Written by Shereefat Balogun, Regulatory Compliance Counsel
It has been over five months since the implementation of the Consumer Financial Protection Bureau’s (CFPB) TILA-RESPA Integrated Disclosure (TRID) rules, yet many credit unions are still worried about disclosure requirements, particularly as they apply to construction-to-permanent loans. One issue that credit unions have had questions about is the Adjustable Payment Table under §1026.37(i) and how it should be completed if a construction-to-permanent loan is disclosed as a single transaction with one set of disclosures. Some have had some confusion as to whether the table is even required in every circumstance.
Generally, the “Adjustable Payment Table” (the “AP Table”) described in 1026.37(i) is only required if the periodic principal and interest payment may change after consummation based on a loan term other than a change to the interest rate, or the transaction contains a seasonal payment product feature. If the transaction does not include either of these loan terms, then the table should not be disclosed on the Loan Estimate.
If the creditor is required to disclose the AP Table because the periodic principal and interest payment will change after consummation, for reasons other than a change to the interest rate, or if the transaction contains a seasonal payment feature, then Section 1026.37(i)(1) through (4) requires a creditor to disclose on the Loan Estimate the periods during which the following features will be in effect: (i) interest only; (ii) optional payment; (iii) step payment; and (iv) seasonal payment product features. The periods required to be disclosed should be disclosed by describing the number of payments counting from the first periodic payment due after consummation.
In the context of a construction-to-permanent loan, if the creditor chooses to disclose this loan as a single transaction with one set of disclosures, the AP Table must be disclosed. Note that, in the construction phase of this loan, the borrower will typically make interest-only payments. Once the construction phase is complete and the permanent phase starts, the borrower will transition into making regular periodic principal and interest payments. Accordingly, with construction-to-permanent loans transactions, there will always be a payment change after consummation that will not be based on a change to the interest rate.
When a creditor elects to disclose a construction-to-permanent loan as a single transaction, the AP table is disclosed pursuant to §1026.37(i), with particular adherence to §§1026.37(i)(1) and (5). The rule provides in relevant part:
(i) Adjustable payment table. If the periodic principal and interest payment may change after consummation but not based on an adjustment to the interest rate, or if the transaction is a seasonal payment product as described in paragraph (a)(10)(ii)(E) of this section, a separate table under the master heading “Closing Cost Details” required by paragraph (f) of this section and under the heading “Adjustable Payment (AP) Table” that contains the following information and satisfies the following requirements:
(1) Interest only payments. Whether the transaction is an interest only product pursuant to paragraph (a)(10)(ii)(B) of this section as an affirmative or negative answer to the question “Interest Only Payments?” and, if an affirmative answer is disclosed, the period during which interest only periodic payments are scheduled.
(5) Principal and interest payments. Under the subheading “Principal and Interest Payments,” which subheading is immediately preceded by the applicable unit-period, the following information:
(i) The number of the payment of the first periodic principal and interest payment that may change under the terms of the legal obligation disclosed under this paragraph (i), counting from the first periodic payment due after consummation, and the amount or range of the periodic principal and interest payment for such payment, labeled “First Change/Amount”;
(ii) The frequency of subsequent changes to the periodic principal and interest payment, labeled “Subsequent Changes”; and
(iii) The maximum periodic principal and interest payment that may occur during the term of the transaction, and the first periodic principal and interest payment that can reach such maximum, counting from the first periodic payment due after consummation, labeled “Maximum Payment.”
12 CFR 1026.37(i)(1) and (5)(emphasis added).
As way of illustration, if the interest-only period during the 12-month construction phase has a rate that adjusts monthly, in disclosing whether there are interest-only payments as required under §1026.37(i)(1), the creditor should state “yes for your first 12 months”. Moreover, under §1026.37(i)(5)(i), the monthly principal and interest payments disclosure labeled “First Change” or “Amount” must disclose the range of minimum and maximum payments that will be made at the second payment.
Note that this general rule applies whether the construction and permanent phases have fixed rates or adjustable rates, or one phase is fixed and the other is adjustable. The key is to remember that the loan is considered a single transaction; and within that single transaction there is a change in payment after consummation as a result of the transition from construction to permanent, which therefore requires the AP Table and the corresponding disclosures under Section 1026.37(i).
On a final note, many creditors have criticized the CFPB for its lack of clear guidance on TRID’s application to construction loans and specifically cite the absence of sample forms and minimal reference to construction loans in the commentary. While some credit unions have considered whether to continue offering construction loans, TRID and Regulation Z's disclosure requirements and guidance generally apply to covered construction loans, except where otherwise mentioned. This is the case even if the guidance or rule provision is not directly on construction loans. And of course, for NAFCU members, if you have any questions on any specific disclosure requirements, please feel free to contact NAFCU’s Regulatory Compliance team, and we would be happy to address any of your specific concerns.
BSA: Reports & Training for CU Boards
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Part of the BSA Webcast Series
It’s vital to understand the roles and responsibilities of credit union board members regarding the Bank Secrecy Act (BSA). Attend this webcast to understand your board’s BSA duties such as risk assessments, policy reviews, and updates, as well as recommended additional training needs. You’ll also get tips for in-house training and learn how to properly report SARs to your board.