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Know the requirements for loan renewals to gain efficiencies

Oct 05, 2023

Loan renewals are a continuation of an existing loan, not to be confused with refinancing which is when the existing obligation is satisfied and replaced with a new obligation. Understanding which compliance requirements apply to renewal loans can create efficiencies in your process.

Regulation B (Equal Credit Opportunity Act)

Appraisal notice and delivery requirements apply to renewals of a first-lien, dwelling-secured loan when an applicant requests the renewal of an existing extension of credit and a new appraisal or other written valuation is developed. The appraisal notice and delivery requirements do not apply if an appraisal or other written valuation that were previously developed in connection with a prior extension of credit is used to evaluate the renewal request.

Collection of government monitoring information is not required, nor permitted, on renewals.

Regulation X (Real Estate Settlement Procedures Act)

Regulation X (Real Estate Settlement Procedures Act) disclosures, such as the Homeownership Counseling Notice, do not apply for renewals.

The initial escrow statement will apply when an escrow account is being established, so if you are establishing an escrow account at the time of renewal, the statement is required.

Regulation Z (Truth in Lending Act)

Regarding Home Equity Lines of Credit (HELOCs), a new plan results if the plan is renewed (with or without changes to the terms) after the scheduled expiration. A new plan is subject to all open-end credit rules, including 1026.6, 1026.15 and 1026.40.

New disclosures are not required for open- and closed-end credit renewals, such as early HELOC disclosure, initial adjustable-rate notice, and loan estimate and closing disclosure, unless one or both of the following apply:

  • A variable rate feature is being added to the loan at the time of the renewal
  • An interest rate increase (based on a variable rate feature) is occurring at the time of renewal and this fact was not properly disclosed when the loan was made

Renewals should not be treated as a refinancing. Per Comment 1026.20(a)(1)-1, this exception applies both to obligations with a single payment of principal and interest and to obligations with periodic payments of interest and a final payment of principal. In determining whether a new obligation replacing an old one is a renewal of the original terms or a refinancing, the creditor may consider it a renewal even if:

  • Accrued unpaid interest is added to the principal balance.
  • Changes are made in the terms of renewal resulting from the factors listed in § 1026.17(c)(3).
  • The principal at renewal is reduced by a curtailment of the obligation.

The following do not apply to renewals:

  • Right of recission [Open-end credit § 1026.15; Closed-end credit § 1026.23]
  • Ability to repay/qualified mortgage rules Sections § 1026.43(c) through (f)
  • High-cost mortgage rules [§ 1026.34]
  • Higher priced mortgage rules [§ 1026.35]

The renewal of optional insurance added to an existing credit transaction is not a refinancing, assuming the appropriate Truth in Lending Act disclosures were provided for the initial purchase of insurance.

Flood rules

A flood determination must be ordered for loan renewals secured by a building unless the financial institution is relying on a previous determination. A previous determination may be relied on when the determination is not more than seven years old, the map has not been revised or changed and the determination was recorded on the Standard Flood Hazard Determination Form.

If the building(s) securing the loan is located in a special flood hazard area, the borrower must be provided the Notice of Flood Hazards and Availability of Disaster Relief Assistance.

Adequate flood insurance must be in place before the loan is renewed.

Privacy

Privacy notices are not required for renewals since the notice was required to be provided to individual customers not later than the time the customer relationship was established.

Beneficial ownership requirements for legal entity customers

The following do not require the covered financial institution to identify and verify the identity of the beneficial owner(s) when a legal entity customer opens a new account:

  • A renewal, modification or extension of a loan (e.g., setting a later payoff date) that does not require underwriting review and approval
  • A renewal, modification or extension of a commercial line of credit or credit card account (e.g., a later payoff date is set) that does not require underwriting review and approval

If the renewal, modification or extension requires underwriting review or approval, then the beneficial ownership rules apply.

All other applicable anti-money laundering (AML) requirements under the Bank Secrecy Act (BSA) and its implementing regulations, including program, recordkeeping and reporting requirements, also apply.

How Wipfli can help

Wipfli specialists can assist with consulting, training, monitoring or audits that include treatment of renewals.  Contact us to learn more about how we can help you through the implementation process and with analyzing data thereafter from a fair lending perspective. Our compliance consultants can provide the support you need for your organization.

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Author(s)

Tracy Bush, CRCM
Senior Manager
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