Yes, we believe that you may renew a balloon loan after its maturity date 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 is important in order to achieve this result.

The Seventh Circuit 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 a balloon payment loan after the original maturity date without triggering Regulation Z’s refinancing requirements.

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,” rather than a modification or renewal.

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.

Similar language in a Pennsylvania case also led to the conclusion that a loan modification was not a “refinancing” for purposes of Regulation Z in the context of a balloon loan. In that case, the modification agreement stated that it “amends and supplements” the original security agreement, and it required the borrower to “comply with all other covenants, agreements, and requirements” in the original security agreement, while also stating that “[n]othing in this Agreement shall be understood or construed to be a satisfaction or release in whole or in part” of the original security agreement.

For resources related to our guidance, please see:

• 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.”)

• 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.’”)

• In re Sheppard, 299 BR 753, 763, 764 (Bankr. E.D.Penn. 2003) (“A review of the Modification evidences no language indicating that the Modification replaces the Original Loan but rather suggests that it does not. The Modification begins with a preamble that it ‘amends and supplements’ the mortgage and note of the Original Loan. . . . Finally, the Modification ends with the express disclaimer that the Modification is not a satisfaction of the Original Loan which remains unchanged except as modified and that the parties are bound by the terms and provisions of the Original Loan as amended by the Modification. . . . There is simply no question of fact that the Modification did not satisfy the Original Loan, as even Plaintiffs concede.”)

• In re Sheppard, 299 BR 753, 757 (Bankr. E.D.Penn. 2003) (The modification agreement at issue also included this language: “‘Nothing in this Agreement shall be understood or construed to be a satisfaction or release in whole or in part of the Note and Security Agreement. except as otherwise specifically provided in this Agreement, the Note and Security Agreement will remain unchanged, and the Borrower and Lender will be bound by and comply with, all of the terms and provisions thereof, as amended by this Agreement.’”)