Skip to content
BOL Conferences
Page 1 of 19 1 2 3 18 19
Thread Options
#1240380 - 08/27/09 05:27 PM Regulation Z changes - 10-01-09
RR Joker Offline
10K Club
RR Joker
Joined: Nov 2002
Posts: 20,654
The Swamp
okay, list #1 to sticky
Last edited by RR joker; 08/27/09 05:29 PM.
_________________________
My opinion only. Not legal advice.

Say you'll haunt me - Stone Sour

Return to Top
Lending Compliance
#1240403 - 08/27/09 05:44 PM Re: Regulation Z changes - 10-01-09 RR Joker
Truffle Royale Offline

10K Club
Joined: Jul 2003
Posts: 17,395
Per request, this is the place to discuss and ask questions regarding the Reg Z changes to be implemented 10/1/09.

Return to Top
#1240467 - 08/27/09 06:42 PM Re: Regulation Z changes - 10-01-09 Truffle Royale
Dollye7 Offline
Gold Star
Dollye7
Joined: Jun 2006
Posts: 255
Southwest USA
Great idea to date these!

In addition to FDIC guidelines, have other regulatory agencies indicated that a balloon payment should not be done on a term of 7 years or less?

I know there has been a lot of discussion on this – does it go into effect on 10.1.09?

Thanks!

Return to Top
#1240505 - 08/27/09 07:05 PM Re: Regulation Z changes - 10-01-09 Dollye7
David Dickinson Offline
10K Club
David Dickinson
Joined: Nov 2000
Posts: 18,762
Central City, NE
To the best of my knowledge, only the FDIC has indicated a balloon of < 7 years is not realistic anymore. Yes this goes into affect 10/1/09 and only if it's a HPML.

One of consultants contacted the author of the article (in the 2nd quarter FDIC Supervisory Insights). She indicated this was "kind of the FDIC's stance" and that the FRB had not been consulted on this. When we questioned what she meant, she skated around the issue - basically saying they were regretting putting this in writing because they weren't sure they really meant it. Wow!
_________________________
David Dickinson
http://www.bankerscompliance.com

Return to Top
#1240515 - 08/27/09 07:11 PM Re: Regulation Z changes - 10-01-09 David Dickinson
RR Joker Offline
10K Club
RR Joker
Joined: Nov 2002
Posts: 20,654
The Swamp
gotta love that!
_________________________
My opinion only. Not legal advice.

Say you'll haunt me - Stone Sour

Return to Top
#1240558 - 08/27/09 07:34 PM Re: Regulation Z changes - 10-01-09 David Dickinson
Frank Offline
100 Club
Joined: Jun 2007
Posts: 133
Central Arkansas
In the FDIC teleconference this morning from the Dallas region, they basically reiterated that a balloon of 7 years is not realistic.

A creditor is presumed compliant if all 3 of the following requirements are satsified:

-verifications of repayment ability

-Determies repay ability using the largest principal and interest payment scheduled in the first 7 years following consummation and taking into account current obligations and mortgage related obligations (property tax, insurance)

-Takes into account at least one of the following:
-DTI
-Consumers available income after paying debt
(residual income)

Return to Top
#1240567 - 08/27/09 07:42 PM Re: Regulation Z changes - 10-01-09 Frank
CRAatBOK Offline

Power Poster
Joined: Mar 2004
Posts: 6,172
Further South than I wanna be.
Is there anywany to test our current loans to determine if they were done after 10-1 the would be high priced. We have a number of 3 year loans that had rate spreads on HMDA that were not NA. I would like to get an idea if these loans would also end up being high cost under the new rules.
_________________________
Life is not the way it's supposed to be. It's the way it is. The way you cope with it is what makes the difference.

Return to Top
#1240569 - 08/27/09 07:43 PM Re: Regulation Z changes - 10-01-09 Frank
OnTheEdge Offline
Diamond Poster
Joined: Apr 2002
Posts: 1,677
SmallTown, USA
But I just ran the numbers and a $50,000 loan with a 5 yr balloon has a final pymt of $29,322 vs a final pymt of $18,853 for a 7 yr balloon. Realistically who could afford either of these?


If we do the following, haven't we basically created an ARM loan?
34(a)(4)(iv) Exclusions from the presumption of compliance.


2. Renewable balloon loan. If a creditor is unconditionally obligated to renew a balloon-payment loan at the consumer's option (or is obligated to renew subject to conditions within the consumer's control), the full term resulting from such renewal is the relevant term for purposes of the exclusion of certain balloon-payment loans. See comment 17(c)(1)--11 for a discussion of conditions within a consumer's control in connection with renewable balloon-payment loans.
_________________________
The opinions expressed are mine and do not necessarily reflect those of my employer.

