In 2017, we originated a home loan to a borrower. It was a 62-month balloon loan with a 20-year amortization and a fixed rate of 4%. Since that time, the borrower’s financial situation has deteriorated, although they are still paying as agreed.

The loan is about to mature, and the borrowers want to stay with the bank, but the lender is not sure how to handle the situation. Given the increased credit risk, the lender wants to make some changes to the term of the loan. Specifically, he wants to change the amortization to 15-years, extend the maturity by 1 to 2 years, and increase the interest rate (it will remain fixed).

I am checking with legal to determine if it would be considered a modification or refinance under state law, but I’m uncertain how TRID would look at it. I know that State law will likely influence the answer. For the purposes of this thread, please assume that state law would allow us to consider this situation a loan modification.

To me, it seems like we are essentially creating a new obligation, so it feels like a refinance. However, I am having difficulty determining if the situation actually constitutes a refinance under 1026.20(a). Specifically, the piece I am struggling with is whether or not we would be satisfying the original obligation and replacing it with another. Technically, our loan modification agreement would allow us to make the proposed changes. Furthermore, we are NOT increasing the rate based on a variable rate feature that was not previously disclosed or adding a variable rate feature to the obligation.

Can we consider this a loan modification, or do we need to consider this a refinance?

Unless you are adding or changing a variable rate feature on the loan, it is not a refinance under 1026.20(a).

Good. I had a feeling I was overthinking it. Thank you!

Modifications cannot include a new variable rate or new money (not including filing fees). There is (to me) surprisingly a lot a modification can do.