IBA Compliance Connection

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The IRS filed a tax lien on a property that secures a HELOC. The HELOC promissory note has a five year term (with extensions permitted), and the mortgage securing the HELOC has a twenty year term. Our lien predates the IRS lien, but now the five-year HELOC term is up. Is there a law that prohibits us from renewing the HELOC without entering into a new mortgage? We don’t want to lose our lien position.

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Yes, we believe that you may renew the HELOC without entering into a new mortgage or jeopardizing the priority of your lien. In order to preserve your lien position vis-a-vis the IRS, however, we do recommend entering into a loan renewal agreement with the borrower, as opposed to refinancing the loan.

To establish that the extension of the HELOC is a renewal and not a refinancing (the latter of which might jeopardize the bank’s priority lien position), we think it is helpful to look to Regulation Z for guidance.

Regulation Z distinguishes a “refinancing,” which could require a new mortgage filing and would require a new set of disclosures, from other transactions, such as renewals and modifications. The general rule under Regulation Z is that a refinancing occurs only when an existing obligation is “satisfied and replaced” by a new transaction. One Illinois court examining this issue held that a modification agreement was not a refinancing — the agreement itself stated that it would “amend and supplement” the original note and mortgage and that “nothing in this Agreement shall be understood or construed to be a satisfaction or release in whole or in part of the obligations contained in the Loan Documents.” Another Illinois court reached the same conclusion, even though the original loan already had matured before the lender agreed to renew the loan, and held that the renewal did not trigger Regulation Z’s refinancing provisions.

While your question does not raise any issues under Regulation Z, we think that its treatment of loan renewals is analogous to your situation for purposes of arguing that the loan has not been replaced and that there has been no lapse in the priority of your lien.

For resources related to our guidance, please see:

  • Illinois Mortgage Foreclosure Law, 735 ILCS 5/15-1302(b)(3) (“All monies advanced or applied in accordance with the terms of a revolving credit arrangement secured by a mortgage as authorized by law shall be a lien from the time the mortgage is recorded.”)
  • 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.”)
  • 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.’”)
  • Jackson v. American Loan Co., Inc., 202 F.3d 911, 913 (7th Cir. 2000) (“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.”)