Is this loan subject to HOEPA?

Five years ago, a loan was booked for the purpose of purchasing and improving a homestead. The loan was set up for 59 payments and a balloon. When it was time to renew, a "modification of note and lien" was executed and filed. Credit insurance was also added.

If there's no new note, would the transaction be subject to HOEPA if any of the tests were met? I'm trying to look forward to October 1. Since credit insurance was added to this particular transaction, I was wondering if a similar transaction, done after October 1, might be subject to HOEPA.

OK, no one is trying this one, so I'll try to start something.

I'm going to lean on 226.20 that discusses "refinancings" vs. "modifications." If you completed a modification and no new note was consummated, I don't believe you have a loan subject to section 32.

Adding credit insurance to a transaction, doesn't make it a new note. I wouldn't recommend doing this, but you certainly can (legally).

I vote no new TIL so therefore, no Section 32 requirement.

This is one of those “darn if I do, and darn if I don’t”, but based on the following sections from 226.20, there may be a need to do a new TIL.

(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 Sec. 226.4(d).

(5) The renewal of optional insurance purchased by the consumer and added to an existing transaction, if disclosures relating to the initial purchase were provided as required by this subpart.

# 4 refers to no new money advanced except for earned finance charges and premiums for contiuation of insurance. In this scenario, insurance was not continued , it was added.

# 5 refers to the renewal of optional insurance and where the initial disclosures were provided. Again they did not renew the insurance, they added it.

Granted, they did modify the note and did not create a new note, but since they added credit insurance, was the proper disclosures given to exclude it from the finance charges?

I would lien to providing a new TIL. (However, I always lien to the conservative side.)

Shirley, I would like to add on to David's discussion of refinancings vs modifications. He is correct. However, it has been my experience that lenders tend to use the terms 'extention', 'renewal', 'modification', and 'refinancing' often interchangably. This increases the confusion regarding a confusing part of the regulation. Further, based on the various regulatory definitions (Reg Z,B,HMDA,RESPA), examiners tend to consider an obligation that is replacing or satisfying a maturing obligation as a refinancing requiring new disclosures. This may not be correct in all instances, such as listed under 226.20, but many banks take the conservative route, fearing that attempts to parse the law regarding this issue isn't worth the compliance/legal risk.

Patrick T. Hubbs, CRCM, CBCO

I like David's answer. As to the insurance, if the addition was voluntary, how does that really differ from adding insurance in year 3 of a 5-year balloon. The real test is whether the obligation has been extinguished and replaced.