Over a year ago, we made an installment loan contract on other real estate owned (OREO) property owned by our bank. The borrowers now are eligible to obtain a new residential loan with us and pay off the contract. The title to the property currently is in our bank’s name. We are selling the loan to Fannie Mae, which is treating it as a refinancing transaction. For purposes of the TRID disclosures, should we treat this as a refinancing or a purchase?

We believe that your bank should identify the loan purpose on the TILA-RESPA Integrated Disclosure (TRID) forms as a refinancing.

The TRID rules require lenders to identify one of four possible loan purposes in the Loan Estimate: (1) purchase, (2) refinance, (3) construction, or (4) home equity. A purchase loan is one made to finance the acquisition of the property securing the loan. A refinance loan is “used to refinance an existing obligation, as defined in § 1026.20(a).” Section 20(a) defines a refinancing as a transaction in which “an existing obligation that was subject to this subpart is satisfied and replaced by a new obligation.”

In our view, this transaction is satisfying and replacing the original installment loan. Consequently, we believe it should be identified as a refinancing.

For resources related to our guidance, please see:

Regulation Z, 12 CFR 1026.37(a)(9) (“For each transaction subject to § 1026.19(e) [closed-end consumer credit transactions secured by real property], the creditor shall disclose the information in this section: The consumer’s intended use for the credit, labeled ‘Purpose,’ using one of the following terms:

i. Purchase. If the credit is to finance the acquisition of the property identified in paragraph (a)(6) of this section [the property securing the transaction], the creditor shall disclose that the loan is for a ‘Purchase.’

ii. Refinance. If the credit is not for the purpose described in paragraph (a)(9)(i) of this section, and if the credit will be used to refinance an existing obligation, as defined in § 1026.20(a) (but without regard to whether the creditor is the original creditor or a holder or servicer of the original obligation), that is secured by the property identified in paragraph (a)(6) of this section, the creditor shall disclose that the loan is for a ‘Refinance.’

iii. Construction. If the credit is not for one of the purposes described in paragraphs (a)(9)(i) or (ii) of this section and the credit will be used to finance the initial construction of a dwelling on the property identified in paragraph (a)(6) of this section, the creditor shall disclose that the loan is for ‘Construction.’

iv. Home equity loan. If the credit is not for one of the purposes described in paragraphs (a)(9)(i) through (iii) of this section, the creditor shall disclose that the loan is a ‘Home Equity Loan.’)

Official Interpretations, Regulation Z, 12 CFR 1026, Paragraph 37(a)(9), Comment 1(i) (“The following examples illustrate when each of the permissible purposes should be disclosed: (i) Purchase. The consumer intends to use the proceeds from the transaction to purchase the property that will secure the extension of credit. . . .”)
Official Interpretations, Regulation Z, 12 CFR 1026, Paragraph 37(a)(9), Comment 1(ii) (“The consumer refinances an existing obligation already secured by the consumer’s dwelling to change the rate, term, or other loan features and may or may not receive cash from the transaction. . . .”)

Official Interpretations, Regulation Z, 12 CFR 1026, Paragraph 37(a)(9), Comment 2 (“Refinance coverage. The disclosure requirements under § 1026.37(a)(9)(ii) apply to credit transactions that meet the definition of a refinancing under § 1026.20(a) but without regard to whether they are made by a creditor, holder, or servicer of the existing obligation. Section 1026.20(a) applies only to refinancings undertaken by the original creditor or a holder or servicer of the original debt. See comment 20(a)-5.”)

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.”)