March 4, 2015 at 10:41 am EST #6725shea930Member
We recently had a Safety & Soundness exam with the FDIC and they suggested that we start doing Renewals instead of treating everything like a Refinance. I have no experience with a true renewal we have always just treat everything as a refinance to be on the conservative side of compliance. None of my contacts that I’ve reached out to really do a true renewal either. I’ve tried reaching out to the FDIC for a little guidance but haven’t heard back from them. I just need to bounce what I’ve researched off of someone else to see if I’m understanding correctly and heading in the right direction. The last thing I want to do is create a compliance problem. If you guys can help or if anyone in the Compliance masters group would be willing to talk with me….either way would be fantastic.
From what I’ve researched a renewal and modification are very similar. Basically what I was finding is we can really get away with doing quite a bit as long as we never met what Reg Z considers a “Refinance” which is the below two items:
(1) Changing from fixed to variable rate;
(2) Totally replacing 1 note with another.
Does that mean as long as we modify or renew prior to maturity we could essentially raise the rate, add fees into loan amount, and not be required to provide any new disclosures other than our modification agreement? I’ve seen where if we pull a new CB we should provide CB disclosure and if new appraisal/evaluation is done we should provide appraisal notice? Is this correct? I know we will need to still provide a flood, possibly have to modify the mortgage, come up with appraisal requirements, etc. I know ARM’s are a little trickier on consumer credit too. We would of course still be doing underwriting especially on renewals. I would love to know how others are handling and what documents are involved. Just wanted to see if I’m headed in the right direction. I’m sorry I know I’m full of questions and all over the place in this post. Any help is appreciated.March 5, 2015 at 6:59 pm EST #6726rcooperMember
I agree with your interpretation – if you aren’t replacing the original note with a new note nor are you adding a variable rate or increasing a variable rate that wasn’t previously disclosed then it wouldn’t be a refinancing under Reg Z.
I also agree that you could need to provide the credit score disclosure if a credit report is used (e.g. exception notice, risk based-pricing and FCRA 609g). And the Reg B appraisal/valuation delivery rules would apply to renewals requests secured by a first lien on a dwelling (assuming you order a new appraisal/valuation and aren’t using an existing one) so you would need to comply with the delivery requirements in 1002.14.
I’ll ask Jack to offer his opinion as well. And I hope some members are able to provide you with information based on their experiences.March 9, 2015 at 3:27 pm EDT #6727kmeadeParticipant
I have additional questions based on the original question. I you are using a modification can you raise the rate and add fees to the loan amount? If yes, do you have to have a rescission if it is their primary residence? If yes to that wouldn’t you need a TIL if you need a rescission? Also would or can the modification continue to cause the loan to be a balloon. If yes, how can you structure the balloon? We have considered this as well, so just looking for guidance.March 12, 2015 at 11:02 am EDT #6728rcooperMember
The Federal Reserve’s supervision manual discusses renewals and I believe answers the interest rate and fee portion of your question on page 25: https://www.federalreserve.gov/boarddocs/supmanual/cch/til.pdf
As for right of rescission, it would not apply since it is not a new transaction (assuming no new security interest or funds advanced). Under the closed end rules, even if the transaction is a refinancing it is exempt unless there are funds advanced beyond the outstanding principal plus any unpaid finance charge and fees attributed to the cost of the refinancing or consolidation. If there are new funds beyond these amounts in a refinance situation then rescission would apply to that newly advanced amount.
I’m not sure about your balloon loan question. I’ll get Jack’s opinion on that.
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