Due to a family situation we are looking at refinancing a loan secured by rental property purchased with the original loan proceeds. The once rental property will now become the borrowers principal residence. This will be a TDR workout situation with an increase of interest rate on the new loan. Would the refinance be subject to the ability to repay requirements?

If you refinance the loan, it is going to be subject to all of the Reg. Z requirements. I would suggest you modify the existing loan rather than doing a complete refinance. Check with your legal counsel.

Official Interpretation

3(a) Business, Commercial, Agricultural, or Organizational Credit

6. Business credit later refinanced. Business-purpose credit that is exempt from the regulation may later be rewritten for consumer purposes. Such a transaction is consumer credit requiring disclosures only if the existing obligation is satisfied and replaced by a new obligation made for consumer purposes undertaken by the same obligor.

If a new loan is being created not sure it is a TDR.

[reply to osucpa]

TDR is how you may be required to classify a loan on your books for regulatory purposes based on specific circumstances that result in a 'troubled debt'. We do new loans under TDR classification all the time...they are also reported for HMDA if they meet the refinance definition.

Whether it is a TDR or not, it would not exempt the transaction from Regulation Z.