Lenders often refer to a construction loan as a construction line of credit. While you can call it whatever you want, when it comes to compliance, you have to be sure you are treating it based on how the Regulation defines it. For example, Regulation Z (Truth in Lending) talks about open-end credit and closed-end credit. Open-end credit is generally what we refer to as a “line of credit”. It’s something that the borrower can draw on, pay back, draw on again, pay back and on and on, up to a certain dollar limit. Closed-end credit, on the other hand, can be drawn on once and cannot be drawn on again, even if paid back. Most credit originated for construction purposes is not open-end, but rather a multiple-advance, closed-end loan. Why does this matter? Because open-end credit is not subject to TRID disclosures, while closed-end credit is. If you fail to provide a Loan Estimate and Closing Disclosure for a construction loan, you will be in hot water with examiners.
Jerod explains more in the video.