A project is 60% complete, but 85% of the construction budget has already been advanced. What should the lender review before approving another draw?
Correct Answer
D) Completed work, remaining budget, lien exposure, and the loan's draw conditions
Why this is correct: In construction lending, the disbursement of funds should closely track the percentage of work completed. A scenario where 85% of the budget is spent but only 60% of the work is done signals significant risk of cost overruns, potential abandonment, or misuse of funds. Before approving another draw, the lender must conduct a thorough review to protect its investment. This includes verifying the actual completed work, analyzing the remaining budget to see if it's sufficient to finish, assessing lien exposure (have contractors been paid?), and strictly adhering to the loan's specific draw conditions and inspections. Why the other choices are wrong: Only the borrower's original credit score is irrelevant to the current construction progress and budget management. Only the permanent interest rate is a future financing term, not a factor in the immediate draw decision. Whether the builder prefers an early payment is not a prudent lending standard; the decision must be based on objective loan conditions and verification, not preference. Exam tip: In construction loans, watch for mismatches between "percent complete" and "percent paid." This is a major red flag requiring immediate, detailed review before any further disbursement.
Why This Is the Correct Answer
Why this is correct: In construction lending, the disbursement of funds should closely track the percentage of work completed. A scenario where 85% of the budget is spent but only 60% of the work is done signals significant risk of cost overruns, potential abandonment, or misuse of funds. Before approving another draw, the lender must conduct a thorough review to protect its investment. This includes verifying the actual completed work, analyzing the remaining budget to see if it's sufficient to finish, assessing lien exposure (have contractors been paid?), and strictly adhering to the loan's specific draw conditions and inspections. Why the other choices are wrong: Only the borrower's original credit score is irrelevant to the current construction progress and budget management. Only the permanent interest rate is a future financing term, not a factor in the immediate draw decision. Whether the builder prefers an early payment is not a prudent lending standard; the decision must be based on objective loan conditions and verification, not preference. Exam tip: In construction loans, watch for mismatches between "percent complete" and "percent paid." This is a major red flag requiring immediate, detailed review before any further disbursement.
More Origination Questions
Before the team acts on a servicing handoff check, a closing coordinator must address Asset Verification and Reserves. Which response is most defensible?
An MLO is reviewing procedures for a case where a cost changes after the Closing Disclosure has already been provided. What is the proper handling?
During a post-application update, a quality-control reviewer encounters a Credit Analysis and Evaluation issue. Which response should avoid a shortcut that would misapply the rule?
A construction-to-permanent loan will disburse in 5 draws over 11 months before the permanent phase begins. Which Regulation Z appendix provides a disclosure method for multiple-advance construction transactions?
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?
A construction loan agreement allows advances only after documented completion of specified work. A builder requests the next draw, but no completion evidence has been provided. What should occur?
Before releasing the final construction draw, which combination most directly supports project completion and clear collateral?
A construction-to-permanent loan will convert to a substantially higher fully amortizing payment. Which payment is especially important when assessing the borrower's long-term repayment capacity?
A construction-to-permanent note states that conversion requires completion, a certificate of occupancy, and no unresolved liens. Construction is finished, but a mechanic's lien remains. What should happen?
A branch manager asks about a loan file because a processor wants to omit known monthly obligations from underwriting. What should happen?
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