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WBA is commonly asked whether standard loan closing disclosures are required when a lender renews an existing consumer loan. This article is intended to update information regarding loan renewals in Wisconsin found in Notice 2008-2, which appeared in the February 2008 WBA Compliance Journal.

For purposes of this article, a renewal is an extension of the term of an existing closed end loan (without additional advances) by the lender that originally made the loan to the same consumer. Commonly, the interest rate may change to reflect market conditions at the time of renewal and the payment schedule may be modified to reflect the continuing amortization of the loan based on the new interest rate.  The following summarizes disclosure requirements and their applicability to such loan renewals.               

1.  Truth-in-Lending and Regulation Z.  

Under Reg Z, disclosures must be given at or prior to the consummation of a loan. This includes, for example, personal consumer loan disclosures and TRID disclosures. When a loan is renewed, must the lender give these disclosures again? New disclosures will be required only if the renewal is considered a refinancing, as defined in Reg Z. A refinancing occurs when an existing obligation is satisfied and replaced by a new obligation undertaken by the same consumer. If the renewal is not a refinancing as defined in Reg Z, (that is, the loan to the consumer has not been satisfied and replaced with a new obligation) new disclosures are not required. There are two exceptions. New disclosures are always required for a renewal if:

  • a variable rate feature is added to the obligation at the time of the renewal; or
  • the interest rate is increased based on a variable rate feature that had not been properly disclosed when the loan was made.               

See the section below on Taking Steps to Document a Renewal and Maintaining Priority, for WBA recommendations to avoid having a renewal note characterized as a refinancing.   

The last paragraph just concluded that if the loan is a refinancing – that is, the lender satisfies and replaces an obligation with a new obligation to the same consumer – new disclosures are required. Reg Z includes five exceptions to this rule. Even if the loan meets the definition of a refinancing, new disclosures are not required if the purpose of the new transaction is to:

  • renew a single payment obligation with no change in the original terms;
  • reduce the APR with a corresponding change in the payment schedule;
  • enter into an agreement involving a court proceeding;
  • enter into certain agreements resulting from default or delinquency; and
  • renew optional insurance purchased by the consumer and added to an existing transaction if the initial purchase of insurance was properly disclosed.

In summary, subject to the two exceptions for adding a variable rate feature to the renewal or having incorrectly disclosed a variable rate feature initially, new consummation disclosures are not required unless the original obligation is satisfied and replaced by a new obligation undertaken by the same consumer. Further, even if the obligation is satisfied and replaced by a new obligation by the same consumer, new disclosures are not required if the new obligation falls within one of the five exemptions listed above.

The right of rescission, which applies to credit transactions in which a security interest is or will be taken in the consumer’s principal dwelling, is not required for renewals. However, if the transaction is a refinancing or consolidation by the same creditor of an extension of credit secured by the dwelling, the right of rescission does apply to any new advance of money. Also, for purposes of rescission, if a security interest in a consumer’s principal dwelling is added to the transaction, rescission will apply to the addition of the security interest. Finally, a refinancing by a different lender is always considered a new loan, subject to all of the disclosures and the right of rescission under Reg Z.

2.  RESPA.

Although certain disclosures previously required under RESPA are now incorporated into Truth-in-Lending/Reg Z (TRID disclosures), RESPA continues to require the provision of certain other disclosures – for example, the Homeownership Counseling Notice. Subject to certain specific exemptions, RESPA applies to loans secured by first or subordinate liens on residential real estate, including the refinancing of any loan secured by residential real estate. RESPA incorporates the basic Reg Z definition of refinancing. That is, if the loan is satisfied and replaced by a new obligation by the same borrower, the transaction is a refinancing and the RESPA rules applicable to refinancings apply. The RESPA disclosures do not apply if the loan is not satisfied and replaced by a new obligation by the same borrower. 

3.  HMDA and Regulation C.  

A HMDA-reportable financial institution is required to report the renewal of a covered loan only to the extent that it is considered a refinancing. Under HMDA and Reg C, a refinancing means a new, dwelling-secured debt obligation that satisfies and replaces an existing dwelling-secured debt obligation by the same borrower. If the loan renewal does not satisfy and replace the existing debt obligation, the loan is not a refinancing. This is true under existing HMDA requirements, as well as the new HMDA rules expanding reportable loans which take effect January 1, 2018. 

4.  Equal Credit Opportunity Act and Regulation B.

Regulation B requires the provision of disclosures and notices, as well as the collection of certain information about applicants. The definition of application under Reg B can include a renewal of credit.  As a result, if a consumer applies for the renewal of a loan, lenders must follow applicable Reg B provisions, including the requirement to provide applicants with the “Right to Receive A Copy of Appraisals” for first-lien, dwelling-secured loans for which the lender conducts a new appraisal or valuation on the property. Additionally, adverse action notice requirements must be followed.

