First of all, I want to state that it's obvious that these modifications must be done before the maturity date.

But something was said the other day that made me question balloon renewals or modifications and whether or not they're actually a refinance.

It was stated that, when doing an Change in Terms renewal, as long as the APR goes down, no new disclosures are required. And since we're in a low rate environment the APR always is lower. But when rates start going back up, extra disclosures will be required because the APR will go up.

This got me curious to find the regulation behind that statement. I looked at 226.20(a)



and saw item (2)...



This would seem to support that statement. However, the commentary shoots that right out of the water.



So, I know this has been a topic of some debate and I've read all the the threads I can find on the subject. But, with that last statement being like it is, I'm having a hard time finding the regulation that supports renewals of balloon loans at all. Am I reading this correctly? If the maturity is lengthened (which is exactly what a balloon renewal is designed to accomplish) it's considered a refi and all Reg Z and RESPA disclosures apply, right?

Most people are looking at this exclusion when addressing balloon notes:

Paragraph 20(a)(1)

1. Renewal. This exception applies both to obligations with a single payment of principal and interest and to obligations with periodic payments of interest and a final payment of principal. In determining whether a new obligation replacing an old one is a renewal of the original terms or a refinancing, the creditor may consider it a renewal even if:

i. Accrued unpaid interest is added to the principal balance.

ii. Changes are made in the terms of renewal resulting from the factors listed in §1026.17(c)(3).

iii. The principal at renewal is reduced by a curtailment of the obligation.

True, but a 5 year balloon is not "a single payment of principal and interest", it's 59 payments of principal and interest and then a single payment. I figure they were meaning like a short term single pay note and the borrower couldn't completely satisfy the obligation so you extend it for another short term.

And it's not "periodic payments of interest" because the periodic payments include principal as well. To mean, this is meaning a construction loan or other line of credit with interest only payments and then the final balloon.

So, that brings me back to the question. When you get down to brass tacks, does the regulation support a change in terms for a balloon mortgage? I'm starting to lean towards the need for a full refi at every balloon maturity.

I'm sure I'm being quite dense, but it's still early in the week so maybe it'll get better. :-)

From the end of the Commentary to 226.20:

References
Statute: None.

Other sections: Section 226.2.

Previous regulation: Section 226.8(j) through (l), and Interpretation

Sections 226.807, 226.811, 226.814, and 226.817.

1981 changes: While the previous regulation treated virtually any change in terms as a refinancing requiring new disclosures, this regulation limits refinancings to transactions in which the entire original obligation is extinguished and replaced by a new one. Redisclosure is no longer required for deferrals or extensions.

The assumption provision retains the substance of §226.8(k) and Interpretation §226.807 of the previous regulation, but limits its scope to residential mortgage transactions.

I read that too, but still wasn't fully convinced.

The commentary to 226.20(a) item 1.i



So deferrals or extensions are meant to be for individual installments. Which, I suppose, one could argue that the final balloon is the individual installment that was extended.

Also, the definition of refinancing ends with "In any form, the new obligation must completely replace the prior one." And with a change in terms, the original obligation isn't being replaced, just modified.

However, I can't help but focus on the fact that the reg lists examples of what would not be considered a refi and that a balloon mortgage product doesn't fall into any one of those examples.