I have some questions for those of you out there using mortgage loan modifications. I'm with a small, community bank that has been fighting our way through all the recent changes and dealing with HPML.
We have MANY balloon mortgage loans that are coming up for renewal. We have not used modification agreements in the past but are considering the pros and cons of implementing that now.
We do not want to appear to be trying to just get around the new regs, but feel that there are times where a modification would be best. Has anyone had any recent feedback from examiners? Any suggestions as to when to modify? Thanks!

Renewals vs Modifications vs Refinances

If you replace and exstinquish the original loan it is a refinance. If you convert a Fixed Rate Balloon loan into an ARM loan it is a refinance.

Otherwise it sounds like it may be a "renewal" of an existing obligation. As a precaution, you may wish to make sure your vendor system provides the terms 'renewal" in the replaced promisorry note.

A modification is generally a modification of an existing note that has not matured so unless the loan has not matured, I would recommend the term "renewals". (i.e. Balloon mortgage coming up for renewal" sounds like a matured loan transaction).

If it's truly a renewal or a modification, TILA and RESPA will not apply. Flood rules apply.

Here are more details ...
Refinance: A new transaction where the existing note is cancelled and a new note is signed to replace it.

Modification: A transaction where an existing note is modified but not cancelled.
• In a modification a lender can extend the term of the loan, change the interest rate, change the monthly payments, etc, as long as the original note is not cancelled, the transaction is a loan modification and RESPA/TILA does not apply to it. The only exception is a change from a fixed rate to a variable rate, which is always deemed a refinance.

Extension: A transaction where the existing note is extended (or renewed) for a period of time.

Conversion: Any conversion of a federally related mortgage loan to different terms that are consistent with provisions of the original mortgage instrument, as long as a new note is not required
• i.e. The conversion of a “Construction-to-Permanent (“CTP”)” loan to permanent financing is a conversion to permanent financing. This does not require modification at time of conversion, unless loan terms are changed. This is the preferred method for handling CTP transactions.
• i.e. Another example of a conversion is the utilization of a FNMA ARM Note with a Conversion Feature (i.e. FNMA Note #3529), whereby the note allows the borrower to ‘convert’ the loan from an ARM to a fixed rate (i.e. between years 2 and 5).

If the borrower signs a new note, replacing and satisfying the old note, a refinancing has occurred and new disclosures are required. The following exceptions may be considered modifications:
• The renewal of a single-payment note with no other change in terms
• A reduction in a note’s annual percentage rate with a corresponding change in the payment schedule
• An agreement involving a court proceeding
• A loan workout if there is no increase in rate or amount financed (loan workout = i.e. consumer default or delinquency)

Thank you for all the good info! I'm glad you brought up single pay notes....

In some instances, we have done single pay loans, typically for a year. If no terms are changed and the loan maturity date is simply extended for another year, we have been considering that a renewal, even though they are signing a new loan document to show the new maturity date (loan number stays the same). Would these single pay 1-4 family loans fall under the new guidelines of HPML or require any new disclosures?

Than

sounds like a renewal. To be safe (not a requirement) - just make sure the loan documents state a renewal.

We always put renewal in the loan purpose field. Thanks again for your help.

This is an old thread . . . but I have a question re: modifying/extending a loan and whether or not it can "become" an ARM. If we made a variable-rate closed-end loan secured by the consumer’s principal dwelling with a term of one-year (thus not an ARM) and then at one-year, we extend (change-in-terms) the loan for another year (still variable rate) - does that make it an ARM? Or does the ARM trigger only occur when the loan is first made? We anticipate that on this product, we will often see extensions for an additional 12-month period - could this be viewed as evasion of the ARM rules? What if the bridge loan is fixed for 12-months and then we extend it for another 12 months but make it a variable rate at that time - does it become an ARM? I'm thinking in both scenarios, it does not. We can also charge an extension fee without triggering new disclosures.

The threads above say that a lender can extend the term, change the interest rate, change the monthly payments, etc, as long as the original note is not cancelled and RESPA/TILA would not apply. True, even with TRID?

One last question - are there any restrictions (or Fair Lending issues?) on pricing a loan based on the loan amount?

Thank you!

One clarification from what I wrote above: I know that if the rate is fixed initially and we change to variable, it is a refinance and we must redisclose. What I meant to say was can we change the rate at the time of extension to a new fixed rate for the second 12 months without it becoming an ARM. And, I believe the answer is YES to that one.