Yes, we believe you may extend and increase the fixed interest rate on a consumer balloon mortgage without the transaction being considered a refinancing, provided that your modification agreement does not satisfy and replace the existing mortgage loan with a new transaction. Further, we do not believe this answer would change if you extend and increase the interest rate after a consumer HELOC has already matured.

For consumer balloon (and other) loans, Regulation Z requires new disclosures when an existing loan is “refinanced,” which Regulation Z treats as a new transaction. However, new disclosures are not required when an existing loan is modified without being refinanced. The general rule under Regulation Z is that a “refinancing” occurs only when an existing obligation is “satisfied and replaced” by a new transaction, which is determined by the language in the parties’ contract and applicable state law.

There are a few court decisions that indicate how to structure a transaction as a modification, as opposed to a refinancing. The difference will depend on the specific language that you use in the documentation to modify the loan. For example, one federal court in Illinois reviewed the language of a modification agreement and determined that it did not constitute a refinancing because the modification agreement specifically stated that it was merely amending and supplementing the original loan agreement and not satisfying or releasing the existing obligation.

Note that Regulation Z’s Official Interpretations state that if you are amending a consumer loan to increase the interest rate based on a variable rate feature not previously disclosed or to add a variable rate feature, new disclosures are required, even if the existing loan obligation is not being satisfied and replaced. However, the Federal Reserve’s Consumer Compliance Handbook explains that “if, at the time a loan is renewed, the rate is increased, the increase is not considered a variable rate feature. It is the cost of renewal, similar to a flat fee, as long as the new rate remains fixed during the remaining life of the loan. If the original debt is not canceled in connection with such a renewal, the regulation does not require new disclosures.” Consequently, we do not believe that extending and increasing the fixed interest rate of a consumer balloon mortgage would be considered a refinancing requiring new disclosures if the modification agreement does not satisfy and replace the existing mortgage loan with a new transaction.

Additionally, we do not believe this answer would change if you extend and increase the interest rate for a consumer HELOC after it has already matured. The Seventh Circuit federal appellate court has considered a similar issue, albeit in the context of a lump sum payday loan. The court found that the loan did not “expire” when it matured and held that it was permissible to renew the loan after the maturity date without triggering Regulation Z’s refinancing requirements. Similarly, we believe that it is permissible to renew, extend or modify a HELOC after the original maturity date without triggering Regulation Z’s refinancing requirements.

We are not aware of any law or guidance specifying what must be disclosed in a change in terms agreement that extends the term and increases the interest rate for a consumer mortgage loan when such a change in terms is not considered a refinancing. However, we believe that such an agreement should clearly and conspicuously disclose all terms that are changing and ensure they are agreed to by your customer.

For resources related to our guidance, please see:

• Regulation Z, 12 CFR 1026.20(a) (“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. A refinancing is a new transaction requiring new disclosures to the consumer.”)

• Regulation Z, Official Interpretations, Paragraph 20(a), Comment 1 (“A refinancing is a new transaction requiring a complete new set of disclosures. Whether a refinancing has occurred is determined by reference to whether the original obligation has been satisfied or extinguished and replaced by a new obligation, based on the parties’ contract and applicable law. . . .”)

• Regulation Z, Official Interpretations, Paragraph 20(a), Comment 3(ii) (“Even if it is not accomplished by the cancellation of the old obligation and substitution of a new one, a new transaction subject to new disclosures results if the creditor either: A. Increases the rate based on a variable-rate feature that was not previously disclosed; or B. Adds a variable-rate feature to the obligation.”)

• Rodriguez v. Chase Home Finance, LLC, No. 10 C 05876 (N.D. Ill. Sept. 23, 2011) (“Here, Rodriguez’s Modification Agreement states that it ‘will amend and supplement (1) the Mortgage on the Property and (2) the Note secured by the Mortgage. . . .’ In short, because the Modification Agreement merely modifies the previous loan rather than cancelling the loan and creating a new obligation, Rodriguez’s modification does not constitute a ‘refinancing.’”)

• Federal Reserve, Consumer Compliance Handbook, page 37 (“If, at the time a loan is renewed, the rate is increased, the increase is not considered a variable rate feature. It is the cost of renewal, similar to a flat fee, as long as the new rate remains fixed during the remaining life of the loan. If the original debt is not canceled in connection with such a renewal, the regulation does not require new disclosures.”)

• Jackson v. American Loan Co., Inc., 202 F.3d 911, 913 (7th Cir. 2000) (“American Loan does not ‘cancel’ the old loan and note, or substitute a new one, when it agrees to defer repayment until another payday, and thus it does not ‘refinance’ the loan. . . . To say, as plaintiffs do, that a loan ‘expires by its terms’ on the original due date is fanciful. All of the loan’s terms, including the repayment obligation, persist.”)