Return to Top
#1240570 - 08/27/09 07:43 PM Re: Regulation Z changes - 10-01-09 Frank
RR Joker Offline
10K Club
RR Joker
Joined: Nov 2002
Posts: 20,654
The Swamp
Quote:
Determies repay ability using the largest principal and interest payment scheduled in the first 7 years following consummation and taking into account current obligations and mortgage related obligations (property tax, insurance)


So..realistically, how do you accomplish that if the loan matures in 3 or 5 years and the balloon becomes the highest payment in the payment schedule as a result??
_________________________
My opinion only. Not legal advice.

Say you'll haunt me - Stone Sour

Return to Top
#1240593 - 08/27/09 08:00 PM Re: Regulation Z changes - 10-01-09 RR Joker
ahkcompliance Offline
Diamond Poster
Joined: Sep 2008
Posts: 2,474
Midwest
The way I take it is if you do a 3 or 5 year balloon and it is HPML you have to use the final balloon payment. There is no way anyone will be able to afford that.

Have a 7 year balloon you would use the payment for 7 years to figure out the ability to repay. For us, not being able to do a 3 or 5 year balloon is going to hurt as that is pretty much our market. I am waiting on management to decide what we are going to do if we will develop a 7 year balloon or just do ARMs.

Return to Top
#1240598 - 08/27/09 08:05 PM Re: Regulation Z changes - 10-01-09 ahkcompliance
David Dickinson Offline
10K Club
David Dickinson
Joined: Nov 2000
Posts: 18,762
Central City, NE
Let's stop the train a minute. I'm going to quote from Reg Z and the Federal Register on this topic:

"Section 226.34(a)(4) governs the process of extending credit; it is not intended to dictate which types of credit or credit terms are permissible and which are not. The rule does not prohibit potentially riskier types of loans such as loans with balloon payments, loans with interest-only payments, or ARMs with discounted initial rates. With proper underwriting such products may be appropriate for certain borrowers in the subprime market. The regulation merely prohibits a creditor from extending such products or any other higher-priced mortgage loans without adequately evaluating repayment ability".

On page 44549 of the FR, it states the following:
"Furthermore, nothing in the regulation prohibits, or creates a presumption against, loan products that are designed to serve consumers who legitimately expect to sell or refinance sooner than seven years".

These two statements clearly show balloon loans that are less than seven years are acceptable. What say you all now?
_________________________
David Dickinson
http://www.bankerscompliance.com

Return to Top
#1240648 - 08/27/09 08:35 PM Re: Regulation Z changes - 10-01-09 David Dickinson
RR Joker Offline
10K Club
RR Joker
Joined: Nov 2002
Posts: 20,654
The Swamp
What payment do you use...common sense tells me you use the payment during the 3 or 5-yr amort period...but the FDIC guidance through a hitch in my gitalong on that...

and, I guess you would lose the "presumption of compliance" as well?

It seems there is some contradiction in there somewhere.
_________________________
My opinion only. Not legal advice.

Say you'll haunt me - Stone Sour

Return to Top
#1240650 - 08/27/09 08:36 PM Re: Regulation Z changes - 10-01-09 David Dickinson
Frank Offline
100 Club
Joined: Jun 2007
Posts: 133
Central Arkansas
No argument from me. There's just no "presumption of compliance". It's just that in my neck of the woods, not too many can afford the huge balloon payment of a balloon of less than 7 years. So realistically, we shouldn't be doing these anymore. That's what the Reg is saying or implying in my opinion.

Joe Schmo is set up on a 5 year balloon with monthly payments based on a 20 year am. If we have to use the highest payment within the first 7 years, then it will show he can't afford it. Joe works as a meter reader for the city and makes $40K a year. Based on the amortized payments, he can afford it over the full course of amortization-but because the amended regs call for looking at the highest P&I in the first 7 years(the balloon payment due in year 5)---he is deemed unable to pay.

At least that what it looks like to me.

Return to Top
#1240675 - 08/27/09 08:45 PM Re: Regulation Z changes - 10-01-09 Frank
ahkcompliance Offline
Diamond Poster
Joined: Sep 2008
Posts: 2,474
Midwest
That what it implies to me as well. We are an FDIC supervised bank so I am going off the Supervisory Insight issued by them.

Return to Top
#1240705 - 08/27/09 09:05 PM Re: Regulation Z changes - 10-01-09 ahkcompliance
rlcarey Online
10K Club
rlcarey
Joined: Jul 2001
Posts: 83,227
Galveston, TX
I have never really understood why you would put Joe Plumber into a balloon loan to begin with.... You get to the end of 3 or 5 years and rates have gone up 4 or 5% and they can't afford to refinance - the bank owns a house and hasn't done the borrower diddly good. These balloon notes were originally designed for the most sophisticated borrowers that expected and had the means to pay the balloon. I see some banks that put people in these short term balloon loans because they would not qualify for A-paper and telling them - don't worry - you can refinance at a later date. This is what got us to where we are today.
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com

Return to Top
#1240738 - 08/27/09 09:22 PM Re: Regulation Z changes - 10-01-09 rlcarey
CRAatBOK Offline

Power Poster
Joined: Mar 2004
Posts: 6,172
Further South than I wanna be.
I am not sure why we do them, I have never received an answer for that. I think it is because we are a CDFI and we want to help our customers that can't get a loan that would be sold in the secondary market. While our rates are a little higher they are no where near what they would pay if they were dealing with the preditory lenders.
_________________________
Life is not the way it's supposed to be. It's the way it is. The way you cope with it is what makes the difference.

