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#2259814 - 09/16/21 10:17 PM Modification vs Refinance
Doug Sanders Offline
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Joined: Aug 2005
Posts: 4
Iowa
Hello all!
We are currently doing mortgage modifications and I've been asked to make sure they are true modifications and exceptions to the definition of a refinance. For fixed rate loans, the interest rate and corresponding monthly payment is lowered and the term and maturity date remain the same. A loan modification agreement is signed by the borrower. The agreement references the terms of the original note, and notes the change in rate and payment.

We are also doing this with adjustable rate loans. The result is the same; the rate and payment are lowered and disclosed in the loan modification agreement. The adjustable rate change date is reset in this agreement. For example, if the borrower's original loan is a 5/1 ARM originated in 2018 with the first rate change date to be in 2023, the modification agreement would state the new rate and payment, with the new rate change date in 2026, as the 5/1 ARM modification changes this. The amortization is the same, with the original expected maturity date of the loan. We provide ARM disclosures. Is this all that is necessary, or would the ARM change make this a refinance requiring further disclosures?

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#2259815 - 09/17/21 12:36 AM Re: Modification vs Refinance Doug Sanders
rainman Offline
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rainman
Joined: Nov 2004
Posts: 3,020
This does not appear to fit the definition of refinancing under 1026.20(a) because you are not satisfying the old note and replacing it with a new note (unless in your state the use of a modification agreement creates a new obligation and satisfies the old one under state law).

It also doesn't fit the circumstances in 1026.20(a), Comment 3 under which new disclosures are required for increasing the rate based on a previously undisclosed variable rate feature or adding a new variable rate feature.
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#2259818 - 09/17/21 11:03 AM Re: Modification vs Refinance Doug Sanders
Richard Insley Offline
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Richard Insley
Joined: Oct 2000
Posts: 9,987
Toano, VA
Originally Posted by Doug Sanders
true modifications and exceptions to the definition of a refinance.
As rainman indicates, if you sharpen the wording of the question, it's easier to get the answer you need. "Modification" is a business term, not a legally-defined term. The same is true for "refinance." The term "refinancing" is a defined term (Section 1026.20(a)), and your disclosure obligation depends on that definition and the facts of the transaction at hand.
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