Can you modify credit from open-end to closed-end without it being considered a refinance, which would trigger an ability-to-repay (ATR) analysis? When a HELOC has matured, we extend a one-year renewal and provide closed-end disclosures, after which we modify the HELOC into a closed-end balloon loan, without new disclosures. If the HELOC has not yet matured, we extend a renewal (either one year or multiple years with a balloon payment) and do not provide new disclosures. However, in either case, we do not perform an ATR analysis. Is this correct?

No, we do not believe a HELOC can be converted after maturity into a closed-end loan as a modification; such a conversion would be considered a refinancing and require an ATR analysis. However, we do believe a HELOC can be converted to a closed-end loan prior to maturity as a modification, which would not trigger an ATR analysis.

A HELOC that is renewed after its maturity date is considered a new transaction for the purposes of Regulation Z. (Note that this rule is specific to HELOCs.) Converting a HELOC after maturity to a closed-end loan is a refinancing that requires closed-end disclosures, as well as an ATR analysis.

Prior to maturity, we believe that a HELOC may be converted to a closed-end credit agreement through a loan modification, but your bank must provide the applicable closed-end credit disclosures. The loan modification should be documented with a modification agreement, rather than a new note. However, an ATR analysis is not necessary for this loan modification.

Under Regulation Z, the general rule is that a refinancing occurs only when an existing obligation is “satisfied and replaced” by a new transaction, based on the parties’ contract and applicable law. (There is an exception to this rule when converting a HELOC to a closed-end loan after maturity, as discussed above.) Generally, the difference between a refinancing and a renewal or modification will depend on the specific language that you use in the documentation to renew or 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.

For resources related to our guidance, please see:

Regulation Z, Official Interpretations, Paragraph 40, Comment 2 (“Section 1026.9(c) applies if, by written agreement under § 1026.40(f)(3)(iii), a creditor changes the terms of a home equity plan — entered into on or after November 7, 1989 — at or before its scheduled expiration, for example, by renewing a plan on different terms. A new plan results, however, if the plan is renewed (with or without changes to the terms) after the scheduled expiration. The new plan is subject to all open-end credit rules, including §§ 1026.6, 1026.15, and 1026.40.”)

Regulation Z, Official Interpretations, 12 CFR 1026, Paragraph 43(a), Comment 1 (Exception from the ATR requirements for “any change to an existing loan that is not treated as a refinancing under §1026.20(a).”)

Regulation Z, 12 CFR 1026.43(a) (“This section applies to any consumer credit transaction that is secured by a dwelling, as defined in § 1026.2(a)(19), including any real property attached to a dwelling, other than: (1) A home equity line of credit subject to § 1026.40. . . . ”)

Regulation Z, Official Interpretations, Paragraph 17(b), Comment 2 (“Except for home equity plans subject to § 1026.40 in which the agreement provides for a repayment phase, if an open-end credit account is converted to a closed-end transaction under a written agreement with the consumer, the creditor must provide a set of closed-end credit disclosures before consummation of the closed-end transaction.”)

Regulation Z, Official Interpretations, Paragraph 40, Comment 5(iii) (“If the consumer and creditor enter into an agreement during the draw period to repay all or part of the principal balance and the amount of available credit will not be replenished as the principal balance is repaid, the creditor must give closed-end credit disclosures pursuant to subpart C for that new agreement. In such cases, subpart B, including the substantive rules, does not apply to the closed-end credit transaction, although it will continue to apply to any remaining open-end credit available under the plan.”)

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. . . . In any form, the new obligation must completely replace the prior one. . . . A substitution of agreements that meets the refinancing definition will require new disclosures, even if the substitution does not substantially alter the prior credit terms.”)

Rodriguez v. Chase Home Finance, LLC, No. 10 C 05876 (N.D. Ill. Sept. 23, 2011) (Determining that a modification agreement that expressly stated it would “amend and supplement” the original mortgage and note and would not constitute a “satisfaction or release” of the original obligations was not a refinancing.)

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.’”)