Extending an Open Ended Loan

6 Replies

Has anyone done an extension on an open ended loan?  I am familiar with the concept, but not so much with the nuts and bolts of how to get it done.  I believe there needs to be a new note and security instrument.  Not sure what other docs are required and how to record it so that it shows up as an extension rather than a net new lien.  Any insight is appreciated.

Mike this is not an easy question to address with the limited information in the post.  Open end loans 'can' be modified in the same way closed end loans are.  However, this is dependent on the security instrument that was used.  State law has some say so as well.  Some open end security instruments are designed to explicitly be an open end loan so modification to those security instruments would need to take place in order to match terms up with a closed end note.  Many times they are just treated like a full refinance since the note and security instrument would need to be modified anyway.

Other details to take note of are whether or not the loan can still be drawn down.  This also means you the Mortgagee have a liability to capitalize the loan on-going through that phase.  Usually there are lots of terms inside the existing open end note which deal with freezing of draws, repayment and default.  Those need to be examined and considered and are what create the maze of requirements.

Even under a modification new disclosures (not to be confused with new security instrument) may need to be issued for the sake of Reg Z and X.  If the loan exists in two instances - both open and closed - then you will disclose portions in two different scenarios.  

Your servicer's counsel should be able to guide you for the required disclosures and documents.  Lots of rules and some rules changed under DF.

@Dion DePaoli  

Thanks for the insight Dion.  I don't personally have an application for this right now, its just something I have been curious about.  I recently reviewed some loans where the lender didn't extend properly and created a mess in title, which brought the question for me of how one would do it properly.  I believe the proper way to do it from a title perspective is to record a new security instrument which identifies it as an extension of the prior security instrument using a clear reference to the prior instrument.

Mike, my first question is: Why an extension of an open ended loan? If it is a true open end, it's a demand note most likely it remains as long as amounts are outstanding, there is no extension of something that never terminates in time.

If you have a future advance loan, some call those open ended, but they are not, they simply secure future advances over a specified term and may require an extension of the term.

There is no need to modify a deed of trust unless specifically required by state law, so long as the funds originally secured remain outstanding the security agreement is effective for those amounts, including future advances as provided for under the note and security agreement. Construction loans are generally a future advance note as an example.

It becomes an accounting function as well, is the note holder creating a new loan paying off the old loan, which is common, in that a new security agreement must be made. If accruals are simply extended, those amounts are already secured, the modification is an extension of time originally agreed. It also depends on the security agreement, if a lender stated an effective term you'd need an extension, better accomplished with a new instrument. But, the Standard Uniform Deed of Trust doesn't require a term to be stated, simply the date the obligation was made and a description of the original amount and rate of interest secured.

Since you don't really have such an issue at hand, you can't tell what direction you would need to go. :)

@Bill Gulley  

Thanks for the response Bill. I think my original understanding of open ended was inaccurate. My understanding was that the amount of the loan could be increased within the context of the original loan. But now after reading your post and doing some additional investigation, I am now under the impression that this applies only within the maximum limit defined by the security instrument and note. A HELOC or an M&M lien would be examples of this.

@Mike Hartzog  That is correct, the future advance note will define the maximum amount to be advanced and secured, beyond that you need a new note and security agreement. Any line of credit will be limited, it's not really "open ended" as implied or thought of. :)