Can we modify or extend a consumer loan after it has matured without changing the interest rate? Can we also do this for residential real estate and commercial loans? Can we backdate the modification agreement to the original maturity date?

Yes, you may modify or extend a matured consumer, residential real estate, or commercial loan without changing the interest rate (unless some provision in the loan agreement prevents the modification or extension). In addition, the effective date that you choose for the modification or renewal is a business decision for your bank.

At least one federal court in Illinois has addressed whether a loan may be renewed after it matures. In the context of a lump-sum payday loan, the Seventh Circuit has found that a loan does not “expire” when it matures and that it is permissible to renew a loan after its maturity date. We believe you may similarly modify or extend a matured loan.

However, in the context of consumer loans (including those secured by residential real estate), we note that Regulation Z distinguishes between renewals, extensions and modifications, which typically are not considered new transactions, from a “refinancing,” which is considered a new transaction subject to new disclosures. Whether a subsequent transaction should be treated as a “modification” or a “refinancing” depends on the specific facts, including consideration of the original and any subsequent loan documents. The general rule is that a refinancing occurs only when an existing obligation is “satisfied and replaced” by a new transaction, based on the parties’ contract and applicable law.

A loan extension that simply renews the existing terms likely would not be considered a refinancing under Regulation Z. If you plan to change any terms, though, there are several 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 modification documentation. 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 simply amending and supplementing the original loan agreement and not satisfying or releasing the existing obligation.

We also note that the effective date which you choose for the modification or extension of a note is a business decision for your bank. Under Illinois law, it is permissible to backdate an agreement — in other words, to use an effective date for an agreement that predates (or postdates) its signing date — provided that the parties’ intention to do this is “clear from the face of the contract.”

For resources related to our guidance, please see:

Jackson v. American Loan Co., Inc., 202 F.3d 911, 913 (7th Cir. 2000) (“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.”)
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.”)
Rodriguez v. Chase Home Finance, LLC, No. 10 C 05876 (N.D. Ill. Sept. 23, 2011) (Determining that a modification agreement that expressly stated it would “amend and supplement” the original mortgage and note and would not constitute a “satisfaction or release” of the original obligations was not a refinancing.)
Grubb & Ellis Co. v. Bradley Real Estate Trust, 909 F.2d 1050, 1054 (7th Cir. 1990) (“Although there is little recent law on the subject, Illinois courts have, in the past, permitted the ‘relation back’ theory of contract effectiveness: that is, contractual terms may be effective for a period before the contract is executed, so long as such coverage is clear from the face of the contract . . . .”)
Asset Recovery Contracting, LLC v. Walsh Constr. Co. of Ill., 366 Ill.Dec. 615, 631 (1st Dist. 2012) (“As is clear from Illinois precedent, the date on the contract is ordinarily the effective date, and where the contract is executed later, its contractual terms relate back and are effective from the date of the contract if such coverage is clear from the face of the contract, as it is here.”)