Do we need to complete a “Net Tangible Benefit Form” under the Illinois Fairness in Lending Act and Illinois High Risk Home Loan Act when refinancing a home loan, even if we are not the original creditor? Does the Illinois Fairness in Lending Act’s net tangible benefit requirement apply to all financial institutions in Illinois, or does the collateral property’s location matter? If we decide to refinance a home loan that we did not originate, how can we ensure that the refinance is beneficial when we have limited knowledge of the original loan? Typically, we are not aware of the original loan’s interest rate when considering a refinancing application.

While you are not required to use a particular form, we recommend conducting some kind of net tangible benefit analysis when refinancing mortgage loans secured by a borrower’s principal residence to ensure you are complying with the Illinois Fairness in Lending Act and Illinois High Risk Home Loan Act (if the loan is considered “high risk”), even if you are not the original creditor. However, a similar requirement under Regulation Z would not apply if you were not the original creditor.

The Illinois Fairness in Lending Act prohibits financial institutions from engaging in the practice of “loan flipping,” which presupposes a “tangible benefit” test. This Act defines “financial institution” as “any bank . . . which operates or has a place of business in this State,” and we believe the prohibition on loan flipping applies to a bank operating in Illinois regardless of the collateral property’s location.

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. Therefore, we recommend conducting a net tangible benefit test and documenting the results if you will be refinancing a mortgage loan and receiving fees, even if you are not the original creditor.

Regulation Z also requires a tangible net benefit test for any “high-cost mortgage,” which cannot be refinanced into another high-cost mortgage within one year of the original mortgage unless the refinancing results in a tangible net benefit to the borrower. However, we do not believe that this requirement would apply if you were not the original creditor (unless the original creditor assigned the original mortgage to your bank before the refinancing).

Regarding the issue of having limited information when your bank is not the original creditor, we recommend communicating with your potential borrower and requesting the information necessary to analyze whether a refinancing will be beneficial to them as part of the refinancing application process.

For resources related to our guidance, please see:

Illinois Fairness in Lending Act, 815 ILCS 120/3 (“No financial institution, in connection with or in contemplation of any loan to any person, may: . . . (e) Engage in equity stripping or loan flipping.”)

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 Fairness in Lending Act, 815 ILCS 120/2(a) (“‘Financial Institution’ means any bank, credit union, insurance company, mortgage banking company, savings bank, savings and loan association, or other residential mortgage lender which operates or has a place of business in this State.”)

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.”)

Illinois High Risk Home Loan Act, 815 ILCS 137/10 (“‘Lender’ means a natural or artificial person who transfers, deals in, offers, or makes a high risk home loan. ‘Lender’ includes, but is not limited to, creditors and brokers who transfer, deal in, offer, or make high risk home loans. ‘Lender’ does not include purchasers, assignees, or subsequent holders of high risk home loans.”)

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.”)