We believe your proposed modification program would be permissible and, aside from the caveats noted below, would not require additional disclosures — but the documentation for the modifications must demonstrate that the existing loans are not being satisfied or released.

It is possible to lower the interest rate on a mortgage loan and charge a modification fee without triggering Regulation Z’s definition of a “refinancing,” which would require new disclosures under the TILA-RESPA integrated disclosure (TRID) requirements — provided that a variable interest rate is not being added to the loan. Regulation Z requires new disclosures if a variable rate feature is added to a loan, even if the original loan is not being satisfied or released.

The language in your loan modification documents is important. 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.” The Regulation Z staff commentary states that this determination is “based on the parties’ contract and applicable law.” While the determination of what constitutes a “refinancing” (rather than a modification or renewal) is not often litigated in courts, we are aware of a federal court in Illinois that 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 was not satisfying or releasing the existing obligation.

Further, we believe that a savings bank may charge a mortgage modification fee agreed to by the borrower, but only for mortgage loans that are not “high-cost mortgages” as defined in Regulation Z or “high risk home loans” as defined in the Illinois High Risk Home Loan Act (for which modification fees are prohibited). The Illinois Savings Bank Act permits a savings bank to “enter into a written agreement with a borrower to modify, in any manner not inconsistent with the provisions of this Act, the terms of a loan as to the amount, time or method of the payments to be made, the interest rate, and any other provision of the loan contract.” The Illinois Interest Act also permits savings banks to “receive or contract to receive and collect interest and charges at any rate agreed upon by the savings bank or savings association and the borrower.”

In addition, the FDIC Compliance Examination Manual indicates that charging a flat fee for a loan renewal will not require new disclosures if the original debt is not being canceled and a variable rate feature is not being added.

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.”)

• Regulation Z, Official Interpretations, 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.”)

• Regulation Z, Official Interpretations, 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. . . .”)

• FDIC Compliance Examination Manual, Truth in Lending Act, V-1.39 (“If, at the time a loan is renewed, the rate is increased, the increase is not considered a variable rate feature. It is the cost of renewal, similar to a flat fee, as long as the new rate remains fixed during the remaining life of the loan. If the original debt is not canceled in connection with such a renewal, the regulation does not require new disclosures.”)

• Regulation Z, 12 CFR 1026.34(a)(7) (“Prohibited acts or practices for high-cost mortgages. . . . (7) A creditor, successor-in-interest, assignee, or any agent of such parties may not charge a consumer any fee to modify, renew, extend or amend a high-cost mortgage, or to defer any payment due under the terms of such mortgage.”)

• Illinois High Risk Home Loan Act, 815 ILCS 137/90.5 (“Modification and deferral fees prohibited. A lender, successor in interest, assignee, or any agent of any of the foregoing may not charge a consumer any fee to modify, renew, extend, or amend a high risk home loan or to defer any payment due under the terms of the loan.”)

• Savings Bank Act, 205 ILCS 205/6006 (“A savings bank, at any time, may enter into a written agreement with a borrower to modify, in any manner not inconsistent with the provisions of this Act, the terms of a loan as to the amount, time or method of the payments to be made, the interest rate, and any other provision of the loan contract, and the loan contract and the security instrument shall not be prejudiced by the making of any modification, even if a modification was not provided for in the loan contract.”)

• Interest Act, 815 ILCS 205/4(1) (“It is lawful for a savings bank chartered under the Savings Bank Act or a savings association chartered under the Illinois Savings and Loan Act of 1985 to receive or contract to receive and collect interest and charges at any rate agreed upon by the savings bank or savings association and the borrower.”)