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?
Correct Answer
B) Follow the draw-control requirements and obtain the required evidence before disbursement
Why this is correct: Construction loan agreements include draw-control requirements to manage risk. As the original explanation notes, if the agreement conditions advances on completion evidence, the lender must obtain that evidence before disbursement to comply with the contract and prudent lending practices. Why the other choices are wrong: "Release the full remaining commitment" is wrong because it violates the agreement's phased draw schedule and increases risk by over-advancing funds. "Convert the loan to permanent financing immediately" is wrong because conversion typically occurs only after construction is complete, not mid-construction due to a missing draw document. "Ignore the agreement if the borrower owns the lot" is wrong because lot ownership does not override the contractual disbursement conditions. Exam tip: Always follow the documented draw process—never disburse without the required completion evidence.
Why This Is the Correct Answer
Why this is correct: Construction loan agreements include draw-control requirements to manage risk. As the original explanation notes, if the agreement conditions advances on completion evidence, the lender must obtain that evidence before disbursement to comply with the contract and prudent lending practices. Why the other choices are wrong: "Release the full remaining commitment" is wrong because it violates the agreement's phased draw schedule and increases risk by over-advancing funds. "Convert the loan to permanent financing immediately" is wrong because conversion typically occurs only after construction is complete, not mid-construction due to a missing draw document. "Ignore the agreement if the borrower owns the lot" is wrong because lot ownership does not override the contractual disbursement conditions. Exam tip: Always follow the documented draw process—never disburse without the required completion evidence.
More Origination Questions
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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?
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 borrower with $61,000 of documented salary also expects the home to appreciate about $20,000 in the first year and offers that as support for a larger loan. May the lender count the home's projected appreciation as income or assets when evaluating ability to repay?
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