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What is the official definition of the lending word "refinance"?
by Andy Zavoina, Mary Beth Guard and Richard Insley, BOL Gurus
QUESTION: What is the "official" definition of the lending word "refinance"?
ANSWER by Andy Zavoina
BIO AND CONTACT INFO
From 226.20:
Subsequent disclosure requirements.
(a) Refinancings. 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 §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.
ANSWER by Mary Beth Guard
BIO AND CONTACT INFO
In addition to the definition Andy cites from Reg Z, note that other regulations have slightly different definitions of the term. Our article "Ready for Refinancings" reviews some of them.
Also, we should note that the definition of "refinancings" for HMDA purposes is changing, effective January 1, 2003. Under the amendments to Regulation C, the definition of a reportable refinancing is being revised to cover transactions in which a new obligation satisfies and replaces an existing obligation, where both the existing and the new loan are secured by a lien on a dwelling. Under the final rule, reportable refinancings are those in which both the existing and the new loan are secured by a lien on a dwelling. (Lenders may rely on a borrower’s statement about whether the loan being refinanced is dwelling-secured.) The FRB believes this definition will avoid covering refinancings of unsecured debt, which could result in a substantial increase in the volume of loans reported, and thus in the reporting burden. It also will reduce the inconsistency of the data.
ANSWER by Richard Insley
BIO AND CONTACT INFO
Definitions are absolutely critical to the proper reading, interpretation and implementation of every law or regulation on the books. As Mary Beth observes, there can be differences from reg to reg, ranging from subtle to substantial. Always assume that a key term means something different than the last time you saw it in another reg, and that the term signifies something quite different at your bank.
First published on BankersOnline.com 3/4/02
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