IBA Compliance Connection

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When we reach the permanent financing phase on a construction loan, we have borrowers execute a change in terms modifying the loan. Are we required to treat these transactions as refinancings, requiring new sets of disclosures under the TILA-RESPA Integrated Disclosure (TRID) requirements?

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We believe that you may modify a construction loan without it falling within Regulation Z’s definition of a “refinancing” (which would require new disclosures under the TRID requirements). However, the language that you use in the loan modification documents will determine whether you achieve this result.

The general rule is that a refinancing occurs only when an existing obligation is “satisfied and replaced by a new obligation undertaken by the same consumer.” The Regulation Z staff commentary states that this determination is “based on the parties’ contract and applicable law.” While this issue is not often litigated in courts, there are a few cases addressing what constitutes a “refinancing” in the context of the lender making subsequent modifications to a loan.

For example, in one Illinois case, a modification agreement stated that it would “amend and supplement” the original note and mortgage. The modification also had an express disclaimer stating 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.” Based on those provisions in the agreement, the court found that the transaction was not a refinancing.

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.”)
  • Official Interpretations, 12 CFR 1026, 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. . . .”)
  • 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.’”)