Refinancing and Paying Off a Loan from a Private Party

Issue/Inquiry

If the Bank is making a loan to pay off a loan made by a private party to the same borrower and secured by the same dwelling, is this considered a refinance?

Response Summary

The loan would not be considered a “refinancing” for TRID purposes, if the private party making it was not subject to Regulation Z. In such case, the purpose of the loan would be disclosed on the Loan Estimate and Closing Disclosure as a “Home Equity” loan. For HMDA reporting purposes, the loan would be considered a refinancing.

Response Detail

The TILA-RESPA Integrated Disclosure (“TRID”) rules require the Bank to disclose the purpose of the loan in the Loan Estimate and Closing Disclosure, using one of the following terms:

• Purchase
• Refinance
• Construction
• Home Equity. 12 CFR §1026.37(a)(9);38(a)(5).

For TRID purposes, the loan will be disclosed as a “Refinance” if:

• None of the loan proceeds will be used for the purchase of the property
• The loan will be used to refinance an existing obligation, as defined in section 1026.20(a) of Regulation Z (but without regard to whether the creditor is the original creditor or a holder or servicer of the original obligation)
• The loan is secured by the same property as the existing loan.

With respect to the definition in Section 1026.20(a), a refinancing occurs when an existing obligation subject to the requirements of Regulation Z is satisfied and replaced by a new obligation undertaken by the same consumer. The requirements of the regulation apply to each individual or business that offers or extends credit when four conditions are met:

• The credit is offered or extended to consumers
• The offering or extension of credit is done regularly
• The credit is subject to a finance charge or is payable by a written agreement in more than four installments
• The credit is primarily for personal, family, or household purposes. 12 CFR §1026.1(c).

Whether the loan in question is a refinancing for the purposes of Regulation Z, and thus for TRID, will depend on whether the private party was subject to the requirements of the regulation when the existing loan was made. If the private party was not subject to Regulation Z, then the loan from the Bank satisfying the existing loan is not a refinance for TRID purposes. In such case, it will be disclosed on the Loan Estimate and Closing Disclosure as a “Home Equity Loan,” which is used when none of the other purposes is appropriate. 12 CFR §1026.37(a)(9)(iv);38(a)(5)(iv).

Under Regulation C, which implements the Home Mortgage Disclosure Act, a refinancing is a new obligation that satisfies and replaces an existing obligation of the same borrower, in which both the existing obligation and the new obligation are secured by liens on dwellings.  12 CFR §1003.2 – Refinancing.

In this case, since the loan being made by the Bank will satisfy and replace an existing loan to the same borrower, and since it will be secured by a lien on a dwelling, it will be a refinancing for HMDA purposes. HMDA does not consider whether the existing loan was made by a lender subject to Regulation Z, but only whether it was made to the same borrower and secured by a dwelling.

This entry was posted on Monday, October 16th, 2017 at 6:00 am.