The answer to both questions is highly dependent on the exact wording of the mortgage and related loan documents. When increasing the loan amount of a construction loan or closed-end mortgage with a future advance, your bank should confirm (ideally, with the assistance of bank counsel) that the original mortgage or note allows such future advances and provides that they will be secured by your original mortgage — otherwise, your bank risks losing its priority lien position when increasing the loan amount unless you take further steps, such as recording a modification of mortgage. Whether such an advance would be considered a refinancing also depends on the language in your original loan documents and the change in terms or modification agreement.

The Illinois Mortgage Foreclosure Law provides that future loan advances are covered by a recorded mortgage only if the advances are referenced in the mortgage or its companion promissory note. As a result, if your original mortgage or note does not address future advances, we believe you would need to record a new mortgage or modification of mortgage to secure the new advances. Consequently, we recommend engaging your bank’s counsel to review the relevant loan documents and determine whether you can extend new credit and whether it is necessary to record a modification of mortgage or other document to protect your lien position.

Whether the modification of the mortgage would be viewed as a refinancing under Regulation Z and Illinois law depends also depends on an analysis of the relevant loan documents. Under Regulation Z, 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. Whether or not the original loan is being satisfied and replaced will depend on the specific language that you use in the modification agreement. 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.

If your original mortgage or note allows for future advances, we believe you would be able to structure a modification agreement in a manner that avoids characterization as a refinancing for purposes of Regulation Z’s consumer disclosure requirements. If your original loan documents do not address future advances, it still may be possible to structure a modification agreement in a manner that avoids characterization as a refinancing — but we are not aware of any Illinois courts that have examined this exact set of circumstances.

For resources related to our guidance, please see:

• Illinois Mortgage Foreclosure Law, 735 ILCS 5/15-1302 (“Certain Future Advances. (a) . . . Except as provided in subsection (b) of Section 15-1302, as to any monies advanced or applied more than 18 months after a mortgage is recorded, the mortgage shall be a lien as to subsequent purchasers and judgment creditors only from the time such monies are advanced or applied. . . . (b)(1) All monies advanced or applied pursuant to commitment, whenever advanced or applied, shall be a lien from the time the mortgage is recorded. An advance shall be deemed made pursuant to commitment only if the mortgagee has bound itself to make such advance in the mortgage or in an instrument executed contemporaneously with, and referred to in, the mortgage, whether or not a subsequent event of default or other event not within the mortgagee's control has relieved or may relieve the mortgagee from its obligation.”)

• Farm Credit Bank of St. Louis v. Biethman, 262 Ill. App. 3d 614, 623–634 (5th Dist. 1994) (“Biethman is correct that in order to secure future advances under a mortgage document, the amount secured must be specified in the mortgage.”)

• National Acceptance Co. v. Exchange Nat’l Bank, 101 Ill. App. 2d 396, (1st Dist. 1968) (“A mortgage may be given to secure future advances and not be void for indefiniteness. . . . Whether the security of a mortgage extends to the secondary liabilities of a mortgagor is a question of intention to be ascertained from the wording of the instrument. All-encompassing provisions similar to those contained in the trust deeds have been labeled ‘dragnet clauses’ . . . and ‘anaconda mortgages’ . . . because by their broad terms the unsuspecting debtor is enwrapped in the folds of secured indebtedness. They are to be carefully scrutinized and strictly construed.”)

• 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. . . .”)

• 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.)

• State Bank of Lake Zurich v. Winnetka Bank, 614 N.E.2d 862, 867 (2d Dist. 1993) (“Although a renewal note may in some cases operate as payment of and a discharge of the original note, the evidence must indicate the parties intended that the new note should serve as payment of the outstanding note. Here, the evidence indicates the parties did not intend the September note and mortgage to be a new and separate transaction which extinguished the June note. The June mortgage was never cancelled or released, and the language therein provides for additional advances at the option of the mortgagee . . . The testimony of State Bank loan officers also established that when a balance of a loan is increased, a new note and mortgage are typically executed . . . Accordingly, we find the September mortgage was a renewal or modification of the June mortgage and the June mortgage was a valid and subsisting lien on the subject property.”)