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#1885377 - 01/10/14 06:57 PM Refinance or renewal?
HuntFish Offline
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undecided
In anyone's opinion, is this a refinance or a renewal?
Loan will mature, a new promissory ote is given but the loan number will be the same as the previous, borrower will receive no new money, fees (is any) will be financed, there will be a new interest rate and new payment amount.

Thank you!!!

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#1885380 - 01/10/14 07:00 PM Re: Refinance or renewal? HuntFish
Truffle Royale Offline

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Are you getting snagged on the same loan number part of this?
Internal numbering systems have no part in determining whether a loan is a refinance or not. You're changing the rate and the payment and giving a new note...you've got a refinance and must not only report for HMDA as such but treat as such re: disclosures, etc.

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#1885495 - 01/10/14 08:38 PM Re: Refinance or renewal? HuntFish
RR Joker Offline
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Agree with TR.
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#1885627 - 01/10/14 10:34 PM Re: Refinance or renewal? HuntFish
HuntFish Offline
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undecided
Thank you both!

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#1885676 - 01/11/14 04:31 PM Re: Refinance or renewal? Truffle Royale
HuntFish Offline
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undecided
I am not questioning your opinion on this but i do have more questions. When this loan is done, I read thru the commentary of Regulation Z to help me make a decision on renewal or refinance. This is what made me think this may be a renewal:
1.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. We did not satisfiy the original obligation on our books, it is still there, just modified with the new terms/conditions.
2. Under commentary 1026.20(a) - there are five events that are not considered refinancings. The one that i focused on is:
a. 20(a)(2) - 2: corresponsing change -

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#1885678 - 01/11/14 04:50 PM Re: Refinance or renewal? HuntFish
Kathleen O. Blanchard Offline

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Your original obligation (note) was satisfied and replaced with a new note.
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#1885682 - 01/11/14 09:54 PM Re: Refinance or renewal? HuntFish
rlcarey Offline
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We did not satisfiy the original obligation on our books, it is still there, just modified with the new terms/conditions.

You need to visit with your legal counsel on this, but I tend to agree with Kathleen. Whether or not you change a loan number on your system or book the transaction as a new loan on your system is irrelevant. Whether an existing obligation is extinguished and replaced by a new obligation is a legal issue and not an operational one.
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#1885748 - 01/13/14 02:20 PM Re: Refinance or renewal? HuntFish
RR Joker Offline
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Quote:
a new promissory note is given


Quote:
We did not satisfiy the original obligation on our books

Quote:
just modified with the new terms/conditions



Without all of the details, assumptions may be being made here. The only way I could see this possibly be outside of the refinance realm, based on the first quote above is if you lowered the rate, with a corresponding lowering of the payment.


"Modifying" generally uses a specific form with specific language that it does not replace the original obligation and only the named terms have been changed. You can't just change whatever you want and consider it a modification (IMHO) from a legal standpoint.

Raising a rate, without a VR feature in the original note would be one of those things. wink
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#1886162 - 01/13/14 10:27 PM Re: Refinance or renewal? HuntFish
HuntFish Offline
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undecided
Just to clarify, the interest rate and the payments were lowered, BUT i am taking what we have discussed here and moving on to loan operations to change our defined "renewal". We will classify these as refinancings. Thanks for the meaningful discussion.

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#1887219 - 01/15/14 09:13 PM Re: Refinance or renewal? Truffle Royale
Liz Y Offline
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Originally Posted By: Truffle Royale

You're changing the rate and the payment and giving a new note...you've got a refinance and must not only report for HMDA as such but treat as such re: disclosures, etc.


Supposing that the interest rate and payment schedule did increase, can I ask...where do I find the subsequent required disclosures?
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#1887236 - 01/15/14 09:49 PM Re: Refinance or renewal? Liz Y
Richard Insley Offline
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Originally Posted By: Liz Y
where do I find the subsequent required disclosures?
Are you asking for cite? If we're talking about Reg. Z and the loan meets the definition of a refinancing, then you start at the top and treat the new note just like any other new loan. Please note, however, that an increase in the interest rate and all the downstream numbers is not part of the test for renewal vs. refinancing. It is based on one of two events:
1. satisfaction of the old note and replacement with a new note, or
2. addition of a variable rate feature.
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#1887326 - 01/16/14 01:41 PM Re: Refinance or renewal? HuntFish
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To further clarify, Richard. If your original note does not contain VR language, doesn't that then bring an increased rate into the the refinance category?

