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Ready for Refinancings?
by Mary Beth Guard

As mortgage rates have dropped, customers are flocking to mortgage lenders seeking refinancings. It's a good time to review compliance regulation coverage for refinancings:

The first step in determining which compliance requirements come into play is to determine what constitutes a "refinancing"? The definition can differ from one law or regulation to another, but generally it involves extinguishing one obligation and replacing it with another. If you have had the customer sign a new promissory note, as opposed to modifying the old one, you probably have a refinancing.

Reg Z. Under Regulation Z, the term refinancing is defined in Section 226.20 as follows:

A refinancing occurs when an existing obligation that was subject to this subpart is satisfied and replaced by a new obligation undertaken by the same consumer. A refinancing is a new transaction requiring new disclosures to the consumer. The new finance charge shall include any unearned portion of the old finance charge that is not credited to the existing obligation. The following shall not be treated as a refinancing:
  1. A renewal of a single payment obligation with no change in the original terms.
  2. A reduction in the annual percentage rate with a corresponding change in the payment schedule.
  3. An agreement involving a court proceeding.
  4. 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 of the types described in Sec. 226.4(d).
  5. 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.
If the loan meets the criteria above and is to a consumer, primarily for a personal, family, or household purpose and either does not exceed the coverage threshold ($25,000) or is secured by real estate or a principal dwelling, the refinancing will be covered by Reg Z. If you will be taking or retaining a security interest in a consumer's principal dwelling in a transaction covered by Reg Z, the right of rescission will apply to the refinancing. Note, however, that if it is a refinancing by the same creditor, the rescission right will apply only to the extent of any new money.

HMDA. If your institution is subject to the Home Mortgage Disclosure Act, include refinancings of home purchase and home improvement loans and remember to request monitoring information for these applications. Appendix A of Regulation C further clarifies covered refinancings as follows: "A refinancing involves the satisfaction of an existing obligation that is replaced by a new obligation undertaken by the same borrower. But do not report a refinancing if, under the loan agreement, you are unconditionally obligated to refinance the obligation, or you are obligated to refinance the obligation subject to conditions within the borrower's control."

RESPA. RESPA is applicable to a refinancing of any loan secured by real property upon which there a 1- to 4-family dwelling is located (or will be located, following the making of the loan, using the proceeds of the loan.) That includes a mobile home, but only if the institution is also getting a mortgage on the real estate. The exceptions to RESPA coverage (for property of 25 or more acres, for business purpose loans, etc.) apply to refinancings as well. The term refinancing is defined in the RESPA regulation at 3500.2 to mean "a transaction in which an existing obligation that was subject to a secured lien on residential real property is satisfied and replaced by a new obligation undertaken by the same borrower and with the same or a new lender."

The RESPA regulation goes on to say:
"The following shall not be treated as a refinancing, even when the existing obligation is satisfied and replaced by a new obligation with the same lender (this definition of ``refinancing'' as to transactions with the same lender is similar to Regulation Z, 12 CFR 226.20(a)):

  1. A renewal of a single payment obligation with no change in the original terms;
  2. A reduction in the annual percentage rate as computed under the Truth in Lending Act with a corresponding change in the payment schedule;
  3. An agreement involving a court proceeding;
  4. A workout agreement, in which a change in the payment schedule or change in collateral requirements is agreed to 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 charges and premiums for continuation of allowable insurance; and
  5. The renewal of optional insurance purchased by the consumer that is added to an existing transaction, if disclosures relating to the initial purchase were provided."
Flood Hazard. The flood requirements come into play any time you are making, extending, increasing, or renewing a loan secured by improved real property or an affixed mobile home. A flood insurance Q&A published by FFIEC says, "If a subsequent loan involving a refinancing or assumption is made on the same property by the same lender who obtained the original determination, and the other requirements contained in Section 528 are met, the lender may rely on the previous determination."

Section 528 of the Act requires that a lender may rely on a previous determination only if the original determination was recorded on the Standard Flood Hazard Determination Form within the previous seven years and there were no map revisions or updates affecting the security property since the original determination was made. However, a loan refinancing or assumption made by a lender other than the lender who obtained the original determination would constitute ``making'' a new loan, thereby requiring a new determination. If you have a situation where you are able to rely on the previous determination and you have life of loan monitoring from a third-party service, check with that third party to see if the refinancing will affect the life of loan monitoring, and make sure the monitoring company has the new loan number, if the loan number changes.

Appraisals. For purposes of the appraisal requirements, the term "real estate-related financial transaction" includes the refinancing of real property or interests in real property.

Originally appeared in the October 2001 edition of the Oklahoma Bankers Association Compliance Informer.

First published on BankersOnline.com 2/25/02



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