Additionally, collection of government monitoring information under Reg B is only required and permitted for applications for the purchase or refinance of a principal dwelling, and not for loan renewals. Thus, monitoring information may only be collected on a renewal application if the renewal is considered a refinancing. As with Reg Z and HMDA, under Reg B, a renewal is not a refinancing unless the debt is satisfied and replaced by a new obligation to the borrower. Note that even in a refinancing, collection of government monitoring information is optional if it was obtained in an earlier transaction.

5.  Privacy. 

Privacy notices must be provided to individual customers not later than the time the customer relationship is established. Assuming the notice was properly provided in connection with the original loan (or earlier than that if the individual was already a bank customer), a loan renewal does not trigger the requirement to provide an initial privacy notice. 

6.  Flood Insurance. 

Lenders may not renew any loan secured by improved real estate or a mobile home located in a special flood hazard area unless the property is covered by flood insurance. At the time of loan renewal, lenders must determine whether flood insurance must be placed. A lender should order an updated flood determination for loan renewals, unless it is able to rely on a previous determination. The lender may rely on a previous determination if the determination is not more than seven years old and the basis for determination was recorded on the Standard Flood Hazard Determination Form. Prior determination forms may not be relied upon if map revisions or updates show the property is in a special flood hazard area. 

Regardless of whether an updated flood determination is required at the time of renewal, lenders must provide the Notice of Flood Hazards and Availability of Disaster Relief Assistance to borrowers for any loan renewal secured by improved real estate or a mobile home located in a special flood hazard area.

Wisconsin Consumer Act.

  • Tattletale Notice. Lenders must notify a non-applicant spouse of an extension of credit if the loan is governed by the Wisconsin Consumer Act (WCA). This disclosure is generally referred to as the tattletale notice. The tattletale notice is not required in connection with the renewal of a loan.
  • Explanation of Personal Obligation. The WCA does not address disclosures for renewals. The WBA recommends that a lender provide an Explanation of Personal Obligation in connection with renewal notes to any person entitled to an Explanation of Personal Obligation in connection with the initial loan (or provide copies of the documents if that is the way the lender complies with the notice requirement, if applicable, under the WCA).

Taking Steps to Document A Renewal and Maintaining Priority. 

When renewing loans, lenders strive to maintain priority on real estate collateral. To maintain priority, lenders want to treat a loan renewal as a continuation of an existing loan rather than a substitution and replacement of the initial loan with a new loan (a refinance). In general, the priority of an optional loan secured by real estate dates from the time of the loan. So, it is important that the date of a loan secured by real estate remain tied to the initial advance. The lender does not want a court to re-characterize a renewal as a new loan with a new advance date.

When renewing loans, the WBA recommends following procedures to avoid a re-characterization of a renewal loan as a refinancing or a new loan. These procedures include:

  1. Clarifying the party’s intent that the initial note is renewed by the renewal note and not replaced, by marking the initial note “renewed but not paid” and by retaining the initial note in the file until the obligation has been paid and satisfied.  
  2. Completing any provision in the renewal note that indicates that the loan renews a prior note by referring to the prior note(s).
  3. Recognizing the risk that a loan may more likely be characterized as a refinancing rather than a renewal to the extent that the terms of the renewal note deviate from the terms of the initial obligation. Wisconsin cases have established a doctrine that a renewal of an existing note is not a discharge of an original obligation and the creation of a new obligation, unless it appears that the parties agreed that it should be destruction of the old and the creation of a new obligation. However, the cases address extension of the term, and do not specifically address other amendments made at the time of the renewal loan.

When the terms of the renewal note deviate from the initial note, the lender may decrease the risk of losing priority at the time of renewal by using title insurance to insure continuing priority. For example, an existing title insurance policy may be brought current with a date down endorsement or other update. Alternatively, a lender could consider obtaining a title search at the time of renewal to determine if there are junior creditors that the lender should consider contacting for consent or a subordination to lender’s mortgage. Lenders may choose to be more or less conservative when priority could be affected by the determination of whether a loan is renewed or refinanced.                   

Charging a Renewal Fee.  

Lenders may collect a fee paid in cash by the consumer as a condition to renewing a note. The lender should document the consumer’s obligation to pay the fee in writing, perhaps by adding the consumer’s agreement to additional provisions in the renewal note or via a separate agreement outside the note. Lenders considering financing renewal fees should consider the consequences. If a renewal fee is financed (rather than paid by the consumer in cash), the lender increases the loan amount. Lenders that increase the loan amount on a renewal note, including by financing fees, without treating the loan as a full refinancing, may have additional disclosure and priority issues and should obtain legal advice as to the consequences.

By, Ally Bates

Events

The training session will begin with a brief overview of conventional commercial lending versus SBA lending. Additionally, the concept of credit scoring will be explored.

