We are extending a closed-end mortgage loan secured by a second lien on a home (we have the first lien as well). Should we use the right of rescission notice contained in model form H-8 (General) or H-9 (Refinancing With Original Creditor)? Our Loan Department thinks we should use form H-9 because the extension of new money can be thought of as a refinance, even though we identified the transaction as a home equity loan, not a refinance, on our TRID disclosures.

We do not recommend using form H-9 unless the transaction is satisfying and replacing your original loan and meets the definition of a “refinancing” under Regulation Z.

Whether a transaction is considered a “refinancing” depends on the specific circumstances of the second lien and your contract with the borrower. Under Regulation Z, a refinancing occurs, “when an existing obligation . . . is satisfied and replaced by a new obligation undertaken by the same consumer.” Regulation Z’s Official Interpretations add that “[w]hether 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.”

Consequently, if the second mortgage is not satisfying and replacing the customer’s existing first-lien loan, then we do not believe it would be considered a “refinancing” under Regulation Z, and the use of form H-9 would be inappropriate and could confuse your customer.

For resources related to our guidance, please see:

Regulation Z, Appendix H, Form H-8 (Rescission Model Form — General)

Regulation Z, Appendix H, Form H-9 (Rescission Model Form — Refinancing With Original Creditor)

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. . . .”)

Regulation Z, 12 CFR 1026.3(a)(1) (“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. The creditor shall deliver the notice required by paragraph (b) of this section but need not deliver new material disclosures. Delivery of the required notice shall begin the rescission period.”)

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, Paragraph 23(f)(2), Comment 4 (“If the refinancing involves a new advance of money, the amount of the new advance is rescindable.”)

Regulation Z, Official Interpretations, Appendix H, Comment 11 (“Models H-8 and H-9. These models contain the rescission notices for a typical closed-end transaction and a refinancing, respectively.”)