Topic: Refinancing a Mortgage Loan
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Our current policy is to notify all refinance customers of a right of rescission, even if we are not extending any additional funds and we are refinancing one of our own loans. Are we creating a problem by giving this disclosure in transactions where the right of rescission does not apply?
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As a general rule, we recommend that you do not deliver a notice of a right of rescission (ROR) when the customer (or other consumer who has an ownership interest in the property securing the loan) is not entitled to Regulation Z’s right of rescission. The ROR under Regulation Z does not apply to a…
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We originate balloon loans, which we usually renew with three- or five-year balloons. Can we increase the interest rate on a renewal? Apparently some states do not allow interest rate increases on modifications (such as Michigan). And would the new ability to repay (ATR) rules apply to the renewals if we increase the interest rate?
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Illinois Laws on Increased Interest Rates We are not aware of any Illinois laws that would prevent you from increasing the interest rate with a loan modification. There are very few limitations on interest rates and fees charged by banks under Illinois law. Section 5e of the Banking Act states that a bank may “elect…
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If we have existing balloon loans that mature after 1/10/14 and the terms were less than 5 years must we refinance the loan into a 61 month balloon to qualify for QM? Or can we extend the existing maturity for less than 5 years? Presently we would just file a modification agreement and extend it for another 3 years.
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We do not believe that a balloon loan with a term of less than five years could be considered a qualified mortgage (QM). It may be possible to make a balloon loan with a term of less than five years, but it would have to otherwise satisfy the general ability-to-repay (ATR) requirements. Also, as discussed…
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Can we capitalize interest on an open-end loan? One of our customers ran into some problems, so we’ve offered to restructure her loan, and our loan officer asked if we could capitalize the outstanding interest on the loan.
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We are not aware of any laws or regulations that prohibit you from capitalizing interest (also known as “re-aging”) an open-end loan. The FFIEC imposes some limits on re-aging past due accounts, without prohibiting the practice, in its Uniform Retail Credit Classification and Account Management Policy (65 Fed. Reg. 36903, 36904 (June 12, 2000)): Open-End…
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A loan officer is trying to help a customer refinance a loan with our bank. The customer originally had an interest-only loan with his parents. The customer is now the sole owner of the home. The customer’s current bank told us that the customer cannot refinance the loan because there’s a new law stating that the customer must own the home solely for at least a year before he can refinance the loan.
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We are not aware of any new laws imposing ownership requirements before a borrower can refinance a mortgage loan. Perhaps you can get more details from the customer, or ask the customer to ask the bank to be more specific. It is possible that the customer is referring to a requirement in the Illinois High…
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If we extend a balloon loan that has not yet matured but change the payment terms (by changing the term from three years to one year), would that be considered a refinance or a renewal?
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Whether a subsequent transaction related to the same loan should be treated as a refinancing with new TILA and RESPA disclosures depends on the loan documents. The general rule is that a refinancing occurs only when an existing obligation is “satisfied and replaced by a new obligation undertaken by the same consumer” (under Regulation Z)…
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For purposes of filling out the GFE and HUD-1 forms for a refinance, can we assume that the borrower has adequate homeowners insurance in place (and therefore list $0 on Block 11 of the GFE), even if we do not have confirmation of the placement of insurance from the bank that made the original loan before the end of the three business day deadline?
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We believe it would be a best practice to estimate the cost of homeowners insurance on the GFE for a refinance, unless the bank has confirmed that the borrower already has a homeowners insurance policy in place. The GFE instructions simply require you to estimate the “total amount of the premiums for any hazard insurance…
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How can we determine whether a loan was a refinance or a renewal?
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The question of whether a second transaction was a “refinance” depends on an examination of the loan documents. The laws and regulations that would apply are as follows: Regulation Z and the RESPA regulations state that a refinancing occurs only when an existing obligation is “satisfied and replaced by a new obligation undertaken by the…
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Is a tangible net benefit form required for all refinances?
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A “tangible benefit” test is required under the Illinois Fairness in Lending Act and under the Illinois High Risk Home Loan Act, though both laws have slightly different tests. The Illinois Fairness in Lending Act prohibits several lending practices, including “loan flipping.” 815 ILCS 120/3. The definition of “loan flipping” includes a tangible net benefit…
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Are higher-priced mortgage loans and three- and five-year balloon renewals treated as higher-priced mortgage loans, or are they just renewals of the same note?
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Whether a renewal of a loan is treated as a higher-priced mortgage loan depends on whether it is considered a “refinancing” under Regulation Z. Supplement I to Section 226, Paragraph 1(d)(5)-1 (“if the transaction were a modification of an existing obligation’s terms that does not constitute a refinance loan under §226.20(a), the final rules, including…