Topic: Loan Modifications
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We have a commercial loan coming due that we placed in forbearance under Section 4013 of the CARES Act for 18 months. Since the customer was not making full payments, the accrued interest increased substantially. We are planning to renew the loan and add the accrued interest to the principal at renewal. Are there any laws or regulations that would prevent us from capitalizing the interest on this loan?
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No, we are not aware of any laws or regulations that would prevent you from adding accrued interest to the loan’s principal balance (i.e., capitalizing the interest). However, we recommend reviewing the terms of your loan contract and forbearance agreement to determine whether the capitalization is contractually permissible. Section 4013 of the CARES Act allows…
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We are looking for guidance on loan modification fees. Is there a cap on how much we can charge a borrower for a modification of a home equity line of credit (HELOC) or an in-house mortgage loan modification?
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Generally, banks in Illinois may charge mortgage modification fees that are agreed to by the borrower, and we are not aware of a cap on such fees. Further, OCC regulations state that national banks may charge customers non-interest fees, and the amount of such fees is a business decision to be determined “according to sound…
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When a change in terms agreement for a real estate-secured loan only involves changing the note’s interest rate, are we required to record a new mortgage?
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No, we do not believe that you are required to record a new mortgage when modifying a loan’s interest rate. However, 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…
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We have home equity lines of credit (HELOCs) maturing this year, and we are allowing the borrowers to renew for another draw period. We will charge modification fees that include charges for a flood determination, a credit report, and document preparation. The borrowers will have the option of paying these fees upfront in cash or by drawing on the HELOC. How should these fees be reflected on the initial periodic statement for each option the borrower may choose? We use the home-secured format for our HELOC periodic statements.
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We believe you are required to disclose these modification fees for the HELOC on the initial periodic statement as charges other than finance charges, whether your customer pays these fees with cash or with funds drawn on the line of credit. Although Regulation Z exempts finance charges that qualify as “start-up fees” from inclusion on…
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Can our bank charge a fee to extend or modify the construction period of a consumer-purpose construction loan?
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Yes, we believe you may charge this fee if the customer agrees to it as part of the extension or modification agreement. We are not aware of any law that would prohibit a bank from charging an extension or modification fee agreed to by the customer, particularly in connection with a mortgage loan. Section 5e…
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Can we disburse new funds on a closed-end commercial loan through a loan modification? For example, if a commercial customer has secured a $100,000 loan and pays down $20,000, can that customer later receive another $10,000 disbursement on the same loan through a modification?
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We are not aware of any laws that would prohibit modifying a commercial loan to allow for additional disbursements, but we recommend consulting with bank counsel to address certain risks created by this type of modification. At the outset, it would be prudent to ensure that either your original security agreement or your modification documents…
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We have a commercial line of credit secured by equipment, farm products, government payments, and livestock. We filed a UCC financing statement regarding our security interest in the collateral. If we execute a change in terms to increase the loan amount, will the entire new loan amount be covered by the original security agreement, or will the amount of the increase be unsecured? The language in our original security agreement and change in terms agreement is not clear.
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We recommend consulting with an attorney to determine whether either your original security agreement or your change in terms agreement extend your original security interest to the new loan amount. The Uniform Commercial Code (UCC) expressly permits security agreements to secure future advances, and Illinois courts generally have upheld “cross-collateralization” clauses in security agreements to…
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Does a request for a modification of an existing loan constitute an “application” under Regulation B, triggering the requirement to send an appraisal notice within three business days? Typically, our modifications involve extending the maturity date or lowering interest rate.
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The answer depends on the specific type of modification and how the request is made. Regulation B’s appraisal notice requirements apply whenever you receive an application for an extension of credit secured by a first lien on a dwelling. Therefore, you must determine whether each modification request involves an “application” for an “extension of credit.”…
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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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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…