Interest Rate Reduction on Existing Loans: Disclosures?

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Question:

With falling rates, we're having several customers who want lower rates on their loans. We're agreeing to do this but charging a 1% (of the outstanding loan balance) modification fee. Does this require redisclosure under Reg Z? We are not refinancing, simply lowering the rate and charging the 1% fee. If we were only lowering the rate, I don't find in Reg Z that redisclosure is required, but the 1% fee would that be a finance charge and therefore, trigger new disclosures?

Answer:

Answer by Jack Holzknecht:
Section 226.20 of Regulation Z requires a new disclosure when a "refinancing" has taken place. A refinancing occurs "when an existing obligation that was subject to this subpart is satisfied and replaced by a new obligation undertaken by the same consumer." The concept of "satisfied and replaced" is determined by state law and the contract that governs the agreement. Generally, a refinancing occurs when the lender obtains a new note.

If the lower rate is reflected in a modification agreement, then no "refinance" has taken place and no TIL disclosure is needed. If you use a new note, you need a new disclosure.

Answer:

Answer by Lucy Griffin:
Generally, any reduction in rate is in the favor of the consumer. Both RESPA and Z allow you to charge a fee for making the modification. Neither regulation specifies a limit on the fee. In addition to the section cited by Guru Jack, there is 226.17(c) to which 226.20 connects. That basically says that the legal obligation is what controls. If the original legal obligation stays in place, then there is not a new disclosure requirement.

First published on BankersOnline.com 11/5/01