TRID and Mortgage Loan Renewals

Issue/Inquiry

The Bank offered an interest-only mortgage loan product at one time. For the first 10 years of the loan, the customer would only have to pay interest, and then a balloon payment at maturity. If the Bank renews these loans, would it be a refinancing or a modification? Would TRID disclosures be required?

Response Summary

A loan that is a refinance for the purposes of Regulation Z would require TRID disclosures. A loan renewal or extension that does not meet the definition of a refinancing will not be subject to the TRID rules.

Response Detail

Under Regulation Z, a refinancing occurs when an existing obligation that was subject to it is satisfied or extinguished and replaced by a new obligation undertaken by the same consumer. A refinancing is considered to be a new transaction requiring new disclosures.

Even if the original obligation is satisfied or extinguished by a new obligation undertaken by the same consumer, the following will not be treated as a refinancing:

• A renewal of a single payment obligation with no change in the original terms
• A reduction in the annual percentage rate with a corresponding change in the payment schedule
• An agreement involving a court proceeding
• A change in the payment schedule or a change in collateral requirements as a result of the consumer’s default or delinquency, unless the rate is increased, or the new amount financed exceeds the unpaid balance plus earned finance charge and premiums for continuation of insurance
• The renewal of optional insurance purchased by the consumer and added to an existing transaction, if disclosures relating to the initial purchase were provided as required by this subpart

On the other hand, a new transaction is subject to new TILA disclosures even if the original note or agreement remains in place, if the creditor either:

• Increases the rate based on a variable-rate feature that was not previously disclosed
• Adds a variable rate feature to the obligation. 12 CFR §1026.20(a).

Assuming that the loans in question will be treated as closed-end consumer loans secured by real property, the Bank would be required to provide the disclosures required by the TILA-Integrated Disclosure (“TRID”) rules if a loan is considered a refinance for the purposes of Regulation Z.

The modification of an existing obligation will not constitute a refinancing unless it is accompanied by the cancellation of the obligation and the substitution of a new obligation for it. Official Interpretations, 1026.20(a) – 1. In such case, if the Bank simply obtained a change in terms agreement from the borrowers but left the original promissory note or agreement in place, and if it did not add a variable rate feature or increase the rate pursuant to a variable rate feature not previously disclosed, it would not be necessary for it to provide the TRID disclosures.

This entry was posted on Monday, January 29th, 2018 at 6:00 am.