A customer with a fixed-rate residential mortgage loan would like to modify the loan to lower the fixed interest rate and shorten the loan term, which would result in a higher monthly payment. Can we make these changes through a modification, and are any new disclosures or a new right of rescission notice required?

Yes, we believe you may modify the terms of the existing loan to decrease the interest rate and shorten the loan term without falling within Regulation Z’s definition of a “refinancing” (which would require new disclosures under the TRID requirements). Also, the right of rescission does not apply to the modification of an existing dwelling-secured obligation if a new security interest is not being taken or new money is not being advanced.

TRID disclosures are required for existing loans only when they are “refinanced,” which Regulation Z treats as a new transaction. The general rule is that a “refinancing” occurs only when an existing obligation is “satisfied and replaced” by a new transaction, which is determined by the language in the parties’ contract, as well as applicable state law.

There are a few court decisions that indicate how to structure a transaction as a modification, as opposed to a refinancing, under state law. The difference will depend on the specific language that you use in the documentation to modify the loan. 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 merely amending and supplementing the original loan agreement and not satisfying or releasing the existing obligation.

New TRID disclosures also are required when a variable-rate feature is added to a loan obligation — even when the original obligation is not being satisfied and replaced. However, in this case, a variable-rate feature is not being added to the loan, since the decreased interest rate will remain fixed.

As to the right of rescission, Regulation Z generally provides a right to rescind a credit transaction when a consumer’s ownership interest in a principal dwelling will be subject to a security interest. However, the right of rescission does not apply to a modification (or a refinancing) by the original creditor for a closed-end loan already secured by the consumer’s principal dwelling if a new security interest is not being taken or new money is not being advanced. Consequently, you do not need to provide your customer with a right of rescission notice if you are not taking a new security interest or advancing new money.

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. A refinancing is a new transaction requiring new disclosures to the consumer.”)

Official Interpretations, 12 CFR 1026, Paragraph 20(a), Comment 1 (“A refinancing is a new transaction requiring a complete new set of disclosures. Whether a refinancing has occurred is determined by reference to whether the original obligation has been satisfied or extinguished and replaced by a new obligation, based on the parties’ contract and applicable law. . . .”)

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 either: A. Increases the rate based on a variable-rate feature that was not previously disclosed; or B. Adds a variable-rate feature to the obligation.”)

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.)

Rodriguez v. Chase Home Finance, LLC, No. 10 C 05876 (N.D. Ill. Sept. 23, 2011) (“Here, Rodriguez’s Modification Agreement states that it ‘will amend and supplement (1) the Mortgage on the Property and (2) the Note secured by the Mortgage. . . .’ In short, because the Modification Agreement merely modifies the previous loan rather than cancelling the loan and creating a new obligation, Rodriguez's modification does not constitute a ‘refinancing.’”)

Regulation Z, 12 CFR 1026.23(a) (“In a credit transaction in which a security interest is or will be retained or acquired in a consumer’s principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind the transaction, except for transactions described in paragraph (f) of this section. For purposes of this section, the addition to an existing obligation of a security interest in a consumer’s principal dwelling is a transaction. The right of rescission applies only to the addition of the security interest and not the existing obligation. . . .”)

Regulation Z, Official Interpretations, Paragraph 23(a)(1), Comment 5 (“Under § 1026.23(a), the addition of a security interest in a consumer's principal dwelling to an existing obligation is rescindable even if the existing obligation is not satisfied and replaced by a new obligation, and even if the existing obligation was previously exempt under § 1026.3(b). The right of rescission applies only to the added security interest, however, and not to the original obligation. In those situations, only the § 1026.23(b) notice need be delivered, not new material disclosures; the rescission period will begin to run from the delivery of the notice.”)

Regulation Z, 12 CFR 1026.23(f)(2) (“The right to rescind does not apply to. . . . A refinancing or consolidation by the same creditor of an extension of credit already secured by the consumer’s principal dwelling. The right of rescission shall apply, however, to the extent the new amount financed exceeds the unpaid principal balance, any earned unpaid finance charge on the existing debt, and amounts attributed solely to the costs of the refinancing or consolidation.”)

Regulation Z, Official Interpretations, 12 CFR 1026, Paragraph 23(f)(2), Comment 4 (“If the refinancing involves a new advance of money, the amount of the new advance is rescindable. . . . For purposes of the right of rescission, a new advance does not include amounts attributed solely to the costs of the refinancing.”)