Topic: Refinancing a Mortgage Loan
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We have consumer mortgage loans secured by balloon notes that will be converted to adjustable rate notes prior to maturity. Under Regulation Z, these transactions must be disclosed as refinances. Some of the borrowers have large second mortgages, and we are concerned that these transactions could result in the loss of our priority lien position. The amounts of the loans will not be increasing, and the original mortgages will not be released, but we will be entering into new notes with the borrowers. Under Illinois law, can we replace an original note with a new note without extinguishing the original mortgage lien? Must we record a new mortgage with a new note, or can we record a modification of mortgage instead?
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Yes, a lender may replace an original note with a new note without extinguishing the lender’s original lien — but the facts in each case and the language in the loan documents are crucial. Consequently, irrespective of our general guidance here, we recommend consulting with your bank counsel to determine how these refinancings can be…
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We received an application for a mortgage loan refinancing. The applicant is the only person listed on the title to the property that will secure the loan, but her boyfriend also lives there. Does the boyfriend have a homestead right in the property? Also, should he be included on the Closing Disclosure and provided a notice of the right of rescission?
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No, the applicant’s boyfriend does not have a homestead right in the property, because he does not have an ownership interest in the property. The Illinois homestead exemption generally applies only to individuals with an ownership interest in their personal residence. Also, the applicant may waive her homestead rights without the boyfriend’s signature, since they…
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We have a five-year balloon mortgage loan secured by the borrower’s primary residence that has matured. Can we renew this loan, or does it need to be refinanced since the loan has matured?
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Yes, we believe that you may renew a balloon loan after its maturity date without it falling within Regulation Z’s definition of a “refinancing” (which would require new disclosures under the TRID requirements). However, the language that you use in the loan modification documents is important in order to achieve this result. The Seventh Circuit…
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We are refinancing a closed-end purchase and home improvement loan, secured by the borrower’s principal dwelling. Does the right of rescission apply?
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No, a right of rescission does not apply to a refinancing by the original creditor for a closed-end loan already secured by the borrower’s principal dwelling — provided that no new money is advanced. However, if new money is advanced, the right of rescission applies to any amount exceeding the original loan’s unpaid principal balance,…
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After a HELOC has matured, can we extend the customer a temporary closed-end loan for a period of twelve months or less, and then modify the temporary loan into a longer-term balloon loan (typically for a term of 3–5 years), thus avoiding the requirement of an ability-to-repay (ATR) analysis?
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While it may be possible to avoid Regulation Z’s ability-to-repay (ATR) requirements when making an initial temporary (“bridge”) loan and subsequently modifying it with a term longer than twelve months, we recommend proceeding with caution. The modification of the bridge loan into a balloon loan must be structured carefully to not be considered a “refinancing,”…
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Can you modify credit from open-end to closed-end without it being considered a refinance, which would trigger an ability-to-repay (ATR) analysis? When a HELOC has matured, we extend a one-year renewal and provide closed-end disclosures, after which we modify the HELOC into a closed-end balloon loan, without new disclosures. If the HELOC has not yet matured, we extend a renewal (either one year or multiple years with a balloon payment) and do not provide new disclosures. However, in either case, we do not perform an ATR analysis. Is this correct?
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No, we do not believe a HELOC can be converted after maturity into a closed-end loan as a modification; such a conversion would be considered a refinancing and require an ATR analysis. However, we do believe a HELOC can be converted to a closed-end loan prior to maturity as a modification, which would not trigger…
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We originated a loan in October 2012 with a three-year balloon payment that recently matured. The loan is secured by an owner-occupied property. We modified the mortgage and note to extend the maturity date for three more years and increased the fixed interest rate. Our procedure is to automatically renew a loan if it is in good standing, and we do not require a new application. We charge a $75 fee to cover the recording costs for the modification and flood certificate. Does this modification trigger any TRID requirements?
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No, we do not believe a loan renewal with an increased fixed interest rate would trigger the TRID disclosures if the original debt is not canceled in connection with the renewal. However, the language that you use in the loan renewal documents must be carefully structured in order to achieve this result. TRID disclosures are…
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When completing a modification of a matured commercial loan that is secured by a mortgage on a commercial property where the only term changing is an extension of the maturity date, does the borrower need to re-sign all documentation that references the loan’s maturity date? Or does the loan need to be refinanced?
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No, the borrower does not need to re-sign existing documentation for the loan to be modified; however, the borrower should sign a loan modification agreement. To determine whether a subsequent loan transaction constitutes a modification, which can be effected through a modification agreement, or a refinancing, which generally requires a new loan agreement, we think…
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When is it permissible to backdate loan documentation? Are you aware of any potential repercussions when backdating loan documentation of a renewal that occurs after the original loan has matured? Alternatively, are there any repercussions for not backdating loan documentation, resulting in a gap between the maturity date and the renewal date? Are there contract considerations for either?
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Under Illinois law, it is permissible to backdate an agreement — in other words, to use an effective date for an agreement that predates (or postdates) its signing date — provided that the parties’ intention to do this is “clear from the face of the contract.” When renewing a matured loan, you may select an…
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If we have a commercial loan modification for two borrowers, and one of them does not sign the modification, does that void their liability for the loan?
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No, we do not believe a co-borrower’s liability under the original loan agreement would be released due to their failure to sign a loan modification. Moreover, the loan modification may be void because it lacks a necessary signature. Generally, a loan modification must be signed by all original parties to the original loan agreement (or…