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4000 - Advisory Opinions

Disclosure Requirements Upon Renegotiation of Fixed-Rate Mortgages


November 5, 1987

Patti C. Fox, Attorney

We are in receipt of your letter dated September 28, 1987 to the Office of the Comptroller of the Currency ("OCC") regarding certain fixed-rate mortgages offered by ***. The bank currently offers fixed-rate 15 year mortgages with a balloon payment at the end of five years, and permits the interest rate to be renegotiated when the balloon payment comes due. The bank is seeking approval to add another balloon payment at the end of the second five year period.

As discussed in your enclosure from the Pennsylvania Department of Banking, adjustable rate mortgages may be offered by state-chartered banks pursuant to the Alternative Mortgage Transaction Parity Act of 1982 (Garn-St. Germain), 12 U.S.C. § 3801, et seq., and regulations issued thereunder by the OCC at 12 C.F.R. Part 29. Section 29.9 provides that sections 29.1, 29.3, 29.4, 29.6, and 29.7 are applicable to nonfederally chartered commercial banks. 12 C.F.R. § 29.9.

Adjustable rate mortgages include "fixed-rate mortgage loan agreements that implicitly permit rate adjustment by having the note mature on demand or at the end of an interval shorter than the term of the amortization schedule unless the bank has clearly made no promise to refinance the loan (when demand is made or at maturity) and has made the disclosure specified in § 29.7(d) of this part.'' 12 C.F.R. § 29.1 (emphasis added). The mortgage appears to fall within the first portion of the definition. Then, if your client promised to refinance, when initially making the mortgage, it would have to comply with all the disclosure requirements under Part 29. If the bank stated only that it might refinance the mortgage, compliance with section 29.7(d) is sufficient. Refinancing has been interpreted by the OCC as a loan which in some manner will supersede or relate to the general mortgage loan. "Applicability of ARM Regulations to Home Equity Loan Programs," OCC Interpretative Ltr. No. 391 [Current Matters] Fed. Banking L. Rep. (CCH) ¶ 85,615 (June 11, 1987).

It is unclear from your letter whether the bank initially made a firm promise to renegotiate the terms of the mortgage. As long as proper and timely disclosures are made under section 29.7 or 29.7(d), whichever is applicable, then the bank may seek an additional balloon payment during the refinanced term of the mortgage.

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