Start Over if Taking Additional Collateral on Residence?

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Question:

I have a question. The bank has taken additional collateral on a Consumer residential loan. The owner of the additional collateral (who is not the borrower) wants to sell and replace with different collateral. The bank wants to do this without doing a new loan. The only thing changing is the additional collateral - nothing pertaining to rate or payment is being changed. Would it be compliant to do a modification making reference to the new collateral? We would have to do a new flood determination for the new collateral being taken and a rescission since the collateral owner is putting up their primary residence. There is no cost to the original borrower but I'm guessing we would need to do a new settlement statement since we would be collecting a new flood determination from the collateral owner. Or would you suggest starting over?

Answer:

Starting over with a new lien is clean but may not be necessary. You should discuss this with counsel to determine the cost of new documents to substitute one piece of collateral for another. RESPA has exemptions that may also fit this if a simple modification/substitution can occur (see Section 1024.5(b)(6)), and Reg Z allows it under Section 1026.20.

First published on BankersOnline.com 7/15/13