We have a customer who was in foreclosure but we are now refinancing the debt. They owe our attorney fees associated with the foreclosure proceeding that happened thus far. This will be billed and collected separately and is allowed within the loan documents. The attorney is saying that in order to collect the secondary/deferred interest (non-accrual) and capitalized fees still owed we must disclose it to the customer. The customer is bringing enough cash to cover the closing costs of the refinance, the attorney fees for the foreclosure proceedings, the secondary interest and capitalized fees. How would we disclose this on the closing disclosure? Use H. Other? or can we just disclose it in Payoff and Payments?

I have sat here and thought about this for a few minutes. Typically, non accrued interest has already been written off [accounting issue]. I would think it would have to be added back to the loan and shown in the payoff if the customer has agreed to pay it back. Fees should already be IN the payoff.

Since you are working with your attorney - ask them if they are saying that you have to disclose it all. As far as Regulation Z - workouts are exempt.

Paragraph 20(a)(4)

1. Workout agreements. A workout agreement is not a refinancing unless the annual percentage rate is increased or additional credit is advanced beyond amounts already accrued plus insurance premiums.

RR Joker, I'm not sure why, but I don't think it is ever written off here, it's only deferred during the period of workout. They don't want to add it to the loan amount being refinanced because the consumer would be paying interest on the interest. The fees are those that were charged on the original loan the was in default but was never paid by the customer - late fees, etc. We don't want to add it to the loan amount because the customer is paying it in cash.

Randy, do you mean that even though we are executing the transaction like a typical refinancing it is still considered a workout? Because from what I understand it will be a standard loan again on our books. Its a miracle but the customer can now pay now and is bringing $35,000 to pay in cash the secondary interest owed, fees, attorney fees, and the new closing costs for the refinance.

Yes - regardless of whether it is accomplished through a new note:

1026.20(a) Refinancings. The following shall not be treated as a refinancing:


(4) A change in the payment schedule or a change in collateral requirements as a result of the consumer's default or delinquency, unless the rate is increased, or the new amount financed exceeds the unpaid balance plus earned finance charge and premiums for continuation of insurance of the types described in §1026.4(d).

Yes - regardless of whether it is accomplished through a new note:

1026.20(a) Refinancings. The following shall not be treated as a refinancing:

(4) A change in the payment schedule or a change in collateral requirements as a result of the consumer's default or delinquency, unless the rate is increased, or the new amount financed exceeds the unpaid balance plus earned finance charge and premiums for continuation of insurance of the types described in §1026.4(d).

Official Interpretation

20(a) Refinancings

2. Exceptions. A transaction is subject to §1026.20(a) only if it meets the general definition of a refinancing. 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.

It sounds as if it's come OUT of workout status. I think they have a refi in this case.

Likes to Comply, there should be no 'interest on top of interest' if the amount is included in the payoff. In addition, adding the late fees back in also makes sense. You see, when you have a total payoff, including what they are going to pay in cash, and then you subtract your new loan amount...the difference will be what they are bringing to the table. That's the cleanest way I know how to handle a situation such as this.

I questioned the special assets department and they feel that the loan is still a workout and as it happens the rate is going to be lower than before. So it seems we possibly could have avoided TRID disclosure.

I see what you are saying now, RR Joker. After testing various CDs I wondered why they just didn't include everything in the payoff also. The only thing I can figure is that the attorney has insisted to the special assets department that the secondary interest and fees must be "disclosed" (itemized) or the consumer can later contest in court that they didn't owe or shouldn't have had to pay the interest and fees because they were not disclosed.

I wish I had access to speak with this attorney because maybe he could help me understand what he is expecting in way of disclosure and why.

Thanks very much for both of your help!