IBA Compliance Connection

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We have a number of balloon loans that will be maturing soon. Can we extend the maturity dates, increase the interest rates and switch from fixed interest rates to variable interest rates without triggering a refinancing (requiring new disclosures, new notes, etc.)? Also, would we have to redo the ability-to-repay analysis for each balloon loan?

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If you are adding a variable rate feature, you will have to treat these transactions as refinancings, requiring all new disclosures under Regulation Z. A refinancing is a transaction in which an existing obligation is satisfied and replaced by a new obligation, and several Illinois courts have clarified what it means to “satisfy and replace” an existing transaction. In this case, that analysis is unnecessary — the Official Interpretations to Regulation Z provide that adding a variable-rate feature to an existing fixed-rate loan always is treated as a refinancing, “even if it is not accomplished by the cancellation of the old obligation and substitution of a new one.”

Additionally, because you must treat these transactions as refinancings, we believe that you must redo the ability-to-repay (ATR) analyses for these loans. While a transaction that modifies a loan without rising to the level of a refinancing is exempt from the ATR requirements, refinancings are not exempt unless another exception applies. And from what you have told us, we do not believe that any of the other exceptions from the ATR requirements would apply.

For resources related to our guidance, please see:

  • 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.”)

  • Regulation Z, Official Interpretations, 12 CFR 1026, Paragraph 20(a), Comment 3(ii) (“Even if it is not accomplished by the cancellation of the old obligation and substitution of a new one, a new transaction subject to new disclosures results if the creditor . . . (ii) Adds a variable-rate feature to the obligation. . . .”)

  • Regulation Z, 12 CFR Part 1026.43(c)(1) (“A creditor shall not make a loan that is a covered transaction unless the creditor makes a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay the loan according to its terms.”)

  • Regulation Z, 12 CFR Part 1026.43(b)(1) (“Covered transaction means a consumer credit transaction that is secured by a dwelling, as defined in § 1026.2(a)(19), including any real property attached to a dwelling, other than a transaction exempt from coverage under paragraph (a) of this section.”)

  • Official Interpretations, 12 CFR 1026, Paragraph 43(a), Comment 1 (Exception from the ATR requirements for “any change to an existing loan that is not treated as a refinancing under §1026.20(a).”)

  • Regulation Z, 12 CFR Part 1026.43(d) (Exception from the ATR requirements for “the refinancing of a non-standard mortgage into a standard mortgage.”)

  • Regulation Z, 12 CFR Part 1026.43(a)(1)–(3) (Additional exceptions from the ATR requirements.)