A banking industry trade group is proposing adding new language to current mortgage disclosures, which they say will stimulate demand for construction-related home financing and open up purchase opportunities.
The Consumer Financial Protection Bureau is currently requesting public input on an application from
Legislation that applied TRID regulations, a combination of Truth in Lending Act and Real Estate Settlement Procedures Act policies, to construction-related home lending, mandated use of disclosures in place today. Such loans were exempt from them prior to 2013.
While the lack of specific construction-loan details led some lenders to create their own additional set of documents, others ceased offering products because of the extra work involved or out of concern they might violate federal policy using TRID in its current form.
"The big issue here is that the current TRID disclosure process fails the transparency test," said Shannon Faries, director of strategic relationships at Land Gorilla, the construction finance software provider serving lenders.
At the suggestion of Federal Reserve banking officials, who asked why some community lenders were no longer involved in home lending, the ICBA assembled a working group of community bankers and technology firms to address concerns and prepare examples of potential new disclosure forms, said Ron Haynie, ICBA senior vice president of housing finance policy.
Members of the working group clearly saw a need for more construction and construction-to-permanent loans for their clients. "These forms are responses to questions that they were getting," Haynie said.
New forms would also eliminate confusion and ease concerns many lenders have about offering the specialty products.
"If a bank was more comfortable complying with TRID, they would be more likely to do it. They would be more likely to engage with the product," he said. "I think a lot would like to, but again, it's just the regulatory uncertainty. They're just not going to take the chance."
The CFPB is accepting comments to the ICBA filing until March 29. If approved, lenders will be able to apply to participate in a testing pilot intended to measure the effectiveness of the updated disclosure forms on business volume and consumer awareness.
Although lenders are already seeing demand from their customers, there is still a large untapped market for these loans, particularly in the areas where community bankers are the primary lending source, according to Haynie.
"Especially in small rural towns, there aren't the big national players. Somebody wants to build a house; they go to their local bank to do that, so it's sort of a natural product for our members," he said.
Another aim of the ICBA proposal is to add to the housing supply. Greater availability of construction-related financing among lenders could help
"It is not uncommon in rural communities for first-time home buyers to build their first home because there are limited existing affordable starter homes," the ICBA application stated.
But the goal is for construction loans to be considered an option for all locations. "It's just one more idea that can help address the housing shortage that we're dealing with, especially affordable housing," Haynie said.
A report from the National Association of Realtors from summer 2022 found a shortage of approximately 5.5 million housing units in the U.S. In other research from last year,
"The housing shortage is clearly a generational problem," Faries said. "It's not going to be cured anytime soon."
If or when regulators allow lenders to use the new disclosures with additional construction-loan details, more businesses are likely to enter the segment, Faries said. Land Gorilla's current list of clients consist of a near-even mix of depository institutions and nonbanks.
"I think that there will be more lenders that will participate, particularly those from the banking sector," Faries said.
