Did I lose my scrap due to reroll?

Under the new loot system, we do not get the second drop from bosses. That is to say, your pinks, recipes and scraps will not be coming from the second drop off bosses. Those of us who have seen the pinks drop today will see that the person who got the pink does not get a green drop. Also, if you got a scrap, you do not a green drop.

Now I encountered this while fighting the fat boss in level 2: we killed ol' fatty and I got the message: you rerolled for better loot! I got a green from that reroll. That got me to wonder, given that the successful reroll upgrades your drop by 1 rarity, I must have gotten an orange drop, and the reroll upgrade the orange from the boss to the green. So, what orange loot will fatty drop? Scraps right?

So, did I just reroll my scrap into a green?

Off topic: We certainly gave fatty a good workout today.

Itll reroll to the rarer item, regardless of color

No you did not. Re-rolls only choose the better item.