Based on these facts, your bank may need to enter into a new promissory note and record a new mortgage in order to secure the advance of additional funds; however, if you roll up the existing promissory note into a new note, you could jeopardize your priority lien position with respect to existing creditors and the existing loan balance.  As to your question about whether new disclosures are required by Regulation Z if you modify the current loan terms to extend further credit and/or the maturity date, the answer would depend on the documentation created to amend the promissory note.

Under Illinois law, whether a mortgage can secure future advances depends on the specific language in the mortgage or the note itself. The Illinois Mortgage Foreclosure Law provides that future loan advances are covered by a recorded mortgage only if the advances are referenced in the mortgage or its companion promissory note. Since your original mortgage does not address future advances, it would not secure the additional amounts your bank seeks to advance unless its companion promissory note provides for future advances. And since we have not reviewed the promissory note, we cannot comment on whether your recorded mortgage would effectively secure further advances in this case.

In any event, if either extending the maturity date or advancing new credit meets the federal definition of a “refinancing,” your bank would be required to provide the borrower with new TILA-RESPA Integrated Disclosures. The general rule is that a refinancing occurs when an existing obligation is “satisfied and replaced by a new obligation undertaken by the same consumer.” Regulation Z’s “Staff Commentary” notes that determining whether this occurs is “based on the parties’ contract and applicable law.” Given Illinois law, if properly executed it is possible to restructure an existing note to extend the maturity date and provide additional credit without crossing this threshold and creating a refinancing – but again, whether this can be accomplished here to advance new funds will depend on the language in the existing promissory note.

In addition, we should note that if a refinancing were to occur, you would be required to provide the borrower with a new notice of their right of rescission if the mortgaged property is their principal dwelling.

In light of the above discussion, we recommend that you ask your bank counsel to review the current promissory note to determine whether it covers the advancement of new funds. If it does, you should be able to structure the loan modification agreement in a manner that will avoid its characterization as a refinancing. In such case, we do not believe that the existing recorded mortgage would need to be modified and re-recorded under Illinois law, but importantly, you also should confirm this point with your bank counsel.

If the current promissory note does not address future advances, however, any modification of it to include future advances likely would be viewed as a refinancing under both Regulation Z and Illinois law. As a consequence, the currently recorded mortgage no longer would protect the priority of your existing lien on the existing loan balance against the borrower’s judgment creditors and other recorded creditors in existence prior to your recording of a new mortgage for the refinancing. To prevent this result, you may wish to consider amending the current note only with respect to extending the maturity date on the current loan – while taking care in the documentation to not create a refinancing – and then entering into a second loan agreement and recording a second mortgage for the advancement of additional funds. Keep in mind, though, this second mortgage would provide a junior lien position with respect to your first mortgage, as well as with respect to any judgment creditors or other recorded creditors in existence prior to the filing of the second mortgage.

For resources related to our guidance, please see:

• Illinois Mortgage Foreclosure Law, 735 ILCS 5/15-1302 (“Certain Future Advances.

  (a) Except as provided in subsection (b) of Section 15-1302, as to any monies advanced or applied more than 18 months after a mortgage is recorded, the mortgage shall be a lien as to subsequent purchasers and judgment creditors only from the time such monies are advanced or applied. However, nothing in this Section shall affect any lien arising or existing by virtue of the Mechanics Lien Act.

  (b)(1) All monies advanced or applied pursuant to commitment, whenever advanced or applied, shall be a lien from the time the mortgage is recorded. An advance shall be deemed made pursuant to commitment only if the mortgagee has bound itself to make such advance in the mortgage or in an instrument executed contemporaneously with, and referred to in, the mortgage, whether or not a subsequent event of default or other event not within the mortgagee's control has relieved or may relieve the mortgagee from its obligation.”)
   

• Farm Credit Bank of St. Louis v. Biethman, 262 Ill. App. 3d 614, 623-634 (5th Dist. 1994) (“Biethman is correct that in order to secure future advances under a mortgage document, the amount secured must be specified in the mortgage.”).
   
