Two Illinois laws require, in certain circumstances, an analysis of whether a refinancing would result in a tangible net benefit, which may be why your software requires the completion of a “Net Tangible Benefit Form” when refinancing a mortgage. Both laws apply to all institutions, regardless of size.

The Illinois Fairness in Lending Act prohibits any lender from engaging in the practice of “loan flipping.” Loan flipping occurs when a loan that is secured by a principal residence is refinanced “for the primary purpose of receiving fees related to the refinancing when (i) the refinancing of the loan results in no tangible benefit to the person and (ii) at the time the loan is made, the financial institution does not reasonably believe that the refinancing of the loan will result in a tangible benefit to the person.” Consequently, a “tangible benefit” test could help ensure that you are not violating the Illinois Fairness in Lending Act.

Another “tangible net benefit” test applies to loans that qualify as “high risk” under the Illinois High Risk Home Loan Act. This law prohibits lenders from refinancing any “high risk home loan” if: (1) the refinancing occurs within a year of the original loan closing, and (2) additional points and fees are charged, unless the refinancing results in a “tangible net benefit” to the borrower.

Additionally, Regulation Z prohibits refinancing any high-cost mortgage into another high-cost mortgage within one year of having extended the mortgage unless the refinancing results in a tangible net benefit to the borrower.

For resources related to our guidance, please see:

• Illinois Fairness in Lending Act, 815 ILCS 120/2(e) (“‘Loan flipping’ means to assist a person in refinancing a loan secured by the person’s principal residence for the primary purpose of receiving fees related to the refinancing when (i) the refinancing of the loan results in no tangible benefit to the person and (ii) at the time the loan is made, the financial institution does not reasonably believe that the refinancing of the loan will result in a tangible benefit to the person.”)

• Illinois High Risk Home Loan Act, 815 ILCS 137/45 (“No lender shall refinance any high risk home loan where such refinancing charges additional points and fees within a 12-month period after the original loan agreement was signed, unless the refinancing results in a tangible net benefit to the borrower.”)

• Regulation Z, 12 CFR 1026.34(a)(3) (“Within one year of having extended a high-cost mortgage, a creditor shall not refinance any high-cost mortgage to the same consumer into another high-cost mortgage, unless the refinancing is in the consumer's interest.”)