Yes, we believe that this ARM loan modification adds new variable-rate features to the loan and will require new disclosures.

Whether Regulation Z requires new disclosures for an ARM loan modification depends on whether the proposed modification is a “refinancing” (as defined by Regulation Z) and whether the modification will result in a new variable-rate feature being added to the loan.

Regulation Z requires new disclosures to be made when a refinancing occurs (i.e., the existing obligation is “satisfied and replaced” by a new transaction). Generally, the difference between a refinancing and a modification will depend on the specific language used in the documentation of the modification. For example, one federal court determined that a loan modification agreement did not constitute a refinancing because it specifically stated that it was merely amending and supplementing the original loan agreement and not satisfying or releasing the existing obligation. Here, it appears that the modification is not a refinancing because it does not satisfy and replace the original loan obligation.

However, Regulation Z also requires new disclosures when a new variable-rate feature that was not previously disclosed is added to the original loan obligation — even if the original loan is not being satisfied and replaced. Regulation Z does not define what changes should be treated as the addition of a variable-rate feature requiring new disclosures, although the Official Commentary to Regulation Z provides that changing the index of a variable-rate transaction to a “comparable index” is not the addition of a new variable-rate feature.

In a slightly different context, the Official Commentary provides several examples of variable-rate program features in the context of the ARM program disclosures that must be provided with the ARM application. Those variable-rate program features include differences in “the rules relating to changes in the index value, interest rate, payments, and loan balance” and “the frequency of interest rate and payment adjustments,” among others. Here, because the modification will change the margin for calculating the interest rate and the timing of adjustments to the interest rate and payments, it appears that the modification is adding new variable-rate features and will require new disclosures to the borrower under Regulation Z.

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.”)

• 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, 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. A creditor does not add a variable-rate feature by changing the index of a variable-rate transaction to a comparable index, whether the change replaces the existing index or substitutes an index for one that no longer exists.”)

• Regulation Z, Official Interpretations, Paragraph 19(b)(2), Comment 2(i) (“Generally, if the identification, the presence or absence, or the exact value of a loan feature must be disclosed under this section, variable-rate loans that differ as to such features constitute separate loan programs. For example, separate loan programs would exist based on differences in any of the following loan features:

A. The index or other formula used to calculate interest rate adjustments.

B. The rules relating to changes in the index value, interest rate, payments, and loan balance.

C. The presence or absence of, and the amount of, rate or payment caps.

D. The presence of a demand feature.

E. The possibility of negative amortization.

F. The possibility of interest rate carryover.

G. The frequency of interest rate and payment adjustments.

H. The presence of a discount feature.

I. In addition, if a loan feature must be taken into account in preparing the disclosures required by § 1026.19(b)(2)(viii), variable-rate loans that differ as to that feature constitute separate programs under § 1026.19(b)(2).”)