• 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 . . . . The following shall not be treated as a refinancing:

  *     *     *     *     *

  ​(4) A change in the payment schedule or a change in collateral requirements as a result of the consumer's default or delinquency, unless the rate is increased, or the new amount financed exceeds the unpaid balance plus earned finance charge and premiums for continuation of insurance of the types described in § 1026.4(d).”)
   

• 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. . . .”)
   
• Regulation Z, 12 CFR 1026.23(f)(2) (“The right to rescind does not apply to. . . . A refinancing or consolidation by the same creditor of an extension of credit already secured by the consumer’s principal dwelling. The right of rescission shall apply, however, to the extent the new amount financed exceeds the unpaid principal balance, any earned unpaid finance charge on the existing debt, and amounts attributed solely to the costs of the refinancing or consolidation.”)
   
• Regulation Z, Official Interpretations, 12 CFR 1026, Paragraph 23(f)(2), Comment 4 (“If the refinancing involves a new advance of money, the amount of the new advance is rescindable.”)

• CQ 2019-059 (“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.”)

• CQ 2017-268 (“There are a few court decisions that indicate how to structure a transaction as a modification as opposed to a refinancing. The difference will depend on the specific language that you use in the documentation to 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.”)

• CQ 2016-233 (“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. Relying on these three provisions, the court also held that the loan modification was not a refinancing.”)

• Bowling Green Sports Center, Inc. v. G.A.G. LLC, 77 N.E.3d 728, 732 (2nd Dist. 2017) (“Although no Illinois court has yet addressed this issue, courts in other states have uniformly held that, while a senior lender and a mortgagor can agree to modify the terms of the underlying note or mortgage without first notifying or obtaining the consent of any junior lenders, if the modification is such that it prejudices the rights or impairs the security of any junior lenders, their consent is required. . . . We note that this authority is consistent with the Restatement (Third) of Prop.: Mortgages § 7.3 (1997). That section provides in pertinent part: ‘Replacement and Modification of Senior Mortgages: Effect on Intervening Interests . . . . (b) If a senior mortgage or the obligation it secures is modified by the parties, the mortgage as modified retains priority as against junior interests in the real estate, except to the extent that the modification is materially prejudicial to the holders of such interests and is not within the scope of a reservation of right to modify as provided in Subsection (c).’”)

• Restatement (Third) of Prop.: Mortgages § 7.3 cmt. c (1997) (“Not all modifications will materially prejudice junior interests. For example, mortgagees commonly consent to an extension of the mortgage maturity date or to a rescheduling or “stretching out” of installment payments. Absent an increase in the principal amount or the interest rate of the mortgage, such modifications normally do not jeopardize the mortgagee's priority as against intervening interests. See Illustrations 7-8. Extensions of maturity generally reduce the likelihood of foreclosure of the senior mortgage and thus are beneficial, rather than prejudicial, to the interests of junior lienors. See the discussion in Comment a.”)

• In re Crane, 742 F.3d 702, 710 (7th Cir. 2013) (“To conclude, the recorded mortgages at issue in these appeals failed to state the interest rates and maturity dates of the underlying debts. Even so, the mortgages supplied the essential terms of a mortgage under Illinois law and were sufficient to satisfy the common law and the permissive terms of 765 ILCS 5/11. Thus, the mortgages provided constructive record notice of the mortgages to the trustees, so the trustees may not avoid the mortgages under 11 U.S.C. § 544(a)(3).”)

• Conveyances Act, 765 ILCS 5/11(a) (“Mortgages of lands may be substantially in the following form: The Mortgagor (here insert name or names), mortgages and warrants to (here insert name or names of mortgagee or mortgagees), to secure the payment of (here recite the nature and amount of indebtedness, showing when due and the rate of interest, and whether secured by note or otherwise), the following described real estate (here insert description thereof), situated in the County of …., in the State of Illinois.”)

• Conveyances Act, 765 ILCS 5/11(b) (“The provisions of subsection (a) regarding the form of a mortgage are, and have always been, permissive and not mandatory. Accordingly, the failure of an otherwise lawfully executed and recorded mortgage to be in the form described in subsection (a) in one or more respects, including the failure to state the interest rate or the maturity date, or both, shall not affect the validity or priority of the mortgage, nor shall its recordation be ineffective for notice purposes regardless of when the mortgage was recorded.”)