NEWS: The League is offering a new form for sale, the Loan Modification Agreement – Interest Rate and Payment Reduction, WCUL #83003 (Rev. 5/20). It allows the credit union and borrowers to agree to a lower interest rate on a loan, with a corresponding reduction in the payments. It is specifically for use with WCUL closed-end notes, not other vendors’ notes.
Full details on the use of the form, a sample copy of the form and instructions are presented in new ii Release No. B081 – WCUL Loan Modification Agreement – Interest Rate and Payment Reduction.
The form is designed for loans subject to Wisconsin law. It has been approved by the Wisconsin Department of Financial Institutions as compliant with the Wisconsin Consumer Act. A sample copy of WCUL #83003 is available here. Line by line instructions for completing the form are available here.
WCUL #83003 may be used to help borrowers facing difficulties during the COVID-19 pandemic, but that is not its only use. It can be used whenever the need arises to reduce a borrower’s interest rate, such as to accommodate member requests for rate reductions during times of declining interest rates. The form makes this possible without a complete rewrite of the note and without new disclosures.
Since proper completion necessarily rules out any extension of the maturity date of the loan, the form helps the credit union avoid many of the complications that can arise with modifications of a real estate mortgage loan or mobile home loan. Those complications may include loss of mortgage lien priority status, a need to modify or file a new mortgage, flood insurance issues, etc.
The Wisconsin Department of Financial Institutions indicates that a loan modification fee cannot be charged on a Wisconsin Consumer Act loan. It is not a permitted additional charge under Wis. Stats. §422.202. On a non-WCA loan, the credit union must be sure that any loan modification fee does not increase the annual percentage rate.
We cannot assure that this form is appropriate for use with other vendors’ closed-end loan agreements. Consult your attorney before using with non-WCUL forms.
Truth In Lending advantage
A refinancing of existing credit, and sometimes a modification, is a new loan. Regulation Z generally requires new Truth in Lending disclosures for a refinancing, as well as the application of many other Reg. Z rules for new loans. Reg. Z says:
A refinancing occurs when an existing obligation…is satisfied and replaced by a new obligation undertaken by the same consumer. A refinancing is a new transaction requiring new [Truth in Lending] disclosures to the consumer.
Determining whether an action is a refinancing or a mere modification, not requiring new disclosures, can be a difficult task. Fortunately, Reg. Z provides exceptions to the disclosure requirement in certain situations – without regard to whether it may be a refinancing.
The form is intended to make it easy for credit unions to rely on Reg. Z § 1026.20(a)(2) to lower a rate without triggering new Truth in Lending disclosures. It does this, if the form is completed properly, by permanently reducing the interest rate with a corresponding reduction in the payments. The Reg. Z Commentary says that a “corresponding change” in the payment schedule to implement a lower annual percentage rate is:
- a shortening of the maturity, or
- a reduction in the payment amount or the number of payments of an obligation.
This exception to the Reg. Z disclosure requirement is not available if:
- the maturity is lengthened, or
- the payment amount or number of payments is increased beyond that remaining on the existing transaction.
Completing the form
The line-by-line instructions for the form give guidance on meeting the requirements to qualify for exemption from the Truth in Lending disclosure requirement.
The credit union must keep the same type of payment structure as in the original note: No converting a level payment loan to a balloon or single payment loan, or vice versa; no deferral of payments; and no extending the maturity date.
As pointed out earlier, proper completion necessarily rules out any extension of the maturity date of the loan. This helps the credit union avoid many of the complications that can arise with modifications of a real estate mortgage loan or mobile home loan. Those complications may include loss of mortgage lien priority status, a need to modify or file a new mortgage, flood insurance issues, etc.
The Loan Modification Agreement – Interest Rate and Payment Reduction form specifies the date upon which the reduced interest rate will take effect – normally the date of signing. The user completes one of three repayments sections on the form. They are modeled after the standard fill-in-the blank payment sections on WCUL closed-end note forms. The appropriate repayment section is filled in, but with a lower payment, fewer payments, and/or an earlier maturity than provided in the original note.
WCUL #83003 includes a blank field for Additional Terms, in case a credit union finds it necessary to add clauses. Use it sparingly. For any language added, consult your attorney for legality, compatibility with the original note, and legally sound wording. It will be important to evaluate whether the additional clause(s) will trigger new Reg. Z disclosures, additional compliance steps, or have adverse effects on mortgage or mobile home loans.
The form must be signed by a credit union representative as well as all borrowers, cosigners, and guarantors.
NCUA guidance
This loan modification is one of the approaches the NCUA encouraged credit unions to consider during the coronavirus pandemic. In Letter to Credit Unions No. 20-CU-13: Working with Borrowers Affected by the COVID-19 Pandemic (April 2020), the NCUA said:
Strategies to permanently modify or refinance an existing loan include, but are not limited to: …Reducing the Interest Rate. Reducing the interest rate can provide financial relief to a borrower by lowering their payment without extending the term of the loan.
The Letter went on to say:
Credit union policies should address the use of loan workout strategies and outline risk management practices. Policies should clearly define borrower eligibility requirements, set aggregate program limits, and establish sound controls to ensure loan workout actions are structured properly.
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Credit union management must comply with regulatory reporting requirements and generally accepted accounting principles, as applicable. A credit union’s decision related to loan modifications may affect regulatory reporting, including interest accruals, troubled debt restructurings (TDRs), and credit loss estimates. As discussed in the revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus, Section 4013 of the CARES Act allows financial institutions to suspend the requirements to classify certain loan modifications as TDRs. Management should ensure loan modifications are reported properly on the Call Report to convey the credit union’s risk profile accurately.
As with any loan modification, it is the facts and circumstances that determine whether the NCUA guidance on loan workouts and troubled debt restructurings (TDRs) apply. See ii Release No. B072 – NCUA IRPS: Loan Workouts, Nonaccrual Policy, and Regulatory Reporting of Troubled Debt Restructured Loans.
Availability of form
Credit unions may purchase the new form online at theleague.coop > Solutions > Credit Union Forms > Consumer Loan Forms. See the April 28, 2020 Compliance Courier: Purchasing League Forms 101.
For questions about use of the form, please call the League’s Compliance Hotline at (608) 640-4050 or email the Compliance Mailbox.