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There’s a couple of different ways construction applications come in. Some of you may simply do construction only. In other words, we’re only going to take requests for credit and process them for the construction financing. We’re going to let some other financial institution do the permanent financing. So, we only take construction loans for the construction phase of the project. We let XYZ Bank down the street, in the next city, in the next town, in the next state, wherever, they do permanent financing. This is our niche, just to do construction. That would be one application for one loan. That’s pretty straightforward.
We go down to the bottom of page letter C, some of you are listing an offer, a little bit of a different production. You do a construction to perm all in one closing. So it’s a construction to perm all in one, one app for one loan. So far, things are pretty consistent whether your letter B, we only do the construction financing, or whether it’s letter C, you do construction and perm, one product, one application, one loan. That’s the takeaway. It’s one app for one loan. It’s a very simple streamlined process.
Many of you listening probably offer a product that goes something like this. You do two phase financing. In other words, I walk in and I say, “I want to build my dream house,” and you process as two different phases. Two different products. I want to be careful with the whole phase/product thing here because some of you who are listening are going, “Well, I do construction to perm all in one. That’s two phases.” Yeah, but it’s one product. One loan. One closing. One application for that one loan, one loan closing, has this built in term where it converts to from construction to permanent financing. One loan, one closing.
Letter D on page number two is different than that what this is, is you have two different loan products: a construction loan product, and when that matures you’re going to convert it or refinance it into a permanent loan product with a new closing and a new maturity date. So, this is where things get a little more complex in the TRID will because they give you some options. What they said is you can turn it into a single app that is for two loans: construction only, followed by permanent financing. Or, you can treat it as two separate applications. Someone who comes and applies for a construction loan, and you do that, and then they apply separately at the same institution for a permanent loan.
There’s three different ways to go about this, I’m going to back up for a moment. We’re going to go to page two, letter D, number one. I wrote next to letter D1, “Path of least resistance.” This is the way I was taught. This is the way when I started working at Bankers Compliance Consulting, and I was able to go out and teach, this is how I taught other bankers. To me, this is the simplest approach. There’s another one, and I’ll come back to it. But when somebody comes into the bank, think about the other side of the desk, the consumer side of this. The consumer walks in and says, “Hey, I want to build my dream home.” “Yeah, we can take care of that. We do that.”
I lay a bunch of stuff down on your desk, and the six items or whatever it is. You’re taking information from me one time for two different loan products. Then you’ll issue me a loan estimate for the construction loan estimate, for the permanent, within three days of getting the sixth item for TRID. There’s no question about what the process is. Somebody wanted to build their dream home. You can help. Here’s the disclosures within the three days of the sixth item for the two different products.
The other alternative option is to have people come in and apply and say, “I want to build my dream home,” and you direct them to the person that takes the construction app. That person only talks construction. They only deal with construction. What you’re going to do is you have a separate process for the permanent financing. When the construction lending person is done, they’ll say, “All right, now you need to go apply for the perm loan. That happens up on the third floor down the street in one of our other offices.” The idea is they wrote this into TRID to allow for procedural flexibility. I still believe the path of least resistance is one app for two loans.
People don’t come in and say, “Oh, I’d like a construction loan. Thank you. I’ll be back in a couple of weeks to talk about permanent financing.” No, people walk in and say, “I want to build my dream home,” and you say, “Yeah, we can help you out. We have two different products. We’ll take your information for both and we’ll process it.” That’s the path of least resistance. I bring that up for this reason, what we want to make sure is that we’re not discouraging people from moving forward with the process. There also can be some issues that crop up if you’re taking two apps for two loans: one for construction, one for permanent. What happens if I sit down and talk construction with somebody and I never move forward with it, and you happen to be HMDA bank?
Now you have to report that construction app because you had no plans for permanent financing, because it never got that far. So, you’ve got to be careful with some of the issues that come up if you take two separate applications as it relates to number two on page number two in your materials.