That has always been my understanding. I appreciate the discussion on this.
Last edited by RR Joker; 01/16/14 01:41 PM.
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#1887397 - 01/16/14 03:09 PM Re: Refinance or renewal? RR Joker
Richard Insley Offline
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Originally Posted By: RR Joker
If your original note does not contain VR language, doesn't that then bring an increased rate into the the refinance category?
No.

If the note is replaced, then you have a refinancing. This test takes no account of which terms changed.

If the note is not replaced (changes are made by some form of modification agreement), then Official Interpretation #3 of Section 1026.20(a) establishes a second test. This additional test is met only in cases where you add a VR feature to the note or increase the IR under an undisclosed VR feature already contained in the note.

In cases where the IR is increased from one fixed rate to another fixed rate, you neither have nor are adding a VR feature.
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#1887457 - 01/16/14 04:21 PM Re: Refinance or renewal? HuntFish
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Wow.

Thank you Richard.

I guess this is one subject that has been pretty well butchered around here!

Can you explain this 'undisclosed VR feature' above?

This additional test is met only in cases where you add a VR feature to the note or increase the IR under an undisclosed VR feature already contained in the note.


What IS that?? Should that be a 'previously disclosed VR feature'?
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#1887540 - 01/16/14 05:18 PM Re: Refinance or renewal? HuntFish
Richard Insley Offline
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Since we aren't limiting this discussion to real estate secured loans, there's at least one legitimate way you could have a previously undisclosed VR feature. (There's also the case where the VR feature was not disclosed due to violation of Reg. Z.)

If the original loan amount exceeded the then-current size threshold, the loan was exempt and no Reg. Z disclosures were required at consummation. Now, the loan has paid down, the loan amount falls short of the threshold, and the size exemption could be lost.

A modification agreement covering anything except a VR feature would not disturb the sleeping-dog-size-exemption. Adding a VR feature, however, would be considered a "refinancing" due to the broad language in paragraph (ii)(A) of the above-cited OI.
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#1887675 - 01/16/14 07:53 PM Re: Refinance or renewal? HuntFish
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Interesting conversation. Once again...thanks. And, once again I think I'm confused, or reading too much into the regulation?

My mind is nearly always on RE-secured loans. Could I please just lay this situation out on the line.

Quote:
In cases where the IR is increased from one fixed rate to another fixed rate, you neither have nor are adding a VR feature.


This sounds like it means on a 1-4 family RE secured loan that you could modify a loan AND increase the rate without triggering a refinance? It seems so contradictive to the majority of the language in that section...so often it speaks of "unless you increase the rate".

If I have a 3 year balloon mortgage at 4.5% fixed, no VR feature, I could (or could not) simply modify it prior to maturity for an additional 3 years at 5% fixed, no VR feature, without triggering a refinance, so long as I don't disturb the original note??

I'm sorry to appear so dense on this...but it's been something so seemingly hard to get a straight answer on!

Thanks so much for putting up with my continual nagging! grin



Last edited by RR Joker; 01/16/14 07:54 PM.
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#1887811 - 01/16/14 10:57 PM Re: Refinance or renewal? HuntFish
Richard Insley Offline
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This is a tough nut to crack. It helps if you lived through the 1981 rewrite of Reg. Z. Everyone laughed at the claim that the "new" Reg. Z had been simplified, but this was one of the rules that was significantly simplified.

The standard in effect from 1969 until 1981 was complex and confusing. The simplified standard is based on one general principle: to be a refinancing (requiring all new disclosures) the note had to be replaced. This is a bright line test and that was the goal of the '81 amendments.

Comment #2 tells us "A transaction is subject to 1026.20(a) only if it meets the general definition of a refinancing." This sentence underscores the critical test for what is and is not a "refinancing."

There are a few exceptions.

