Housing starts in August 2018 have reached 1.282 million and have been on a steady incline since the housing crash of 2008. However, the state of existing housing inventory is far from what it was prior to the recession (2.28 million starts in January of 2006) and housing inventory has not kept up with growing demand. The housing crisis we are now in is far more complex than those of recent history.
We see a need for more inventory, which means a need for more lenders to offer construction loans to create that inventory. Unfortunately, construction lending has some innate hurdles to overcome, in the form of federal and state compliance and ever changing requirements.
This blog post details construction loan compliance challenges, and offers solutions to overcome compliance headaches, so you can offer construction loans with confidence.
Federal Construction Loan Compliance
TRID has been on every lender’s mind, and now TRID 2.0 is imminent. October 1, 2018 marks the official date when TRID 2.0 will be required and regulatorily mandated.
The three-year-old TRID ruling has gotten a 560 page update in the form of TRID 2.0 and part of the amendment applies directly to construction one-time close loans. Specifically, it changes how cost may be divided between the disclosure for the construction phase and the permanent phase of a one-time close loan.
Finance charges, points, and fees must now be calculated in the construction phase disclosure if they would not be imposed but for the construction financing. This potentially complicates your Loan Estimate and Closing Disclosure in terms of timing, property value, inspection and handling fees, and closing costs financed, to name a few.
While there are marked differences between TRID and TRID 2.0, specifically for construction lenders, the purpose was to add clarity after industry response to TRID. Nevertheless, the new changes and clarifications need to be completely understood in order to correctly implement and maintain compliance. Understanding TRID 2.0 is important, and will take resources from your teams to gain compliance.
With this understanding being so important and imperative to the success of construction loan, it’s fastest, easiest, and safest to outsource to a company whose sole purpose is to help you maintain construction loan compliance.
State-Specific Construction Loan Compliance
While federal regulations are exhaustive, they provide the ease of meeting only one set of regulations in the United States. Things get more complicated as we begin to look at state level compliance. Missing some of these regulations may end up in failing to protect your first lien priority during construction. For example:
- 28% of states require a Notice of Commencement (or similar like event). Unfortunately it’s not a similar use of the term “Notice of Commencement” across all states with this regulation, so keep an eye out for alternative naming conventions that mean the same thing. These similar events helps the lender have visibility, protect their priority, or somehow become a participant in the process.
- 24% of states require Statutory Lien Waiver Forms. California is an example of this with four state specific lien waivers, including lien release forms that must be used.
- 8% of states require Notarization on Lien Waivers. Of those states that require specific forms, 8% of them require notarization. There is growing demand for notarization of lien waivers, and have introduced online e-notary or digital notary process into state law processes where they review statutory requirements. While digital notary is being reviewed, the industry could see some major changes as notary catches up with technology.
- 24% of states require a Notice of Completion to be filed.
A word of caution from our partner, Asurity Docs
As a company that helps lenders produce guaranteed compliant loan packages, no matter what state they are servicing, they have seen their fair share of incorrect documentation when auditing a new clients folio. They frequently find that lenders have been using incorrect loan waivers that are not valid in one out of four states. They got these loan waivers from other programs that provide document services and they weren’t as vigilant explaining the differences in state statutes.
Ever Changing Regulatory Requirements
Not only do lenders need to understand and implement federal and state requirements, but to make matters more challenging, a new regulatory alert is issued every 7 minutes. We understand that it can be hard to keep up with changing requirements and it adds an extra level of frustration and fear. Lenders who are not offering one-time construction to permanent loans use these as reasons to stay out of the construction lending space.
However, those that do offer construction loans know of the profitability of these types of loans.
The Digital Construction Lending Solution
The solution to the ever changing requirements and the existence of federal and state regulations is simple: technology. Regardless of your footprint, whether you’re national, state, or regional, there are tools to help your construction loan management process. The best solution to compliance challenges is technology like construction loan management software that manage compliance and compliance documentation packages for the lender.
It’s important to look for technology that matches all the areas that affect your ability to bring these construction loans to the closing table and project completion. Look for technology that will monitor regulatory agencies and update their software with the latest changes seen on both the federal or state levels. The best compliance technology can provide error free packages, with accurate calculations, and backed by insurance.