We gave a client a bridge loan last year to purchase and renovate the dwelling and will pay back the loan with either refinancing or by the sale of their current residence. The client now needs additional funds to complete the renovations and again will pay back the additional funds by refinancing or by the sale of their current residence. I know that a home improvement loan can be considered temporary, but in this situation, I'm leaning towards it being a short term loan because we already gave them a temporary/bridge loan to purchase and renovate and this to me should be a refinance with additional money, hence, RESPA applies.... Anyone????

Will this 2nd loan also be repaid by a permanent loan? If so, I'd call this loan temporary too. You may want to read the article entitled "HMDA Temporary Financing" found at our website:
http://www.bankerscompliance.com/compliance-resources/free-downloads.htm

Does it have to be a separate loan, or can we modify (increase) the original bridge loan .. again, knowing that the funds are to be repaid with the sale of their existing home or by permanent financing?

I think that it would be dangerous to modify a loan to add money to it. You need a new "promise to pay" (promissory note) to advance new funds......just my opinion. I doubt the security instrument covers any monies other than what was originally borrowed.