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MortgagePoint » Your Trusted Source for Mortgage Banking and Servicing News 40 August 2023 F E A T U R E have construction lending programs will be in the right position in the coming months. And those who do not still have time to learn about and begin construction lending, even though construction loans are not as simple as the average 30-year fixed product. Considerations for Successful Construction Lending T here are many benefits to offering con- struction-to-permanent loans, including the ability to generate net interest income, which can be used to enhance profitability and generate more efficient operations and fuel other areas of a lender's business. The problem? Traditionally, originat- ing construction-to-permanent loans is both messy and risky, which often severely impacts the lender and the borrower's experi- ence. This typically occurs because of a lack of mentors in the construction lending space and a missing understanding of the tools, processes, and software that would help con- struction programs to be successful. For example, for a single construction loan, many lenders rely on a combination of soft- ware, spreadsheets, and email to manage draw requests, disbursements, project inspections, and other aspects of the construction process. This lack of cohesion often creates an over- abundance of manual work, such as checking and rechecking to confirm when funds were sent and received. It also makes the origination process more frustrating and time-consuming for everybody—not just for borrowers, but for builders and other parties as well. Take inspection reports, for example. In many cases, a lender's staff must log into multiple systems to order an inspection and then, when it comes in, they must manually cross-reference the report with the draw request and project budget. Often, they must use multiple computer screens. This type of scenario can add days and errors to the overall process. Constantly Shifting Rules T here is yet another problem lenders looking to boost volume with construc- tion loans face: Navigating the constantly shifting landscape of regulations and guide- lines involving construction lending, which is no small task. For example, Fannie Mae could revise the guidelines in its Sellers Guide for single- closing construction-to-permanent loans at any time, creating additional conditions that lenders need to know about, understand, and meet. While intended to ensure safe lending practices, these changes represent another bar to clear that demands constant monitor- ing, staff training, and shifts in processes. Keep in mind that underwriting construction-to-permanent loans to GSE (government-sponsored enterprise) stan- dards can be a useful strategy in case of a future liquidity crisis, as it reduces barriers for secondary mortgage market traders and investors. However, Fannie Mae's selling guide is already a bit confusing for lenders that sell construction loans. For example, it does not mention whether a licensed general contractor is needed, nor does it clearly define the cost of construction. Meanwhile, the current Loan Estimate and Closing Disclosure lenders use to meet the TILA-RESPA Integrated Disclosure (TRID) rule are not very useful when ap- plied to construction-to-permanent loans, as they do not adequately disclose the unique costs involved in these products and create confusion for borrowers and lenders. This barrier can actually discourage lenders and community banks from expanding their construction loan activity. Fortunately, the Consumer Financial Protection Bureau (CFPB) is reviewing a draft proposal by the Independent Community Bankers of America (ICBA) for alternative mortgage disclosures for construction loans. The ICBA's Trial Mortgage Disclosure Sand- box Template proposal, which my company participated in putting together, would improve the disclosures by including new construction phase details, cost breakdowns, and more details about the borrower's per- manent financing. While it remains to be seen where the proposal will go, the effort underscores the complexity that TRID presents to lenders that originate construction loans, both in how these loans are presented to borrowers and how they are processed internally. Technology Comes to the Rescue T hese dynamics demonstrate how originating construction loans correctly and soundly is a continually moving target. Staying ahead of these changes, especially There is yet another problem lenders looking to boost volume with construction loans face: Navigating the constantly shifting landscape of regulations and guidelines involving construction lending, which is no small task.