One of our consumer mortgage loans (for owner-occupied residential real property) matured last week. If we extend the maturity date of the loan, would it be considered a refinance because it already matured (and as a result be subject to the new CFPB mortgage rules)?

We agree that the CFPB’s new ability-to-repay requirements do not apply to renewals of existing loans, provided that the renewals are not considered “refinancings” under Regulation Z. Official Interpretations, 12 CFR 1026, Paragraph 43(a), Comment 1 (“§1026.43 does not apply to any change to an existing loan that is not treated as a refinancing under §1026.20(a)”). However, in determining whether the extension of the maturity date constitutes a refinance, you must look to the loan documents. While we can provide you with some guidance on determining whether a renewal will be considered a refinancing, the issue is very fact-specific, and we cannot advise as to whether a specific transaction will be considered a refinancing.

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” (Regulation Z), (or “by the same borrower” under RESPA). 12 CFR 1026.20(a)12 CFR 1024.2(b). The Regulation Z Official Staff Commentary states that this determination is “based on the parties’ contract and applicable law.” Official Staff Commentary, 12 CFR 1026 Paragraph 20(a) Comment 1.

While this issue apparently is not frequently litigated in court, we have found a few cases in which a court has determined a second transaction to be a modification and not a refinancing. It may be useful to examine the contract language relied on by those courts for their findings that the transactions at issue were modifications and not refinancings. See Rodriguez v. Chase Home Finance, LLC, No. 10 C 05876 (N.D. Ill. Sept. 23, 2011); In re Sheppard, 299 BR 753, 764 (Bankr. E.D.Penn. 2003).

For example, in the Illinois Rodriguez case, the 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 modification agreement, the court found that the transaction was not a refinance.

Also, the Seventh Circuit has held that the extension of a loan after it has already matured is not necessarily a “refinance,” albeit in the context of a lump-sum payday loan. The court held that an extension of a loan beyond the original due date is not, automatically, a refinance. “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.” Jackson v. American Loan Co., Inc., 202 F.3d 911, 913 (7th Cir. 2000). Because the loan did not “expire” when it matured, the court held that it was possible to renew the loan without triggering Regulation Z’s refinance requirements.

In sum, we recommend examining the agreement for the loan modification or extension to ensure that it is not satisfying and replacing the original loan documents. If the original loan documents will remain in effect, the subsequent extension or modification most likely should not be considered a refinancing, in which case the CFPB's ability to repay rules should not apply.