Are there any rules as to what can and cannot be done as far as mortgage modifications? This is a non-standard mortgage (consumer purpose; originally a purchase) that is not government backed and is serviced by us. Loan is currently still at its initial rate/floor and rate will not adjust for several more years. I know that we do not HAVE to allow a modification, but if we WANT to, are there any guidelines surrounding this?

On a portfolio loan you can do whatever would be allowed under State law. If you change a variable rate feature however, it will be a refinance under 1026.20(a) and subject to all Z and RESPA requirements.

Thanks Randy,

Would re-setting the index or reducing the margin be considered 'adding' a variable rate feature (B. below) ? Otherwise according to ii. (below) it sounds like no new disclosures needed?


3. Variable-rate. i. If a variable-rate feature was properly disclosed under the regulation, a rate change in accord with those disclosures is not a refinancing. For example, no new disclosures are required when the variable-rate feature is invoked on a renewable balloon-payment mortgage that was previously disclosed as a variable-rate transaction.

ii. Even if it is not accomplished by the cancellation of the old obligation and substitution of a new one, a new transaction subject to new disclosures results if the creditor either:

A. Increases the rate based on a variable-rate feature that was not previously disclosed; or

B. Adds a variable-rate feature to the obligation. A creditor does not add a variable-rate feature by changing the index of a variable-rate transaction to a comparable index, whether the change replaces the existing index or substitutes an index for one that no longer exists.

iii. If either of the events in paragraph 20(a)-3.ii.A or ii.B occurs in a transaction secured by a principal dwelling with a term longer than one year, the disclosures required under § 1026.19(b) also must be given at that time.

Reducing the margin - no - I have no idea what you mean by resetting the index.

re-setting her payment amounts based on the same index used at consumption (1 year treasury) but at today's value, which is over 2 points lower than it was at that time. So basically everything would be exactly the same - just a lower index. And the mortgage would not be satisfied and replaced - we would keep all the existing obligations in place.

So, basically just temporarily lowering the rate. As long as you were not changing the next adjustment date, etc., then no.

Ok, awesome. Thanks for the help!

Similar but slightly different question.. HELOC moving from variable to fix, is that considered a refi and subsequent refi d/s? In the original agreement is references the borrower's option to move to a fix rate..

Thanks!

Well, open-end rules and closed-end rules are totally different. You mean you have a HELOC agreement that allows for the borrower to established a fixed rate portion of the credit line for a period of time as part of the original agreement?

Yes sorry if my question wasn't clearer.

If it is a feature that is set forth in the original agreement, then it would not involve a modification. Also, even if this is a feature of the HELOC (fixed rate-fixed period of time for a portion of the balance) that feature remains part of the overall open-end agreement and would be handled as part of the account as far as on-going periodic statements, etc. are concerned. As principal is paid down, that becomes available credit again.

If that is not how it works, then exercising such an option would constitute a new closed-end credit subject to TRID disclosures.

They can reborrow the amount as the fixed portion is paid down, thus to me it's open ended and no additional d/s are needed.

Thanks for the clarification!

Hi, we are also looking into a modification option where we would reduce the interest rate on a 3/1 or 5/1 ARM loan. We'd also like to start the initial 3- or 5-year period over so we'd have a new 3- or 5-year fixed rate period.

Is this a "variable-rate feature" we're prohibited from changing under Sec. 1026.20(a)-3? Since we are not changing the initial fixed rate period (a loan originally disclosed as 5/1 would remain 5/1), my hope is that this is not a new variable-rate feature but rather a modification of an existing variable-rate feature, but I am curious what others think.

Thank you for your feedback.

You are adding a new fixed rate period to the loan. IMHO - That makes it a new loan program regardless of the current status of the existing loan within the original parameters disclosed.