Regulatory Compliance Considerations for Loan Deferments/Modifications
The banking supervisory agencies have published joint statements to assist and clarify matters for financial institutions making payment accommodations to borrowers affected by SARS-CoV-2 virus and the incidence of COVID-19. For residential real estate loans, loan payment deferral requirements can be a bit more challenging from a regulatory compliance perspective. This article provides guidance on how to be compliant during these unprecedented times.
Is It a Modification or Refinance?
- Regulation Z defines a “refinancing” as “when an existing obligation … is satisfied and replaced by a new obligation undertaken by the same consumer.” Generally, if the existing note and security agreement are not satisfied and replaced, it is a modification, not a refinance. There are exceptions to the “new obligation equals new disclosures” rule; we encourage you to review section 1026.20(a) of Regulation Z and its commentary to see how it applies to your bank’s unique circumstances.
- A refinance is a new transaction and requires all new disclosures related to Regulation Z and Regulation X (RESPA); modifications do not. While various modifications to the original loan are allowed, a variable-rate feature to a loan cannot be added without triggering new disclosures.
- Loan modifications are not Home Mortgage Disclosure Act-reportable.
Applications, Adverse Action & Appraisals/Evaluations
- Deferments, extensions and modifications are requests for credit under Regulation B, so joint intent rules apply. Joint intent must be evidenced at the time of application.
- If a request is denied, Regulations B and V adverse action timing and notification requirement should be followed.
- Appraisal guidelines may be triggered in instances when a borrower requests a renewal of an existing loan and a new appraisal/evaluation will be produced.
- Do you have a MIRE (modification, increase, renewal or extension)?
- You may rely on previous flood determination, but it cannot be more than seven years old.
- Provide the required Notice of Special Flood Hazards and Availability of Federal Disaster Relief Assistance for loans in a Special Flood Hazard Area (SFHA).
- Follow escrow flood rules.
- Interest capitalization does increase the loan balance; monitor loans located in an SFHA to help ensure an increase in flood insurance is not required.
Regulation V – Fair Credit Reporting Act
- If a credit report is pulled as part of the decision-making process, provide credit score disclosures as applicable.
- Review and adjust credit reporting processes. Borrowers who receive payment accommodations are not reported to the credit bureaus as past due.
Provide borrowers with clear and adequate disclosures that outline the potential impact on the loan. In addition, the agreement should be properly executed between the bank and the borrower and outline all requirements.
- Will the bank charge any fees?
- Will it result in a balloon payment?
- Will the maturity be extended?
- Will the loan balance re-amortize?
- Will the deferment include principal only? How will interest be handled?
- How will escrow payments be handled? Agreements should address the potential of escrow account shortages or deficiencies.
Please note that the requirements we discussed here are based on federal law. Please check state laws for additional considerations. As with most topics related to COVID-19, changes are being made rapidly. Please note that this information is current as of the date of publication.
For further information or assistance related regulatory compliance matters, reach out to your BKD Trusted Advisor™ or use the Contact Us form below.