Comment #2 goes on to exclude additional types of transactions: "Section 1026.20(a)(1) through (5) lists 5 events that are not treated as refinancings, even if they are accomplished by cancellation of the old obligation and substitution of a new one." The exclusive purpose of this sentence is to widen the categories of transactions that are not to be treated as refinancings. Even though Section 1026.20)(a)(4) speaks of interest rate increases, the purpose is only to slightly narrow an exclusion, not expand the general rule.

Comment #3 lists two types of events that expand the list of transactions that are to be treated as refinancings. As discussed above, these exceptions are:
- addition of a VR feature, or
- rate increase based on an undisclosed (but existing) VR feature.
Whether or not the note is replaced, the occurrence of one of these events constitutes a refinancing.
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#1887979 - 01/17/14 03:50 PM Re: Refinance or renewal? HuntFish
RR Joker Offline
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HOly toledo.


Okay, so a RE secured loan would be subject to VR disclosures to be 'legitimate'. RE secured loans are not a part of 'size' limits, so that's not an issue on 'previuosly not disclosed, but existing'. SO, if you don't have a VR feature and disclosed your original note as such (fixed rate), you would have a refinance situation if you increase an interest rate.

If this IS the case, it's the way I've always understood things.

Please tell me if I cracked the nut...or not!

[If it weren't extremely important for me to know..I promise I wouldn't be so persistent].
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#1888058 - 01/17/14 05:49 PM Re: Refinance or renewal? HuntFish
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As a FDIC bank, I've found the FDIC Compliance Exam Procedures for Reg Z particullarly helpful on this topic - Especially page 16.

http://www.fdic.gov/regulations/compliance/manual/pdf/V-1.1.pdf
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#1888088 - 01/17/14 06:22 PM Re: Refinance or renewal? HuntFish
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OMG...thank you PD...actual plain English! Awesome! Makes no sense, really...but it's in black and white and something I can give to the powers that be without sounding like I'm talking in a great big circle and questioning myself at the same time! laugh crazy
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#1888138 - 01/17/14 06:56 PM Re: Refinance or renewal? HuntFish
RR Becca Offline
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out of the frying pan...
Wow. This is a complete game changer. Thanks!
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#1888164 - 01/17/14 07:38 PM Re: Refinance or renewal? RR Joker
Richard Insley Offline
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Originally Posted By: RR Joker
you would have a refinance situation if you increase an interest rate.
Your analysis doesn't begin in the right place and a simple rate change (FR to FR) is not the same thing as a variable rate. Here is a flow chart (in narrative form) that steps you through the decision-making process.

Step 1: Determine whether the old note will be satisfied and replaced by a new note signed by the same consumer(s).

If "yes", then you can either
(a) declare the transaction to be a "refinancing" and end.
(b) look for an exclusion in Section 1026.20(a)(1) through (5). If no exclusion is found, then the transaction is a "refinancing." End.

If "no", then proceed to Step 2.

Step 2: Determine whether the old note had a "variable rate feature" and whether it was properly disclosed at the appropriate time. (Section 1026.18(f) defines a "variable rate" as a case where the annual percentage rate may increase after consummation. Since an increase from one fixed rate to another fixed rate would cause the APR to increase at consummation, not afterwards, a simple rate increase is not a variable rate feature.)

If a VR feature existed and it was properly disclosed, then any rate change in accordance with the previously disclosed VR terms does not constitute a refinancing. Proceed to Step 3.

If a VR feature existed but was not disclosed, then any rate change in accordance with the undisclosed VR feature must be treated as a refinancing. End.

Step 3: Determine whether the new or modified note will include a new VR feature.

If "yes", then you have a refinancing. End.

If "no", then the transaction is not a refinancing. End.
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#1888216 - 01/17/14 08:21 PM Re: Refinance or renewal? HuntFish
RR Joker Offline
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Thank you, thank you, thank you. And did I say Thank you? grin
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#1888229 - 01/17/14 08:34 PM Re: Refinance or renewal? HuntFish
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out of the frying pan...
I'm printing this whole thread and putting it in my folder o' modification info. Thank you both!
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#1888244 - 01/17/14 08:51 PM Re: Refinance or renewal? HuntFish
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This is one thing I've struggled so hard to get a straight answer on...for YEARS.

I feel like an anvil has been lifted. It has been saved in my 'watched' posts! cool
Last edited by RR Joker; 01/17/14 08:51 PM.
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