IBA Compliance Connection

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We have a borrower with two commercial loans secured by first liens on residential rental property. When the borrower fell behind on her payments last year, we allowed her to make interest-only payments for one month and then resume making the regular principal and interest payments. The arrangement was documented with a letter signed by the borrower. The borrower recently fell behind again, and we are contemplating allowing her to make interest-only payments for three months, after which she will resume making full principal and interest payments. We also would document this arrangement with a letter signed by the borrower. Are there any regulatory implications with respect to modifying a loan repayment in this fashion?

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We are not aware of any significant regulatory implications with this transaction, although your bank may be required to provide a copy of an appraisal or other written valuation if one was prepared in connection with the customer’s request for temporarily modifying the loan repayment terms (which we understand is not the case here).

Resources Relied On For Answer

  • Regulation B, 12 CFR 1002.14(a)(1) (“A creditor shall provide an applicant a copy of all appraisals and other written valuations developed in connection with an application for credit that is to be secured by a first lien on a dwelling.”)
  • Regulation B, 12 CFR 1002.14(b)(2) (“Dwelling. The term ‘dwelling’ means a residential structure that contains one to four units whether or not that structure is attached to real property. The term includes, but is not limited to, an individual condominium or cooperative unit, and a mobile or other manufactured home.”)
  • Regulation B, 12 CFR 1002.14(a)(2) (“For applications subject to paragraph (a)(1) of this section, a creditor shall mail or deliver to an applicant, not later than the third business day after the creditor receives an application for credit that is to be secured by a first lien on a dwelling, a notice in writing of the applicant’s right to receive a copy of all written appraisals developed in connection with the application. . . .”)
  • Equal Credit Opportunity Act (ECOA) Valuations Rule, Small Entity Compliance Guide, pg. 10 (“Loss-mitigation transactions, such as loan modifications, short sales, and deed-in-lieu transactions, are subject to 1002.14(a)(1) if they are credit transactions covered by Regulation B.”)
  • Regulation B, 12 CFR 1002.2(f)  (“Application means an oral or written request for an extension of credit that is made in accordance with procedures used by a creditor for the type of credit requested.”) 
  • Regulation B, 12 CFR 1002.2(j) (“Credit means the right granted by a creditor to an applicant to defer payment of a debt, incur debt and defer its payment, or purchase property or services and defer payment therefor.”)
  • Regulation B, Official Interpretations, Paragraph 2(j), Comment 1 (“Regulation B covers a wider range of credit transactions than Regulation Z (Truth in Lending). Under Regulation B, a transaction is credit if there is a right to defer payment of a debt – regardless of whether the credit is for personal or commercial purposes, the number of installments required for repayment, or whether the transaction is subject to a finance charge.”)