I have a question in the ages-old refinance-vs.-modification debate. We have a request from a client to "renew" their 5/1 ARM secured by their primary residence. The client is nearing the end of the initial five-year period and would like to extend the five-year, fixed-rate period for another five years. We would not change the ultimate maturity date, so we would basically turn our 5/1 ARM into a 10/1 ARM. No new money or fees would be added, and the loan is in good standing.

My feeling is that this change would be a refinancing under 1026.20, as we would be adding a previously undisclosed adjustable-rate feature. Our business line, of course, would like to treat this as a standard modification under 1026.20 without all of the standard Reg. Z and other disclosure obligations. Am I being too conservative here? Thanks.

You are right on point. You are in essence making them a new 5/1 ARM.

Thanks. Does anyone think it would it make a difference if it was a second home and not a primary residence?

Regulation Z only cares whether the transaction is consumer or business. If it is consumer, then it is covered under 1026.20(a). Collateral is not a consideration. 1026.20(a) would apply to the modification of a car loan.

I'd like to as if there would be a difference if the loan has already matured? I know that if a HELOC has matured it is needs to be refinanced. Does the same hold true for a residential mortgage loan? The mortgage itself has not matured. The bank would like to term out the balloon, but the loan has already matured. Can we do a modification/Change-in-Terms without re-disclosing? Or, will it be considered a refinancing and be subject to TRID and RESPA?

Talk to your legal counsel about "applicable law".

Official Interpretation
20(a) Refinancings
1. Definition. A refinancing is a new transaction requiring a complete new set of disclosures. Whether a refinancing has occurred is determined by reference to whether the original obligation has been satisfied or extinguished and replaced by a new obligation, based on the parties' contract and applicable law. The refinancing may involve the consolidation of several existing obligations, disbursement of new money to the consumer or on the consumer's behalf, or the rescheduling of payments under an existing obligation. In any form, the new obligation must completely replace the prior one.

Talk to your legal counsel about "applicable law". Do this.

There is an old age argument that once the legal obligation has matured then any changes to that legal obligation in effect satisfies and replaces it, thus making those changes a refinancing.

Thank you for your responses! We've reached out to our attorney to get his opinion.