The webinar will also cover underwriting a commercial loan, including a review of financial statement analysis with emphasis on various cash flow analyses. Additionally, a standard loan “write-up” or written presentation format will be displayed.

The webinar will also cover negotiating a commercial loan, sources of commercial financing, and a brief review of various legal aspects of commercial lending.

What You Will Learn

  • Define commercial lending
  • Conventional commercial lending versus SBA lending
  • Credit scoring
  • Underwriting a commercial loan including financial statement analysis with emphasis on cash flow analyses
  • Standard loan write up
  • Review negotiating commercial loans, sources of commercial financing, and legal aspects of commercial lending

Who Should Attend
Commercial lenders, credit analysts, loan documentation specialists, private bankers, business development officers, branch managers.

Instructor Bio
David L. Osburn, MBA, CCRA, is the founder of Osburn & Associates, LLC, a Business Training & Contract CFO Firm that provides seminars, webinars, and keynote speeches for bankers, CPAs, credit managers, attorneys, and business owners.

His extensive professional background of over 30 years includes 20 years as a Business Trainer/ Contract CFO and 16 years as a bank commercial lender including the position of Vice President/Senior Banking Officer. Mr. Osburn has also been an adjunct college professor for over 30 years including College of Southern Nevada.

Registration Options

Live Access, 30 Days OnDemand Playback, Presenter Materials and Handouts $279

  • Available Upgrades:
    • 12 Months OnDemand Playback + $110
    • 12 Months OnDemand Playback + CD + $140
    • Additional Live Access + $75 per person

More webinar details coming soon.

Presenter

Cynthia Dopjera, a Certified Public Accountant, has 38 years of experience focused on accounting and regulatory reporting for financial institutions. During the first 18 years of her career, Ms. Dopjera held various positions with responsibility across all operational areas, to include accounting, internal audit, call report preparation and review while working for community as well as regional banks.

In 2000, Ms. Dopjera joined the public accounting firm of Harper & Pearson Company, P.C., where she served as Practice Leader for the Firm’s financial institutions practice covering community and regional institutions. The Firm’s services included financial statement audit, accounting, tax preparation and filing, internal control audit, Call Report audit, loan and asset quality review, and design and implementation of internal controls over financial reporting frameworks for institutions regulated under FDICIA and Sarbanes-Oxley. In 2018, Ms. Dopjera retired from Harper & Pearson Company, and currently provides accounting, consulting, and training services to financial institutions.

Registration Options

  • Live Access, 30 Days OnDemand Playback, Presenter Materials and Handouts – $279
  • Available Upgrades:
    • 12 Months OnDemand Playback + $110
    • 12 Months OnDemand Playback + CD  + $140
    • Additional Live Access + $75 per person

This webinar will begin with a review of “commercial real estate” including types of properties and demand/supply in the “current” market.

The session will then cover the entire “loan process” by which a commercial real estate (CRE) loan is marketed, underwritten, approved, documented, “closed,” and monitored. The process will include a discussion of CRE underwriting techniques and loan documentation issues.

Additionally, strategies to handle a problem CRE loan will be addressed.

Objectives
Review commercial real estate including types of properties and demand/supply in the current market
Gain an understanding of how banks process CRE loans
Learn the steps of marketing, underwriting, approving, documenting, closing, and monitoring a CRE loan
Cover CRE loan underwriting techniques and documentation issues
Address problem CRE loan issues
Who Should Attend?
Commercial lenders, credit analysts, loan documentation specialists, relationship managers, branch managers, private bankers, and business development officers.

Presenter

David L. Osburn, MBA, CCRA, is the founder of Osburn & Associates, LLC, a Business Training & Contract CFO Firm that provides seminars, webinars, and keynote speeches for bankers, CPAs, credit managers, attorneys, and business owners.

His extensive professional background of over 30 years includes 21 years as a Business Trainer/ Contract CFO and 16 years as a bank commercial lender including the position of Vice President/Senior Banking Officer. Mr. Osburn has also been an adjunct college professor for over 30 years including College of Southern Nevada.

Registration Options
Live Plus Five (days) – $265
OnDemand Recording – $295
CD-ROM – $345
Live Plus Six (months) – $365
Premier Package – $395v

Attend this proactive seminar and learn a comprehensive approach to financial statement analysis.

The session will begin with analyzing the four financial statements – Income Statement, Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows. This will include revenue and expense recognition, FIFO, LIFO, and average inventory costing models, operating expenses (repairs) versus improvements, depreciation including straight-line, units-of-production, and double-declining balance, amortization, and depletion.

The seminar will also explore accounts receivable assessment, allowance for doubtful accounts, intangible assets, accounts payable assessment, capital and operating leases, and analysis of the equity section of the Balance Sheet including partners’ capital accounts, common and preferred stock, treasury stock, stock splits, and retained earnings.

