Refinance, Modifications & Renewals

Lending Modification Rules

Refinance…Renewal…Modification…Extension.  Many banks use these terms interchangeably but from a compliance standpoint they are NOT the same.  If your bank calls something a modification when the regulations deem to be a refinance, you are going to have problems.  You need to understand that the rules for closed-end credit differ from open-end credit. 

Click on the video to listen to David explain more.

Video Transcript:

What’s a refinance versus a renewal versus a modification?

Hi, Dave Dickinson with Banker’s Compliance Consulting. I want to talk about these terms that we use almost as synonyms, but they’re absolutely not. Let’s start out with what’s a refinance. Imagine you have loan A, and the regs use the term satisfy, replace, extinguish. We put loan B in place of it. That’s a refinance. It contractually stands on its own. When you do that, you have to give all new disclosures. Basically everything’s on the table. So A is wiped out. It’s satisfied, it’s replaced, it’s extinguished with loan B. Do everything again.

What’s a renewal? Well, there really is no regulatory definition of a renewal. We use that term a lot in the banking industry. Flood insurance talks about renewals, but it never defines it. But Truth in Lending, RESPA, HMDA, all talk about refinances and then everything else, and they call those modifications. So you have to decide is this renewal that you’re calling it, is it a refinance where A is replaced with B, or is it not?

Let’s go on to what that modification or maybe you call them extensions, increases, elongates. There can be lots of different terms. The idea is they’re not refinances. Loan A is not satisfied, replaced, extinguished. It’s tweaked. I like to call it an A plus. You add something to that loan. Those do not require new disclosures under Truth in Lending, RESPA, and they’re not reported for HMDA. So modifications allow you to do a lot of things. You can substitute collateral, again, increase the loan amount. Maybe add a skip a payment or add on to the end of the term by moving payments out.

In fact, in Truth in Lending, there’s a section in it called right of rescission that even talks about adding a house to an existing loan and not giving new disclosures. Now you’d have to give a right of rescission. Quite honestly, I think that’s a little crazy. I don’t recommend you do that, but it’s even an example in Reg Z that says you could. So that hopefully helps you understand that if you’re satisfying, replacing, extinguishing a loan contractually, that’s a refinance. If you’re not, then you don’t have to give new disclosures.

Now, there’s a couple exceptions that apply. You cannot go from fixed to variable rate and you cannot go from close to open, or non-revolving to revolving credit without giving all new disclosures. There’s all also some exceptions though where you can do some things and you don’t have to give new disclosures. That really gets into the weeds. If you have questions on those types of things, give us a call. We’d be glad to walk you through this. I hope this helps. Thanks for watching this video.

Published
2021/10/18