A borrower requests that construction funds be paid directly to the borrower, but the loan agreement requires controlled disbursement to documented contractors. What should the lender do?
Correct Answer
A) Follow the controlled-disbursement terms unless they are properly modified
Why this is correct: Construction loan agreements include controlled disbursement terms (payments directly to contractors/suppliers upon verification of work) for a critical reason: to ensure loan proceeds are used for their intended purpose—building the home—and to minimize the risk of diversion, fraud, or mechanics' liens. The lender is contractually bound to follow these terms. A borrower's request for cash does not override the legal agreement. The lender should follow the controlled-disbursement terms unless they are properly modified through a formal, documented process agreed to by all parties. Why the other choices are wrong: Ignore the agreement whenever the borrower requests cash would violate the loan contract and expose the lender and borrower to risk of fund misuse and lien issues. Disburse the entire commitment as a permanent-loan refund makes no sense; it would provide no funds for construction and violate the loan's purpose. Use another borrower's draw schedule is improper; each loan has its own unique agreement and draw schedule based on its specific project. Exam tip: Construction loan funds are for construction costs. Controlled disbursement to verified parties is a standard, non-negotiable safeguard. The signed agreement governs.
Why This Is the Correct Answer
Why this is correct: Construction loan agreements include controlled disbursement terms (payments directly to contractors/suppliers upon verification of work) for a critical reason: to ensure loan proceeds are used for their intended purpose—building the home—and to minimize the risk of diversion, fraud, or mechanics' liens. The lender is contractually bound to follow these terms. A borrower's request for cash does not override the legal agreement. The lender should follow the controlled-disbursement terms unless they are properly modified through a formal, documented process agreed to by all parties. Why the other choices are wrong: Ignore the agreement whenever the borrower requests cash would violate the loan contract and expose the lender and borrower to risk of fund misuse and lien issues. Disburse the entire commitment as a permanent-loan refund makes no sense; it would provide no funds for construction and violate the loan's purpose. Use another borrower's draw schedule is improper; each loan has its own unique agreement and draw schedule based on its specific project. Exam tip: Construction loan funds are for construction costs. Controlled disbursement to verified parties is a standard, non-negotiable safeguard. The signed agreement governs.
More Origination Questions
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Before closing, the team discovers that a borrower asks which upfront charge can be collected before intent to proceed. What is the safest compliant answer?
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