We made a loan to purchas a new home, temporary financing until they sold the old home which would either pay off the loan or pay down and extend the remaining balance on a long term payout. Customers sold their home, paid down the note and loan is being made to put on long term payout.Rate didn't change but term of loan of course and payment amount changed. Under Reg Z is this a refinance and reportable for HMDA purposes.

Are you having a new note signed that will replace the existing note, or are you modifying the existing note?

Based on what is posted I would say you have a refi, but that depends your answer to the above question.

We had a new note signed with a reduced principle amount. Loan was 85,000 paid down to 36,000. Used same loan number, I know that probably doesn't make any difference.

Dan, when you say modify an existing note, exactly what do you mean, do you mean having a modification agreement signed rather than a new note. I always struggle with a renewal or refinance. I have another where the lender is saying it is a renewal, again new note signed same loan number on a line of credit getting it back up to the original amount and has done this since 2002(original note). Thanks so much for your help

We have got to get some consistent terminology in the industry for the reason that jbest (and many others) points out.

A "modification" is NOT a new note. It modifies an existing loan. It does not require new disclosures (in most cases - RofR and Flood are the exception, if applicable).

A "renewal" and "extension" are the same thing as a modification. They do NOT legally replace, satisfy or extinguish the original loan.

A "refinance" is a new note that replaces, satisfies or extinguishes (legally) the original loan. Loan A is paid off by Loan B. These require all new disclosures.

It does not matter if you use the same loan number or assign new ones. That is an internal bookkeeping system that has nothing to do with regulations.

Whew! I feel better.

jbest: you have a "refinancing" because you have a new note. The loan officer might call it a "renewal" but if you read §226.20(a) [and similar sections in RESPA and HMDA], you will see that a new note is a refinancing.

The above makes sense to me. That's how I see it too.

Since I'm still on my soapbox, I thought I would continue:

I bet we get 2-3 questions every day here at BOL about "refinance vs. renewals" and it is all because people use these terms in different ways.

Everyone raise your right hand and repeat after me:
"I will always use these terms in the correct way and vow to help others understand how to use them correctly as well."

Let's try to get these terms standardized (they are in the regulations) so that we can stop wasting time on this topic.

Also, bookmark this string as a favorite. Every time someone asks a "renewal or refinance" question, simply point them to this thread and we can quit discussing it over and over and over.

OK, I'm done (I think).

I swear - Thank you David and Dan

I'm glad I found this thread we are going through this same discussion and are finding it very difficult to come to a common understanding. Everyone sees it differently. David - if a modification and a renewal and extension are as you stated "the same thing", then what actually determines when a "modification" agreement is used vs. just doing a renewal? Is this more of a "system" issue in how banks do this? On open-end loans (i.e. a HELOC), if you are increasing the line, would you "modify" or "refinance"? We have a modification agreement for our HELOCs. Can you "renew" a loan with additional money? Is this a renewal or a "refinance"? Is it different for consumer vs. commercial loans? I'm sorry for all the questions and would really appreciate any input. Thank you as always!

Yessssss. Please clarify how best practices are established on how to handle an increase or change in the amount of the loan - should that be used as an indicator of how to 'process' the request (modification or refinance)?

Not to create more confusion, but I have heard from regulators that some modifications will trigger disclosures as well. Their theory is if you make enough changes to the original obligation, you have effectively replaced it with a new obligation. Go figure.

First, let me say that the only legal or regulatory source that we have for these terms is in the TIL Act, RESPA and HMDA ((Regulations Z, X and C, respectively). Specifically, refer to §226.20(a), the definition of "refinancings" in §3500.2 and §203.2(k). These are the only official guidances of which I am aware. From these and from 16 years in the regulatory industry, I have come to the following conclusions.

Be sure to read my first post to this string where I stated:

Quote:

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A "modification" is NOT a new note. It modifies an existing loan. It does not require new disclosures (in most cases - RofR and Flood are the exception, if applicable).

A "renewal" and "extension" are the same thing as a modification. They do NOT legally replace, satisfy or extinguish the original loan.

A "refinance" is a new note that replaces, satisfies or extinguishes (legally) the original loan. Loan A is paid off by Loan B. These require all new disclosures.

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Now to your specific questions:

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David - if a modification and a renewal and extension are as you stated "the same thing", then what actually determines when a "modification" agreement is used vs. just doing a renewal? Is this more of a "system" issue in how banks do this?

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A "modification" can be several things. It is a general term used for extensions (generally where the maturity date is increased for a month, a payment is pushed to the end of the installment loan, etc. but nothing else changes) or for renewals (where the entire loan is re-done (like a 3 month single payment loan that is renewed to another a 3 month single payment loan). It is not a "system issue". It is purely terminology.

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On open-end loans (i.e. a HELOC), if you are increasing the line, would you "modify" or "refinance"? We have a modification agreement for our HELOCs. Can you "renew" a loan with additional money? Is this a renewal or a "refinance"?

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I would call this an "increase" if I left the maturity date and everything else the same and didn't replace the original loan with a new loan. If I replaced the old loan with a new loan (legally satisfy and replace) then it is a "refinance" - no if, and's or but's about it.

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Is it different for consumer vs. commercial loans?

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My short answer is "no." Obviously, Reg Z & RESPA do not apply to non-consumer loans, but HMDA certainly does (to some). I encourage you to use the same terms for all types of loans in your institution - whether consumer or commercial.

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Please clarify how best practices are established on how to handle an increase or change in the amount of the loan - should that be used as an indicator of how to 'process' the request (modification or refinance)?

