We're considering modifying a fixed rate loan by lowering the interest rate, but then tacking the interest that would have been paid on at the end of the of the loan term as a balloon payment.

1) How would the balloon payment be disclosed?
2) Are there any considerations if this is pre-default vs. a workout?

I appreciate any insights. TIA

So in essence you will be taking the additional interest that would have accrued and added it to the principal of the loan?

Yes, so I'm unclear if this is truly a modification and what disclosure requirements would apply.
It's something we're considering doing for various clients in light of COVID19 and I'm trying to assess the regulatory impact.

If you are modifying the loan and not adding or changing a variable rate feature, it is not a refinance under 1026.20(a) and it would not trigger new disclosures. I would suggest reviewing the latest guidance from your regulator as for accounting treatment.

So with that said, if we only do the interest rate reduction for a temporary period of time - one year, for example - would we be creating an ARM? Meaning 1026.20(a) does apply because we've added a variable rate feature?

I'm confused by the CFPB's official interpretation of 1026.20(a)(2), and am unsure if a temporary interest reduction qualifies as a variable rate feature under 1026.20(a). I'd love to be able to go back and say we don't have a refinance and don't need new disclosures, but I feel like I'm going to get hit with one of these if they decide to do the rate reduction for only a short period of time instead of over the whole loan life!

Paragraph 20(a)(4)

1. Workout agreements. A workout agreement is not a refinancing unless the annual percentage rate is increased or additional credit is advanced beyond amounts already accrued plus insurance premiums.

I should have been clearer. These loans are not workouts. The borrowers are not yet in default. It's a proactive program we're trying to launch as relief for clients who have been affected so they don't actually end up in default.

Then modifying the loan into a stepped rate feature is not adding a variable rate.