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Muddling through Modifications

By Jon Tavares, JD, LLM, CRCM, NCCO 11 Jul 2018

It seems like Regulation Z has a disclosure for everything you could possibly do with a loan. Well, one area where there is surprisingly no disclosure requirement is modifications to closed-end loans. In fact, Reg. Z says practically nothing about modifications. It doesn't even really define what is a modification; all it does is tell you what changes to a loan constitute a "refinancing," i.e. not a modification. With that in mind, let's look at what a modification is and what you can't do with a modification without it becoming a refinancing.


Essentially a "modification," or some financial institutions refer to them as a "change in terms," is any change that you make to a loan that is not a refinancing. If you have a refinancing, it is a new transaction requiring all new disclosures and the transaction is subject to all the requirements of Reg. Z. For example, if you change a term of a loan secured by the consumer's principal dwelling, you will need to provide a loan estimate (LE) and a closing disclosure (CD), you will need to determine the borrower's ability to repay, you will need to check for HPML/HOEPA, etc. If you change a term and it is not considered a refinancing, there are no disclosure requirements under Reg. Z (though you may have some requirements under state law) and you do not need to determine if the consumer has the ability to repay under the new terms (though you might want to for safety and soundness reasons).


Section 1026.20(a) defines a refinancing as when an existing obligation is satisfied and replaced by a new obligation undertaken by the same consumer. This means any time you sign a new note. No matter what the change, except for the exceptions we'll discuss below, it is a refinancing if you use a new note to accomplish the change. But even if you use a new note to accomplish the change, it is still not considered a refinancing under certain conditions. If you have a single pay obligation and you use a new note to renew it, you do not have a refinancing. If you reduce a consumer's APR and payment via a new note, you do not have a refinancing. Any agreement involving a court proceeding that changes the terms of a consumer's loan is not a refinancing, even if a new note is used to accomplish it. If you renew optional insurance and you add it to the loan with a new note, it is not a refinancing. And, the one that is probably the biggest relief for financial institutions, the workout exception; you may use a new note to make a change in the payment schedule (i.e. change the payment amount or the number of payments) or change the collateral requirements as a result of the consumer's default or delinquency without it becoming a refinancing unless you increase the rate or the new loan amount exceeds the unpaid balance plus earned finance charge and premiums for continuation of any insurance that is excludable from the finance charge.


That sounds easy... doesn't it? Well, you know nothing in Reg. Z (or compliance in general) is ever that easy. Despite the general rule that it is only a refinancing if you use a new note and any change that is accomplished without a new note, the commentary is clear that there are certain changes that will be considered a refinancing and must be treated as a new transaction even if accomplished without satisfying and replacing the existing obligation. Even if you do not use a new note, you have a refinancing subject to all new disclosures if you increase the rate based on a variable-rate feature that was not disclosed in your initial disclosures or you add any new variable-rate feature to the obligation. If the obligation is longer than one year and is secured by the consumer's principal dwelling, the change is an ARM and the ARM program disclosure is required. You do not add a variable-rate feature if you are merely changing the index to a comparable index. This is true whether the old index continues to exist. You also have a new transaction where you advance new money in a fashion that extinguishes the original obligation and replaces it with a new one. Now, whether you satisfy and replace, the existing transaction is determined by looking to the contract and applicable law.

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