We are acquiring an institution that has three-year balloon loans. We would like to modify the notes by extending the balloon term to five years and changing the interest rate. Will new GFEs be required, or can we treat this as a modification?

While we can provide you with some guidance on determining whether these changes will be considered a refinancing, the issue is very fact-specific, and absent more facts, we cannot advise as to whether a specific balloon loan term or interest rate change would be considered a modification or refinancing (the latter requiring new TILA and RESPA disclosures). Additionally, we are operating under the assumption that you are purchasing these financial institutions and merging them into your charter, thereby becoming their successor financial institution and not a new lender.

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.” This determination is “based on the parties’ contract and applicable law” (largely meaning state law). However, a new obligation undertaken by the same consumer with a different lender would be considered a refinancing.

There is a smattering of court decisions addressing this issue based on an analysis of contract language found in the mortgage note. One federal court in Illinois analyzed a modification agreement stating that it would “amend and supplement” the original note and mortgage. The modification agreement 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 refinancing.

Additional facts also might shed light on the answer. A reduction in the annual percentage rate with a corresponding change in the payment schedule is not a refinancing. In addition, an extension of a loan term generally is considered to be a modification, not a refinancing. In addition, even if your changes qualify as a modification, rather than a refinancing, the language in the documentation your bank uses to accomplish these changes will be important. For example, there should be no language indicating that a new note is being issued (since issuing a new note constitutes a renewal).

For resources related to our guidance, please see below:

RESPA — 12 CFR 1024.2 (defines “refinancing” as a transaction where an existing obligation is satisfied and replaced by a new obligation undertaken by the same borrower with the same or a new lender, and excludes a reduction in the annual percentage rate with a corresponding change in the payment schedule from the definition of refinancing)

Regulation Z — 12 CFR 1026.20(a) (defines “refinancing” as a transaction where an existing obligation is satisfied and replaced by a new obligation undertaken by the same consumer and in subsection (a)(2) provides that a reduction in the annual percentage rate with a corresponding change in the payment schedule is not a refinancing)

Regulation Z — Official Interpretations 12 CFR 1026, Paragraph 20(a), Comment 5 (The refinancing section applies only to refinancings undertaken by the original creditor or a holder or servicer of the original obligation. A “refinancing” by any other person is a new transaction under the regulation, not a refinancing under this section)

Rodriguez v. Chase Home Finance, LLC, No. 10 C 05876 (N.D. Ill. Sept. 23, 2011) (analyzing the language of a modification agreement and finding that it was not a refinancing)

In re Gunn, 317 Fed.Appx. 883, 885 (11th Cir. 2008) (merely extending an obligation, without satisfying and replacing it, is not a refinancing)