IBA Compliance Connection

Your go to source for compliance!

For a consumer-purpose construction loan, how should we calculate the cash to close under the TRID requirements? Should we include only the cash the customer will bring at closing, or should we include the total amounts paid by the borrower for the construction and closing costs? May we put the amount of funds available for construction draws in the payoff section of the Loan Estimate and Closing Disclosure?

—

by

admin

We believe that for consumer-purpose construction loans, construction costs, as well as construction inspection and handling fees (depending on when they are collected), must be factored into the Cash to Close calculation. Additionally, we believe that construction holdbacks may be disclosed separately from other construction costs in the Payoffs and Payments disclosures.

The CFPB’s TRID Small Entity Compliance Guide states that for a construction-permanent loan disclosed as either a single transaction or two separate transactions, “the creditor factors the construction costs into the funds for borrower calculation in the Calculating Cash to Close table. They are included as part of the existing debt in the calculation.” This is true for both the Loan Estimate and the Closing Disclosure. In this context, “construction costs” include “costs for improvement that the consumer contracts for to be made to the property in connection with the financing transaction and that will be paid in whole or in part with loan proceeds.”

Additionally, the Small Entity Compliance Guide states that construction holdbacks (a portion of loan proceeds placed in a reserve or other account at consummation) can be disclosed separately from the other construction costs in the Summaries of Transaction table or in the Payoffs and Payments calculations and disclosures. If you choose to disclose the construction holdbacks separately, you can disclose them as a separate itemized cost in the same manner as the other construction costs and exclude the construction holdback amount from the balance of the construction costs to avoid double-counting them. Also, the amount must be labeled in a clear and conspicuous manner to make it clear that it is for construction holdbacks.

Note that construction inspection and handling fees are disclosed differently on the Loan Estimate and Closing Disclosure depending on when they are collected. If they are collected before consummation, the total of the fees must be disclosed in the “Loan Costs” table. Consequently, such fees would be included in the “Calculating Cash to Close” table as part of the “Total Closing Costs.” If the fees are collected after consummation, the total of the fees must be disclosed in a separate addendum and are not counted in the Calculating Cash to Close table.  If the inspection and handling fees are unknown at the time the disclosures are provided, you must use the best information reasonably available to disclose the amount.

For resources related to our guidance, please see:

  • Loan Estimate. On the Loan Estimate, the creditor factors the construction costs into the funds for borrower calculation in the Calculating Cash to Close table. They are included as part of the existing debt in the calculation. (§ 1026.37(h)(1)(iii) and (h)(1)(v)).
  • Closing Disclosure. On the Closing Disclosure, the creditor also factors the construction costs into the funds for borrower calculation. They are included as part of the existing debt in the calculation. They are also disclosed in the Summaries of Transactions table. (§ 1026.38(i)(4), (i)(6), and (j)(1)(v))”)
  • CFPB, TILA-RESPA Integrated Disclosure Rule: Small Entity Compliance Guide, page 130 (May 2018) (“Construction costs are costs for improvement that the consumer contracts for to be made to the property in connection with the financing transaction and that will be paid in whole or in part with loan proceeds. For example, construction costs include the portion of a construction loan’s proceeds that is placed in a reserve or other account at consummation. The portion of the proceeds that is held in such an account is sometimes referred to as a ‘construction holdback.’”)
  • CFPB, TILA-RESPA Integrated Disclosure Rule: Small Entity Compliance Guide, page 130–31 (May 2018) (“Construction holdbacks can be disclosed separately from the other construction costs in the Summaries of Transaction table or in the Payoffs and Payments calculations and disclosures. If the creditor chooses to disclose the construction holdbacks separately, it can disclose the amount as a separate itemized cost in the same manner as the other construction costs discussed above, and would exclude the construction holdback amount from the balance of the construction costs to avoid double-counting. The amount must be labeled in a clear and conspicuous manner to make clear it is for construction holdbacks. (Comment app D-7.vi.D)”)
  • Collected at or before consummation. If collected at or before consummation, the total of such fees is disclosed in the Loan Costs table, and is included in the Calculating Cash to Close table. A fee collected at consummation includes a loan proceeds advance taken at consummation to cover inspection and handling fees.
  • Collected after consummation. If collected after consummation, the total of such fees is disclosed in a separate addendum, and the fees are not counted for purposes of the Calculating Cash to Close table. (Comments 37(f)-3 and 37(f)(6)-3)”)