HMDA and a Loan Modification

Issue/Inquiry

The Bank is refinancing a loan, but using a change in terms agreement to do so. The original promissory note, loan agreement, and mortgage will be left in place. Should this be reported as a refinance for HMDA purposes?

Response Summary

As the existing obligation has not been satisfied or replaced, the transaction is not a refinancing for HMDA purposes or HMDA-reportable.

Response Detail

Under Regulation C, which implements the Home Mortgage Disclosure Act (“HMDA”), a “refinancing” is a closed-end mortgage loan or open-end line of credit in which a new dwelling-secured debt obligation satisfies and replaces an existing dwelling-secured debt obligation by the same borrower. 12 CFR §1003.2(p).

Whether a refinancing has occurred is determined by reference as to whether the original debt obligation has been satisfied or replaced by a new debt obligation, based on the parties’ contract and applicable law. Whether the original lien is satisfied is irrelevant. Official Interpretations, 1003.2(p) – 1.

In this case, the Bank has not satisfied and replaced its mortgage loan; rather, it has modified the existing terms with a change in terms agreement. The promissory note, loan agreement, and mortgage remain in full force and effect, except to the extent which they have been changed by the change in terms agreement. Consequently, the loan would not be reported on the HMDA Loan Application Register as a refinancing.

A question remains as to whether the transaction is reportable as anything else. Under the reporting rules that went into effect on January 1, 2018, a financial institution is required to collect data regarding applications for covered loans that it receives, originates, and purchases for each calendar year. A “covered loan” is a closed-end mortgage loan or an open-end line of credit that is not an excluded transaction. A “closed-end mortgage loan” is an extension of credit that is secured by a lien on a dwelling and that is not an open-end line of credit. 12 CFR §§1003.2(d),(e); 4(a).

Whether this transaction is HMDA-reportable will depend on whether it is a covered loan, which will in turn depend on whether it is a closed-end mortgage loan. The official commentary states that an extension of credit is the granting of credit pursuant to a new debt obligation. Therefore, if a transaction modifies, renews, extends, or amends the terms of an existing debt obligation, but the existing debt obligation is not satisfied and replaced, the transaction is not a closed-end mortgage loan because there has been no new extension of credit. Official Interpretations, 1003.2(d) – 2.

This means that the transaction is not HMDA-reportable, since no new credit has been granted pursuant to a new debt obligation and the existing debt obligation has not been satisfied and replaced. There has only been a modification of the existing obligation, which is not reportable.

This entry was posted on Monday, July 9th, 2018 at 6:00 am.