Have a few questions regarding loan modifications (on consumer non-RE loans):

1) In what situations does your bank use a loan modification agreement instead of a doing a refinance/renewal of a loan and provide all new disclosures?
2) Is your loan modification agreement a document your bank (or legal counsel) created/customized or is it provided through your loan processing system?
3) And what other compliance issues/concerns are there regarding consumer (non-RE) loan modifications we need to be aware of?

We do not currently have a loan modification agreement in place for consumer non-RE loans, and instead, process all requests that could be handled through a modification agreement as a refinance. Thanks.

Not much response, so here goes.

1. A modification of a consumer loan, as long as you are not adding or changing a variable rate feature would not normally trigger a refinance under 1026.20(a), as the original obligation is not replaced. Typically, a modification is used to extend the term, re-amortize the loan over a longer period or after a large principal reduction, lower an interest rate, etc. Allowable modifications and under what conditions should be addressed in your loan policy.

2. It would depend. If the modification form from your loan processing system is specifically geared to match and supplement the original notes, then usually they are fine for simple modifications. However, I would suggest that some samples still be reviewed by legal counsel prior to allowing their use.

3. There really is not much else from a compliance standpoint on simple consumer loan modifications other than that they are allowed and applied in an unbiased way to avoid fair lending issues.

Regarding #3: You may still be triggering joint intent documentation. If there is more than one borrower, do all agree to the modification? Maybe one wants to extend the loan while another borrower does not. A modification could be a new request from one applicant/borrower. Therefore, you need to document joint intent of all applicants again.

I know you mentioned non-RE in your original post, but IF it were a real estate secured loan, and depending on how you are modifying the loan, you may still trigger Flood Insurance requirements.

I agree with Randy and David, but will add to #2. Just because your loan processing system spits out a document, that doesn't guarantee that the document will hold up in court. The software vendors always try to create the impression that their documents are bullet-proof, but they won't be going to court to defend them if there's a legal challenge to the terms of a contract or disclosure document. That duty will fall to your legal counsel. An ounce of prevention being worth a pound of cure, it's good business to have your own attorney review and bless every contract/disclosure document and the procedures for using them.