Does amending or extending the terms of a balloon note after maturity require a new note and new disclosures? Do the rules differ for different loan types?

Generally, whether amending and extending a balloon loan (or other type of loan) after maturity requires a new note and new disclosures depends on whether you are modifying or refinancing the loan.

For consumer balloon (and other) loans, Regulation Z requires new disclosures when an existing loan is “refinanced,” which Regulation Z treats as a new transaction. However, new disclosures are not required when an existing loan is modified without being refinanced. The general rule under Regulation Z 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 and applicable state law. While Regulation Z does not apply to commercial transactions, we think it is helpful to also look to this Regulation Z standard for guidance in the context of a commercial balloon loan.

There are a few court decisions addressing what constitutes a “refinancing,” rather than a modification. For example, the Seventh Circuit has concluded that a lump sum payday loan did not “expire” when it matured and held that it was permissible to renew the loan after the maturity date without triggering Regulation Z’s refinancing requirements. Similarly, we believe that it is permissible to renew a balloon payment loan after the original maturity date without triggering Regulation Z’s refinancing requirements.

Similar language in a Pennsylvania case also led to the conclusion that a loan modification was not a “refinancing” for purposes of Regulation Z in the context of a balloon loan. In that case, the modification agreement stated that it “amends and supplements” the original security agreement, and it required the borrower to “comply with all other covenants, agreements, and requirements” in the original security agreement, while also stating that “[n]othing in this Agreement shall be understood or construed to be a satisfaction or release in whole or in part” of the original security agreement.

However, we note that if you are amending a consumer loan to increase the interest rate based on a variable rate feature not previously disclosed or to add a variable rate feature, Regulation Z requires new disclosures to be made, even if the existing loan obligation is not being satisfied and replaced.

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 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. . . .”)

Jackson v. American Loan Co., Inc., 202 F.3d 911, 913 (7th Cir. 2000) (“American Loan does not ‘cancel’ the old loan and note, or substitute a new one, when it agrees to defer repayment until another payday, and thus it does not ‘refinance’ the loan. . . . 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.”)

In re Sheppard, 299 BR 753, 763, 764 (Bankr. E.D.Penn. 2003) (“A review of the Modification evidences no language indicating that the Modification replaces the Original Loan but rather suggests that it does not. The Modification begins with a preamble that it ‘amends and supplements’ the mortgage and note of the Original Loan. . . . Finally, the Modification ends with the express disclaimer that the Modification is not a satisfaction of the Original Loan which remains unchanged except as modified and that the parties are bound by the terms and provisions of the Original Loan as amended by the Modification. . . . There is simply no question of fact that the Modification did not satisfy the Original Loan, as even Plaintiffs concede.”)
In re Sheppard, 299 BR 753, 757 (Bankr. E.D.Penn. 2003) (The modification agreement at issue also included this language: “‘Nothing in this Agreement shall be understood or construed to be a satisfaction or release in whole or in part of the Note and Security Agreement. except as otherwise specifically provided in this Agreement, the Note and Security Agreement will remain unchanged, and the Borrower and Lender will be bound by and comply with, all of the terms and provisions thereof, as amended by this Agreement.’”)

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.”)