Principal Payments At The Completion Of A Construction Loan - Q2 2000

By the Division of Banks

A borrower is granted a construction to permanent mortgage loan. During the construction phase of the loan, the borrower decides to change the house plans or to make other changes, which increases the cost and delays the completion of the home. Subsequently the borrower is granted a new construction loan, which is documented by a new construction note. Principal payments are required at the completion of construction and issuance of an occupancy permit, but in no event later than two years from the date of the note.

General Laws chapter 167E, section 2 paragraph 13 provides that: "Any such bank may make construction mortgage loans with respect to any of the classes of mortgage loans authorized by this chapter, or by any other provision of general or special law applicable to banks; provided, however, that any payments required on account of principal shall commence not later than two years from the date of the mortgage note."

The issue is whether the two-year period specified in the statute extends from the date of the original note or only from the date of the refinancing. It is the opinion of the Division that the two year period begins with the date of the refinancing. The refinancing extinguishes the original obligation. As such, the two year period can not be deemed to run against an obligation that is no longer in existence. The Division would not however, take this position if the purpose of the establishment of the new obligation were to evade the statute.