Additionally, the types or levels of financial statements will be highlighted including company-prepared, compiled, reviewed, and audit. The audited financial statements will include unqualified, qualified, adverse, and disclaimer.

The participant will then be introduced to a five-part financial statement analysis model which will include the liquidity, activity, leverage, operating performance, and cash flow.

The Cash Flow section will include the business traditional EBITDA cash flow and personal cash flow of the business owner (using the 1040 tax return, including tax schedules and K-1s, and the personal financial statement). Additionally, the global cash flow or combined business & personal cash flow model will be displayed along with sensitivity cash flow analysis.

Additionally, the related topics of the Z-Score (bankruptcy predictor) and the sustainable growth models will be reviewed.

Two case studies will be used to illustrate the five-part analysis model and the correct interpretation of the financial statements.

Objectives:

Analyze the four financial statements including Income Statement, Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows
Explore income statement issues including revenue recognition, inventory costing, and depreciation
Cover Balance Sheet accounts including accounts receivable, allowance for doubtful accounts, accounts payable, and the equity section
Review the levels of financial statement reporting including company-prepared, compiled, reviewed, and audit
Analyze a “five-part” analysis model including liquidity, activity, leverage, operating performance, and cash flow
Analyze the EBITDA, personal (business owner), global, and sensitivity cash flow analyses
Discuss the Z-score (bankruptcy predictor) and sustainable growths models
Summarize the seminar concepts through case studies

Target Audience
Commercial lenders, commercial relationship managers, credit analysts, loan administrators

Presenter
David Osburn, Osburn & Associates, LLC

Registration Option
Live presentation $275

Recording available through Feb. 2, 2022

Many bankers underwrite loans primarily from personal and business tax returns, particularly at the community bank level. What reported income is actually cash flow? How can we properly assess a large capital gain (or loss)? How can you determine of an item is recurring? Why should you exclude non-recurring items? How do loss carryforwards affect cash flow? What is the Section 179 deduction? This program provides answers and provides case examples.

Covered Topics

Examples of capital gains (and losses) and how to extract the cash flow involved
Issues in determining if an item is recurring
When to ask questions of the borrower and/or his or her tax advisor when the tax return does not appear to make sense
What is a loss carryforward item and how it should be treated in an analysis
Overview of Section 179 for write-off or depreciation of assets
In complex situations, ideas for limiting the analysis to material or significant items, and how to determine if further and/or annually updated information should be waived
Ways to move forward with analysis while waiting for additional information
Why you will often need information beyond what is reported in tax returns

Target Audience
Branch managers, consumer lenders, mortgage bankers, private bankers, small business lenders, commercial lenders, credit analysts, loan review specialists, special assets officers, lending managers and credit officers

Presenter
Richard Hamm, Advantage Consulting & Training

Registration Option

Live presentation $275

Recording available through Jan. 26, 2022

In many instances of commercial real estate (CRE) lending, the risks to a borrower/owner/guarantor from contingent liabilities outweigh the strength of the property your bank is proposing to finance. How can you effectively evaluate the risks of these guarantees? This program provides a framework not only for arraying the various properties, but a strategy for determining the risk of individual properties. Yes, developing property cash flows for tax returns and other data is the first step, but bankers need to go deeper into estimating collateral value and any potential shortfall within the property that becomes a direct liability to your borrower/owner/guarantor. Due to the high incidence of banks requiring owners to guarantee a percentage higher than the person’s ownership percentage, minority interests in CRE create a more complicated analysis, even best case/worst case/most likely scenarios. Finally, issues such as property type, location, length of leases in place and strength of tenants quickly take the analysis beyond tax return or operating statement data.

Covered Topics

Net operating income (NOI) components and concepts
Understanding key variables within NOI: vacancy, management fees, replacement reserves and capital expenditures
Understanding cap rates and how they are used to link cash flow to property value
Using tax returns and customer rent rolls, plus issues with commercial leases
Unique characteristics of the major types of real estate
Transaction-level stress-testing of debt service coverage (DSC) and loan-to-value (LTV)
How to use a sample worksheet to explore the major issues, including stress-testing
Issues faced in the global analysis of the various holdings of the borrower/guarantor
Taking the global analysis beyond the face values of guarantees (contingent liabilities analysis)
Using the cash flow analysis as part of ongoing loan monitoring, including estimated property
values, not in lieu of appraisals, but as a key part of the overall CRE process
Brief look at residential rentals and related cash flow and property value issues

Target Audience
Commercial lenders, credit analysts and small business lenders; consumer lenders, mortgage bankers and private bankers; loan review specialists, special assets officers, lending managers and credit officers

Presenter
Richard Hamm, Advantage Consulting & Training

Registration Option

Live presentation $275

Recording available through Jan. 26, 2022