We have a situation where a borrower purchased a "rental home" in early 2009. This rental home has now become the primary residence of his daughter and her spouse and they want to be added to the loan. The loan officer wants to just do a modification to add the couple. I think it needs to be rewritten due to it's a TRID loan now (needs disclosures), HPML rules will apply, etc. I would love to have your opinion, please and thank you!!

If you are going from a commercial loan to a consumer loan then new docs and disclosures are required. Most commercial notes interest is calculated differently then consumer as well. Much cleaner to refinance, you do not want to even give the impression that you are avoiding/circumventing TRID and all primary residence disclosures.

Thank you Peach.

I have a small bit of a different opinion on this.

What is the customer requesting? Are they requesting a refinance? Or, are they just requesting the addition of the borrowers.

If the former, I change the entire thing over to consumer purpose. If the latter, I would modify and add the borrowers.

Until you actually refi the loan, a modification can be done without changing a purpose.

The thing that kicks me Joker is he is adding borrowers that live in the home has their primary residence. If he was just adding other business partners then sure modify I would agree. I guess I am gun shy on the borrowers/primary residence thing. Good points.

Sounds like a reportable assumption to me:

1026.20(b)- Commentary

2. Existing residential mortgage transaction. A transaction may be a residential mortgage transaction as to one consumer and not to the other consumer. In that case, the creditor must look to the assuming consumer in determining whether a residential mortgage transaction exists. To illustrate: The original consumer obtained a mortgage to purchase a home for vacation purposes. The loan was not a residential mortgage transaction as to that consumer. The mortgage is assumed by a consumer who will use the home as a principal dwelling. As to that consumer, the loan is a residential mortgage transaction. For purposes of §1026.20(b), the assumed loan is an “existing residential mortgage transaction” requiring disclosures, if the other criteria for an assumption are met.

4. Retention of original consumer. The retention of the original consumer as an obligor in some capacity does not prevent the change from being an assumption, provided the new consumer becomes a primary obligor. But the mere addition of a guarantor to an obligation for which the original consumer remains primarily liable does not give rise to an assumption. However, if neither party is designated as the primary obligor but the creditor accepts payment from the subsequent consumer, an assumption exists for purposes of §1026.20(b).

I am researching this to put together assumption procedures for our bank. In the commentary for 1026.20(b)-5 it states:

5. Status of parties. Section 1026.20(b) applies only if the previous debtor was a consumer and the obligation is assumed by another consumer. It does not apply, for example, when an individual takes over the obligation of a corporation.

It appears that if the existing borrower is a corporation and consumer borrowers take over the obligation, then it is not considered a RMT?

20(b) Assumptions
1. General definition. i. An assumption as defined in §1026.20(b) is a new transaction and new disclosures must be made to the subsequent consumer. An assumption under the regulation requires the following three elements:

A. A residential mortgage transaction.
B. An express acceptance of the subsequent consumer by the creditor.
C. A written agreement.
ii. The assumption of a nonexempt consumer credit obligation requires no disclosures unless all three elements are present. For example, an automobile dealer need not provide Truth in Lending disclosures to a customer who assumes an existing obligation secured by an automobile. However, a residential mortgage transaction with the elements described in §1026.20(b) is an assumption that calls for new disclosures; the disclosures must be given whether or not the assumption is accompanied by changes in the terms of the obligation. (See comment 2(a)(24)–5 for a discussion of assumptions that are not considered residential mortgage transactions.)

It is not covered by Regulation Z - period.