Topic: Refinancing a Mortgage Loan
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When refinancing a closed-end mortgage loan, we disclose amounts for property taxes and hazard insurance in the prepaid section of the Loan Estimate. Is that a required disclosure? We will not be collecting amounts for these items at closing; we require them as a condition of the loan, but we know that the borrower has been up to date on them (although we do not escrow for these amounts).
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Based on a conversation we had with a CFPB attorney, we believe that a creditor is not required to disclose property taxes and homeowner’s insurance premiums in this situation. Regulation Z requires the Loan Estimate and Closing Disclosure to itemize “amounts to be paid by the consumer in advance of the first scheduled payment” as…
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Can we renew, extend, or modify commercial and consumer loans after they have matured?
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Yes, you may modify, renew, or extend a commercial or consumer loan after maturity. We are aware of at least one court decision that has addressed whether a loan can be modified after its maturity date. In the context of a lump-sum payday loan, the Seventh Circuit has found that a loan does not “expire”…
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If we perform a cash-out refinance of a loan secured by an eight-unit apartment building, are we required to obtain a termite inspection report? The existing loan was made by another lender. Do the apartment buildings need to be ADA compliant?
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We are not aware of any general requirement to obtain a termite inspection report when providing a cash-out refinancing of a loan secured by an apartment building. However, it is possible that a secondary market purchaser may require a termite inspection; for example, Fannie Mae requires termite inspections for multifamily properties in some circumstances. Otherwise,…
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Can we modify or extend a consumer loan after it has matured without changing the interest rate? Can we also do this for residential real estate and commercial loans? Can we backdate the modification agreement to the original maturity date?
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Yes, you may modify or extend a matured consumer, residential real estate, or commercial loan without changing the interest rate (unless some provision in the loan agreement prevents the modification or extension). In addition, the effective date that you choose for the modification or renewal is a business decision for your bank. At least one…
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One of our commercial mortgage loans has matured, and we would like to extend it. The borrower has not been able to pay off the loan due to a delay in a sale of the loan collateral. The borrower is currently making monthly payments at a post-maturity interest rate (which is 2% higher than the loan’s pre-maturity interest rate). What should we use as the effective date for the renewal agreement? If we use the original loan’s maturity date, then our loan system will not treat the borrower’s recent payments as post-maturity and will apply the extra 2% interest paid to the loan principal. (We could rectify this by entering into an addendum in which the borrower agrees that the higher post-maturity interest rate applies.) But if use the signing date as the effective date, we would be concerned about our lien priority because there would be a break between the original loan agreement date and the renewal agreement date.
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The effective date that you choose for the renewal of a note is a business decision for your bank. 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…
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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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We have a number of balloon loans that will be maturing soon. Can we extend the maturity dates, increase the interest rates and switch from fixed interest rates to variable interest rates without triggering a refinancing (requiring new disclosures, new notes, etc.)? Also, would we have to redo the ability-to-repay analysis for each balloon loan?
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If you are adding a variable rate feature, you will have to treat these transactions as refinancings, requiring all new disclosures under Regulation Z. A refinancing is a transaction in which an existing obligation is satisfied and replaced by a new obligation, and several Illinois courts have clarified what it means to “satisfy and replace”…
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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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If we refinanced a home mortgage through a Freddie Mac streamline refinancing program that did not require an appraisal, how should we determine the original value of the property for the purpose of terminating private mortgage insurance? Can we use the value estimate generated by Freddie Mac’s Home Value Explorer tool?
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In our view, it is acceptable to use the home value estimate generated by Freddie Mac’s Home Value Explorer (HVE) tool for the purpose of calculating the termination of private mortgage insurance (PMI). Under the Homeowners Protection Act (HPA), a borrower’s PMI automatically terminates on the date when the principal balance of the mortgage is…
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Our bank offers a three-year, interest only home equity line of credit (HELOC) with a balloon feature, and a ten-year HELOC with a monthly payment of 1% of the balance and a balloon feature. Can we modify these loans to extend their maturity date another three or ten years and add an amortization schedule? Or would that be considered a refinancing? Does it matter if the modification occurs before or after maturity?
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We believe that you may modify the HELOCS in the way that you described before or after maturity without treating the changes as a “refinancing.” However, the language that you use in the loan modification documents will determine whether you achieve this result. The Seventh Circuit has considered a similar issue, albeit in the context…