We would like to renew our balloon loans that are maturing soon by raising the interest rates and extending the loan terms to thirty years. Do we need to treat these as refinances?

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 balloon loan modification would be considered a refinancing (subjecting the transaction to Regulation Z and the new ability-to-repay (ATR) 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.” 12 CFR 1026.20(a). The Regulation Z staff commentary states that this determination is “based on the parties’ contract and applicable law.” Official Interpretations, 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.

Similar language in the Pennsylvania In re Sheppard case led the court to the same conclusion, that a loan modification was not a “refinance” for purposes of Regulation Z. In that case, the modification agreement stated that it “amends and supplements” the original security agreement, it required the borrower to “comply with all other covenants, agreements, and requirements” from the original security agreement, and it also stated 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 those three provisions, the court held that the modification was not a refinance.