Topic: Loan Documentation
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We want to add new collateral (a deposit account) and lower the interest rate on an existing commercial mortgage loan, with no other changes. Can we modify the note without recording a modification of mortgage since there is no extension of the loan term or increase in the loan balance?
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Yes, we believe that your bank may modify the promissory note without recording a modification of mortgage, but we recommend engaging your bank’s counsel to review the relevant loan documents and ensure that your bank’s lien position will not be affected. Illinois courts repeatedly have held that a note “given in renewal of another note…
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We have a commercial line of credit secured by a mortgage that has matured. We would like to renew it using a modification of mortgage. Can we provide a new note with the mortgage modification, or do we have to use a change in terms agreement instead of a new note? If we issue a new note, will it affect our lien position?
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In general, there is no prohibition against issuing a new note when extending the maturity date of a commercial line of credit. However, whether issuing a new note will affect your lien position on the mortgaged collateral depends on whether the new note is intended to extinguish the original note. Illinois courts have repeatedly held…
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Our loan documentation system produced the following warning: “The IL Banking Act does not authorize the taking of a mortgage on a loan for $5,000 or less.” We are not chartered in Illinois, but we have a branch in Illinois and are extending a mortgage loan secured by an Illinois property. Does this law apply?
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No. The Illinois Interest Act (not the Illinois Banking Act) does contain a provision that generally operates to prohibit lenders from taking a security interest in real property on “a revolving credit arrangement” under $5,000. However, this prohibition does not apply to bank lenders. The Illinois Financial Services Development Act exempts “any financial institution” from…
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Our external auditors told us that we must ask all consumer and mortgage loan applicants from a community property state whether they have a prenuptial agreement. Is that required?
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We are unaware of any requirement to inquire about a potential borrower’s prenuptial or premarital agreements in a community property state. Still, we can see how this information could be helpful, as prenuptial or premarital agreements may contain information needed to underwrite a loan. For example, a prenuptial agreement could clarify the ownership of property…
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Can we modify a commercial loan after maturity without entering into a new mortgage and issuing a new note?
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Yes, you may modify a matured commercial loan without issuing a new note or mortgage, provided that you enter into a modification agreement rather than by refinancing the loan. To determine whether a subsequent loan transaction constitutes a modification, which can be affected through a modification agreement, or a refinancing, which generally requires a new…
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We service student loans made by trusts for which our trust department serves as trustee. If the student borrowers meet certain conditions, such as finding employment in their field of study, then the loan is forgiven (it becomes a “scholarship”). If not, the student must pay back the loan to the trust. The loan terms are longer than a year, and they are unsecured. Is our bank considered a servicing agent for these loans? If so, what regulations apply? What disclosures are required?
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Do any of the trusts make more than twenty-five unsecured loans in a calendar year? If not, all of their student loans likely are exempt from Regulation Z. Regulation Z exempts creditors that make fewer than twenty-five unsecured loans annually, and its Official Interpretations treat these trusts as “separate entities” when counting their loans. But…
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On our consumer real estate loans, we charge a “Processing fee” that is actually a fee charged to us by the purchaser of the loan. The purchaser charges us a processing fee, which we pass on to the borrower. In addition to this “processing fee,” we would like to charge a “document preparation fee” to cover our internal costs to prepare the real estate documents associated with the loan. Is there any reason we cannot charge both fees? Would they both be part of the finance charge?
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We are not aware of any prohibition against charging both the “processing fee” and “document preparation fee” that you have described, provided that both fees are accurately disclosed to the borrower. Regarding the finance charge calculation, under Regulation Z, charges imposed on a creditor by another person for purchasing a consumer's obligation are included in…
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For transactions under $250,000 that are exempt from all appraisal requirements, would a printout from a real estate sales website (such as Zillow) or a county assessor suffice?
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No, we do not believe that a printout with informal information from a real estate sales website or a county assessor would suffice as an evaluation of a property’s value for loan underwriting purposes. The Interagency Appraisal and Evaluation Guidelines permit financial institutions to use evaluations in lieu of appraisals for transactions under $250,000, but…
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Are appraisals required for transactions under $250,000? I understand that an appraisal on such a transaction may be required for safety and soundness reasons, but is an appraisal required under any appraisal regulations?
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Interagency Appraisal Regulations and Guidance The Appraisal Regulations permit the use of evaluations in lieu of appraisals for transactions under $250,000, but sometimes such transactions nonetheless require an appraisal for safety and soundness reasons. (We reference the FDIC’s appraisal regulations below, as the FDIC is your bank’s primary federal regulator.) While we cannot predict whether…
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If you have a borrower that has no ownership in the property that is being pledged as the collateral for the borrower’s loan, is it best to have that borrower also sign the mortgage along with the person or business pledging the collateral even though the borrower has no ownership in the property?
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We are not aware of any statute or regulation requiring the borrower to sign the mortgage in this situation. Nonetheless, some lenders will require the borrower to sign the mortgage in similar situations in order to commit the borrower to certain representations, warranties and covenants that may appear in the mortgage or deed of trust…