I have always understood that capitalizing interest was a no no. I have a loan officer that had a customer that filed bankruptcy. He didn't include our debt in the BR. Now that the BR is over he wants to refinance his loan with us which is paid down below the original loan amount. The loan officer has talked to a couple of attorney's that seem to think it's o.k. to capitalize the interest on this loan which is secured by the customer's home. I don't know how much interest will be capitalized but it must be a good bit. The loan officer wanted me to research this but I can't find anything. Can someone point me in the right direction please or shed some light on this?

Thanks!

In Georgia Law 7-4-17 I think I found my answer.

I have the same understanding, ldsnanny. It's always been a "no way, no how" and is included in the FDIC best practices as a 'no no'. Here is a bleep out of an FDIC "Notice of Charges" that I wouldn't want to touch:

(d) The Bank has engaged in unsafe and unsound banking practices by renewing loans without the full payment of accrued interest, payment extensions, capitalization of interest, and note modifications. As of December 31, 2008, loans exhibiting this practice total $6,314,000.

{Now, in an isolated case where the following is true? I don't think those were intended to be frowned upon}.

NOW, here's where I think the point is missed. If you have a large equity position in a home whereby you could do a cash out equity loan that would be as much or more than the interest...then what the heck is the difference?

If you are at 80% or less LTV/cost, what is the difference in walking away with cash, or covering the full payoff. There is no difference to me.

And FWIW, why are you asking an attorney? I don't think legality is the issue (but then maybe they are in-house counsel that is involved with S&S)...S&S is the issue here. I actually don't think Georgia prohibits it...but they (and the FDIC) are so against it as to put the FEAR of it in most rational bankers heads.

IMHO, you also need to consider Fair Lending...you get that 'do unto others as you did for him' if you aren't careful.

Thanks Joker, Do you have any idea where I can find the law or best practice that will support this? I know that I have heard about it all my banking life but I can't find the actual law that supports it.

I tried to also say...that reference up there is criminal usury and I've never heard it having any bearing on capitalized interest.

Hang on and I'll get you the FDIC reference.

Try this one...I think you could convince your loan officer that it's a really BAD idea...Look under the section on closed-end.

https://www.fdic.gov/regulations/laws/rules/5000-1000.html

Thank you so much for your help!!