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My best practices opinion only: If you are lowering interest rates, lowering payments, skipping a payment at the borrower's request or other types of "customer friendly" changes, then I would simply prepare some type of modification/extension agreement.

If you are "re-doing" the loan, increasing fees, increasing the interest rate, or some other type of change that may not be as "friendly" to the borrower, I would prepare all new disclosures. Do you have to? Not necessarily, but I think it passes the "smell test" and there are no questions down the road.

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Not to create more confusion, but I have heard from regulators that some modifications will trigger disclosures as well. Their theory is if you make enough changes to the original obligation, you have effectively replaced it with a new obligation. Go figure.

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Absolutely not true! All 3 regulations [Reg Z - 226.20(a), RESPA and HMDA] clearly state that a "refinancing" is when a new note legally satisfies, replaces and extinguishes a previous note. If you do not do this, you do not have a refinancings - no matter how many, or how few, terms you change.

If your examiners say different, then they are wrong and are not following the regulations. Point this out to them. Discuss it with them. I was an examiner and certainly didn't know everything no matter how hard I tried. The same holds true today - I'm still learning. So are your examiners. Hopefully, so are you.

Thank you for your comments David, good facts. However, for a consumer loan, if it is 'friendly', in that the customer requests and increase and there are no other changes (term, rate, etc.)...wouldn't a TIL for the the amount of the increase be prudent? Some systems don't generate the disclosures if you modify the note, and to be safe we have often done a refinance of the note in order to generate a disclosure. I"ve not found clear guidance on whether or not a TIL w/b required in this 'increase' scenario - is it buried in the regs and I don't know where to look? I guess an example of when the system drives?

I'm not David, but 226.20 and its Commentary gives good guidance. As an example (from 226.20):

Previous regulation: Section 226.8(j) through (l), and Interpretation

Sections 226.807, 226.811, 226.814, and 226.817.

1981 changes: While the previous regulation treated virtually any change in terms as a refinancing requiring new disclosures, this regulation limits refinancings to transactions in which the entire original obligation is extinguished and replaced by a new one. Redisclosure is no longer required for deferrals or extensions.

Does this mean if you provide additional funds on a modification would it be HMDA reportable as a Refinance?

Modifications are not reportable under Reg. C.

So if you advance additional money - would that fall under a modification agreement?

Yes, it can. A modification can be anything. What a modification is not is a new loan that satisfies an old loan (that's a "refinance"). It's really that simple!

But isn't additional money considered an "extension of credit" and how does that fall into Reg Z and refinance?

Reg Z (as well as RESPA and HMDA) doesn't care if there is new money extended. It only cares if legally there is a new transaction - a refinance. If not, no disclosures are required. Please read 226.20(a) and it's commentary.

Well you introduced the "variable" feature and that can create some change under §226.20(c) and the OSC section you cited.

Interesting revival of the "renew vs. refinance" discussion. (Rant coming.)

I e-mailed an FDIC Field Review Examiner recently regarding the need for a new Flood Determination when we do our "refinance". Due to ALM issues at my Bank, we refinance loans every 18 - 24 months. We take new applications, perform new credit bureaus and essentially re-qualify the borrowers (especially important so the loans are not viewed as "disguised ARM's").

This is the answer that I received:

"This email is in response to your Flood Insurance question submitted to the FDIC following the Dallas Teleconference on Flood on August 25, 2005.

The definition of a refinancing according to Regulation Z - Truth in Lending states that the contract and other applicable law governs whether a refinaincing has occured. The TILA commentary to paragraph 20(a) indicates that a refinancing is a new transaction requirieng a complete new set of disclosures. Whether a refinancing has occurred is determined by reference to whether the original obligation has been satisfied or extinguised and replaced by a new obligation, based on the parties' contract and aplicable law. The new obligation must completely replace the prior one. The tie-in to other "applicable law" has been interpreted as certain transactions were not refinancings because under particular state laws or cases the original credit obligations were not extinguished. These types of laws are sometimes referred to as "relation-back" or "novation" rules. Under these rules the the argument has been made that the issuance of a second note does not necessarily satisfy and replace the original obligation, but instead is merely a continuation of the prior note, thus maintaining the lender's lien priority.

In the case of Louisiana law, collateral mortgages remain in existence for a number of years and are re-inscribed every 10 years or so. Based on the scenario provided, you did not state that the lien had been satisfied and replaced by a new one. Which would indicate that a refinancing has not occurred based on the definition provided by Regulation Z. If this is the case, the bank can use the previous determination if it is within the 7 year timeframe and was recorded on a designated SFHDF as mandated by the 1994 Reform Act. Consequently, if a refinancing has occurred according to the definitions provided by Regulation Z, a new determination for Flood Insurance is needed."

It appears that the FDIC is back on the "the real obligation is the mortgage not the Bank promissory note" bandwagon. This issue came up in my FDIC region back in 2004 in regard to the revised definition of refinance for HMDA purposes. The FDIC (Dallas, Jackson, Ms. and Baton Rouge, La. offices) finally were convinced by Washington , D.C. that the lien had nothing to do with the refinance. But prior to that, they had been telling their banks that a refinance only occurred for HMDA purposes when the Mortgage documents were satisfied and replaced. Therefore, there should be some concern as to whether these banks then went back and correctly reported HMDA loans where the bank promissory note was satisfied and replaced. The FDIC stated that it wasn't necessary for these banks to go back and properly report. So how much of the newly released HMDA information was actually reported correctly with respect to refinances?

As David Dickinson stated, wouldn't it be nice if the Regulator's could come up with a "universal" definition for some terms that everyone could agree to use?

(Rant over.)