A construction-only phase has an initial term of 12 months and will be followed by a separate covered permanent mortgage. Under Regulation Z's ATR rule, which statement is accurate?
Correct Answer
B) The temporary construction phase may qualify for the construction-phase exemption, while the permanent covered loan requires its own ATR analysis
Why this is correct: The correct answer is "The temporary construction phase may qualify for the construction-phase exemption, while the permanent covered loan requires its own ATR analysis." Under Regulation Z's Ability-to-Repay (ATR) rule, a temporary or "bridge" loan with a term of 12 months or less, such as a construction-only loan, may be exempt from the ATR requirements. However, the subsequent permanent mortgage is a separate "covered transaction" and is not exempt. It requires a full ATR analysis based on the borrower's financial information at the time of the permanent loan application or closing. Why the other choices are wrong: "Both phases are always exempt from ability-to-repay requirements" is wrong because the permanent mortgage is a covered loan and is subject to ATR. "The permanent loan is exempt whenever the same property secures both loans" is wrong; securing the same property does not create an ATR exemption for the permanent loan. "The borrower may waive ATR analysis for both phases" is wrong because ATR is a legal requirement for covered loans; it cannot be waived by the borrower. Exam tip: Remember the 12-month threshold for the construction-phase ATR exemption. The permanent loan always needs its own ATR check.
Why This Is the Correct Answer
Why this is correct: The correct answer is "The temporary construction phase may qualify for the construction-phase exemption, while the permanent covered loan requires its own ATR analysis." Under Regulation Z's Ability-to-Repay (ATR) rule, a temporary or "bridge" loan with a term of 12 months or less, such as a construction-only loan, may be exempt from the ATR requirements. However, the subsequent permanent mortgage is a separate "covered transaction" and is not exempt. It requires a full ATR analysis based on the borrower's financial information at the time of the permanent loan application or closing. Why the other choices are wrong: "Both phases are always exempt from ability-to-repay requirements" is wrong because the permanent mortgage is a covered loan and is subject to ATR. "The permanent loan is exempt whenever the same property secures both loans" is wrong; securing the same property does not create an ATR exemption for the permanent loan. "The borrower may waive ATR analysis for both phases" is wrong because ATR is a legal requirement for covered loans; it cannot be waived by the borrower. Exam tip: Remember the 12-month threshold for the construction-phase ATR exemption. The permanent loan always needs its own ATR check.
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?
Between the Loan Estimate and closing, prepaid interest increases $180, homeowner insurance increases $95, transfer taxes increase $40, and a credit report fee for which the consumer could not shop increases $12. There is no valid revised estimate or other exception. Which increases violate TRID's zero-tolerance 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?
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