Final rule—amendment to Regulation Z - Legal Developments

Federal Reserve Bulletin, Feb, 2002

Paragraph 34(a)(3) Refinancings within one-year period.

1. In the borrower's interest. The determination of whether or not a refinancing covered by section 226.34(a)(3) is in the borrower's interest is based on the totality of the circumstances, at the time the credit is extended. A written statement by the borrower that "this loan is in my interest" alone does not meet this standard.

i. A refinancing would be in the borrower's interest if needed to meet the borrower's "bona fide personal financial emergency" (see generally section 226.23(e) and section 226.31 (c)(1)(iii)).

ii. In connection with a refinancing that provides additional funds to the borrower, in determining whether a loan is in the borrower's interest consideration should be given to whether the loan fees and charges are commensurate with the amount of new funds advanced, and whether the real estate-related charges are bona fide and reasonable in amount (see generally section 226.4(c)(7)).

2. Application of the one-year refinancing prohibition to creditors and assignees. The prohibition in section 226.34(a)(3) applies where an extension of credit subject to section 226.32 is refinanced into another loan subject to section 226.32. The prohibition is illustrated by the following examples. Assume that Creditor A makes a loan subject to section 226.32 on January 15, 2003, secured by a first lien; this loan is assigned to Creditor B on February 15, 2003:

i. Creditor A is prohibited from refinancing the January 2003 loan (or any other loan subject to section 226.32 to the same borrower) into a loan subject to section 226.32, until January 15, 2004. Creditor B is restricted until January 15, 2004, or such date prior to January 15, 2004 that Creditor B ceases to hold or service the loan. During the prohibition period, Creditors A and B may make a subordinate lien loan that does not refinance a loan subject to section 226.32. Assume that on April 1, 2003, Creditor A makes but does not assign a second-lien loan subject to section 226.32. In that case, Creditor A would be prohibited from refinancing either the first-lien or second-lien loans (or any other loans to that borrower subject to section 226.32) into another loan subject to section 226.32 until April 1, 2004.

ii. The loan made by Creditor A on January 15, 2003 (and assigned to Creditor B) may be refinanced by Creditor C at any time. If Creditor C refinances this loan on March 1, 2003 into a new loan subject to section 226.32, Creditor A is prohibited from refinancing the loan made by Creditor C (or any other loan subject to section 226.32 to the same borrower) into another loan subject to section 226.32 until January 15, 2004. Creditor C is similarly prohibited from refinancing any loan subject to section 226.32 to that borrower into another until March 1, 2004. (The limitations of section 226.34(a)(3) no longer apply to Creditor B after Creditor C refinanced the January 2003 loan and Creditor B ceased to hold or service the loan.)

Paragraph 34(a)(4) Repayment ability.