We have a mortgage loan borrower that is delinquent in paying their real estate taxes for a consumer loan secured by their principal dwelling. We want to make a protective advance to pay off the delinquent taxes, which will involve increasing the principal balance of the mortgage loan and re-amortizing it. Are there any timing or disclosure requirements that apply? Are we limited to just the current delinquent amount? Does the borrower have a right of rescission in this scenario?

We are not aware of any law or regulation expressly addressing when and how a mortgage lender may advance funds to protect their interest in collateral. Accordingly, we believe whether you may make such an advance (and any related procedures) will depend on the terms of your agreement with the borrower.

For example, Fannie Mae’s standard mortgage, which we have linked in the resources below, states that the lender may pay any “sums secured by a lien that . . . may attain priority” over the security instrument, as well as “other fees incurred for the purpose of protecting Lender’s interest in the Property.” It also allows the lender to add these amounts as additional secured debt. We recommend reviewing your customer’s mortgage and note for similar provisions that would govern timing and disclosure requirements and any limitations on the amount of your protective advances.

We do not believe that the borrower would have a right of rescission in the scenario you described unless your increase of the principal balance and re-amortization of the loan constitutes a refinancing. Regulation Z’s right of rescission applies to an existing loan when there is an “addition to an existing obligation of a security interest in a consumer’s principal dwelling,” and “[t]he right of rescission applies only to the addition of the security interest and not the existing obligation.” Since your bank already has a security interest in your customer’s principal dwelling, we do not believe advancing funds to protect your security interest would be considered a rescindable transaction.

Additionally, your increase of the principal balance and re-amortization of the loan would be rescindable only if these changes constituted a “refinancing of an extension of credit already secured by the consumer’s principal dwelling.” Under Regulation Z, a refinancing occurs, “when an existing obligation . . . is satisfied and replaced by a new obligation undertaken by the same consumer.” We do not believe that increasing the principal balance of the mortgage loan and re-amortizing it would constitute a refinance, unless your bank plans to satisfy and replace your customer’s original loan obligation.

For resources related to our guidance, please see:

Fannie Mae, Standard Security Instruments, Illinois (“Protection of Lender’s Interest. If: (i) Borrower fails to perform the covenants and agreements contained in this Security Instrument; (ii) there is a legal proceeding or government order that might significantly affect Lender’s interest in the Property and/or rights under this Security Instrument (such as a proceeding in bankruptcy, probate, for condemnation or forfeiture, for enforcement of a lien that has priority or may attain priority over this Security Instrument, or to enforce laws or regulations); or (iii) Lender reasonably believes that Borrower has abandoned the Property, then Lender may do and pay for whatever is reasonable or appropriate to protect Lender’s interest in the Property and/or rights under this Security Instrument, including protecting and/or assessing the value of the Property, and securing and/or repairing the Property. Lender’s actions may include, but are not limited to: (I) paying any sums secured by a lien that has priority or may attain priority over this Security Instrument; . . . and (III) paying . . . (C) other fees incurred for the purpose of protecting Lender’s interest in the Property and/or rights under this Security Instrument, including its secured position in a bankruptcy proceeding. . . . Although Lender may take action under this Section 9, Lender is not required to do so and is not under any duty or obligation to do so. Lender will not be liable for not taking any or all actions authorized under this Section 9.”)

Fannie Mae, Standard Security Instruments, Illinois (“Additional Amounts Secured. Any amounts disbursed by Lender under this Section 9 will become additional debt of Borrower secured by this Security Instrument. These amounts may bear interest at the Note rate from the date of disbursement and will be payable, with such interest, upon notice from Lender to Borrower requesting payment.”)

Regulation Z, 12 CFR 1026.23(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, Official Interpretations, Paragraph 23(f), Comment 6 (“Multiple advances. Just as new disclosures need not be made for subsequent advances when treated as one transaction, no new rescission rights arise so long as the appropriate notice and disclosures are given at the outset of the transaction. For example, the creditor extends credit for home improvements secured by the consumer's principal dwelling, with advances made as repairs progress. As permitted by § 1026.17(c)(6), the creditor makes a single set of disclosures at the beginning of the construction period, rather than separate disclosures for each advance. The right of rescission does not arise with each advance. However, if the advances are treated as separate transactions, the right of rescission applies to each advance.”)

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, 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. . . .”)