Recently I got a question from a banker. “We have received conflicting information on what qualifies as a refinance. If we have the borrower sign a new note but keep the same note number, should we report the transaction as a refinance?”
That’s a great question, but not so easy to answer.
The failure to adequately define the term “refinance” is one of the Federal Reserve Board’s biggest screw-ups. We can only hope that when Regulation C gets transferred to the new Bureau of Consumer Financial Protection in a few months that the new agency will clean up this mess.
The term “refinance” is defined as a new transaction that satisfies and replaces an existing transaction. For HMDA purposes, both the old transaction and the new transaction must be secured by a dwelling. There is no discussion of having a new note number or not.
From my perspective, if the borrower signs a new note, with or without a new note number, the new note satisfies and replaces the existing note. So the transaction is a refinance. If the new note did not satisfy the existing note, the borrower would then owe the balance on both notes, which is clearly not the case.
Now that I have that out of my system, let’s talk some reality. Because of the lack of clear guidance from the Fed, examiners are all over the board on this issue. So you should seek guidance from your examiner on this issue. Find out which definition he or she is using this week. And be aware that not all examiners are in agreement on this issue, so the next examiner may have a different interpretation on this matter and you may have violations as a result. We have seen cases where the opinion of an examiner has changed from one exam to the next.
As stated previously – it’s a mess, a mess that is easily cleaned up by adding proper clarification to the regulation or the Official Staff Commentary. Of course, sometimes the Fed’s attempt to clean up a mess only makes a bigger mess. Don’t get me started on the Fed’s attempt to clarify “temporary financing.”