling means a residential structure that contains one to four units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, mobile home, and trailer, if it is used as a residence.”)

Regulation Z, Official Interpretations, Paragraph 37(a)(9), Comment 1(i) (“The following examples illustrate when each of the permissible purposes should be disclosed: (i) Purchase. The consumer intends to use the proceeds from the transaction to purchase the property that will secure the extension of credit.”)

Regulation Z, Official Interpretations, Paragraph 37(a)(9), Comment 1(iii) (“The following examples illustrate when each of the permissible purposes should be disclosed: . . . (iii) Construction. Section 1026.37(a)(9)(iii) requires the creditor to disclose that the loan is for construction in transactions where the creditor extends credit to finance only the cost of initial construction (construction-only loan), not renovations to existing dwellings, and in transactions where a multiple advance loan may be permanently financed by the same creditor (construction-permanent loan). . . .”)