We have several fixed-rate mortgage loans that we'd like to modify into ARMs.

Reg Z states that adding a variable-rate feature is a refinancing for subsequent disclosure purposes. Issuing new disclosures is not aproblem, but for purposes of note, mortgage, appraisal, etc. can the loan be modified or does it need to be treated as a refinancing?

Thank you!

It's a refinancing. You have to follow all the disclosure requirements and their timing, HPML, HOEPA, Flood, HMDA, etc.

Dan, we will gladly issue the disclosures and follow timing requirements. But the concern is mortgage re-recording, etc. Can the terms of the existing obligation be modified, rather than creating a new obligation?

The obligation is your note, not your mortgage. You are replacing a fixed rate note with a variable rate note thus the reason for it becoming a refinancing under 1026.20.

You will also be adding a variable rate feature to the mortgage. Whether you can modify that by simply filing an adjustable rate rider is a matter for you to discuss with an attorney familiar with your state's RE laws.

Supplement I to Part 226—Official Staff Interpretations, in relevant part states:

Section 226.20 Subsequent Disclosure Requirements
1. Definition. A refinancing is a new transaction requiring a complete new set of disclosures. Whether a refinancing has occurred is determined by reference to whether the original obligation has been satisfied or extinguished and replaced by a new obligation, based on the parties' contract and applicable law. The refinancing may involve the consolidation of several existing obligations, disbursement of new money to the consumer or on the consumer's behalf, or the rescheduling of payments under an existing obligation. In any form, the new obligation must completely replace the prior one.

3. Variable-rate.
...

ii. Even if it is not accomplished by the cancellation of the old obligation and substitution of a new one, a new transaction subject to new disclosures results if the creditor either:
A. Increases the rate based on a variable-rate feature that was not previously disclosed; or
B. Adds a variable-rate feature to the obligation. A creditor does not add a variable-rate feature by changing the index of a variable-rate transaction to a comparable index, whether the change replaces the existing index or substitutes an index for one that no longer exists.

So it looks like for Reg Z subsequent disclosure purposes, it does not matter whether the obligation has been satisfied or not. Just the addition of a variable-rate feature triggers it. What I was trying to figure out, is whether an addition of the variable rate feature really does replace the old note with a new one or just modifies the terms of the old note (regardless of what disclosures we need to hand out). In case of the former, the mortgage securing the obligation would need to be released. In case of the latter, it would not. I will look at state law, thank you Dan!