Return to Top
#1240758 - 08/27/09 09:34 PM Re: Regulation Z changes - 10-01-09 CRAatBOK
rlcarey Online
10K Club
rlcarey
Joined: Jul 2001
Posts: 83,227
Galveston, TX
"Predatory" is more than just rates. It also involves putting people in loans that in 3 to 5 years that they most likely cannot afford to payoff if the rate market goes against them. I think if they cannot qualify for a secondary 30 year fixed loan, placing them in a 3-5 year balloon is just as predatory of an action. Other people may disagree, but if the Fed doesn't balance the current economic market correctly, the printing of unlimited amounts of money is going to drive inflation and rates are going to skyrocket when that happens. How will a 3-5 balloon help these people that can't get a conventional loan now???
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com

Return to Top
#1240767 - 08/27/09 09:38 PM Re: Regulation Z changes - 10-01-09 rlcarey
rlcarey Online
10K Club
rlcarey
Joined: Jul 2001
Posts: 83,227
Galveston, TX
OK - I have really digressed from the original issue, but if the person can't afford the balloon, I think the bank loses the "presumption of compliance" for the above reasons.
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com

Return to Top
#1240770 - 08/27/09 09:39 PM Re: Regulation Z changes - 10-01-09 rlcarey
CRAatBOK Offline

Power Poster
Joined: Mar 2004
Posts: 6,172
Further South than I wanna be.
Hey, you won't get an arguement from me. I am just telling you what I am up against here. Luckily we do very few of these type of loans. Some have been on our books for years and every three years we renew them. That is a story all in itself. They do a new note but don't show the previous as paid off, just renewed. It is a strange world here.
_________________________
Life is not the way it's supposed to be. It's the way it is. The way you cope with it is what makes the difference.

Return to Top
#1240786 - 08/27/09 09:47 PM Re: Regulation Z changes - 10-01-09 rlcarey
David Dickinson Offline
10K Club
David Dickinson
Joined: Nov 2000
Posts: 18,762
Central City, NE
I don't disagree the bank loses the presumption of compliance. In fact, I agree. But what does this really mean? Even if you fully comply with the presumption of compliance requirements, you can still get sued. The borrowers can claim the lender disregarded repayment ability despite following the requirements of .34(a)(4). So I can see a borrower (who qualified as the time of application who has since lost their job) who is being foreclosed on stating "the bank didn't properly qualify me". The bank will go to court whether they followed these rules or not.

So my question is "what's to be gained or lost" by making loans with balloons of 3/5 years?
_________________________
David Dickinson
http://www.bankerscompliance.com

Return to Top
#1240801 - 08/27/09 09:55 PM Re: Regulation Z changes - 10-01-09 David Dickinson
rlcarey Online
10K Club
rlcarey
Joined: Jul 2001
Posts: 83,227
Galveston, TX
IMHO - there is absolutely nothing to be gained. Why run the risk of being sued in 3-5 years if they can't afford to refinance?
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com

Return to Top
#1240813 - 08/27/09 10:00 PM Re: Regulation Z changes - 10-01-09 rlcarey
David Dickinson Offline
10K Club
David Dickinson
Joined: Nov 2000
Posts: 18,762
Central City, NE
I understand what you're saying, but do the chances of being sued increase if you do a 7 year balloon vs. a 5 year balloon?
_________________________
David Dickinson
http://www.bankerscompliance.com

Return to Top
#1240968 - 08/28/09 01:16 PM Re: Regulation Z changes - 10-01-09 David Dickinson
Clint,,,,, Offline
Gold Star
Clint,,,,,
Joined: Apr 2003
Posts: 382
Way Out West
Having been a CO in the late 70's and early 80's and watching Prime climb to around 21%, I must agree with Randy's opinions.

That being said, David also makes a valid "risk-based" case.

Until and IF we get firm regulatory guidance, I believe that each bank's Senior Management is going to have to make their own choice in this matter.
Last edited by Clint,,,,,; 08/28/09 01:16 PM.
_________________________
"Are you going to pull those pistols or whistle Dixie?"

Return to Top
#1240991 - 08/28/09 01:34 PM Re: Regulation Z changes - 10-01-09 Clint,,,,,
Bville Offline
Diamond Poster
Bville
Joined: May 2001
Posts: 1,282
Out West
I'm am with David in trying to understand what benefit the presumption of compliance really gives you if the customer can still sue.

As far as figuring repayment ability on a 7-year balloon my understanding is that you don’t use the balloon payment. The commentary gives the following example 34(a)(4)(iii)(B)-1i
Balloon-payment loan; fixed interest rate. A loan in an amount of $100,000 with a fixed interest rate of 8.0 percent (no points) has a 7-year term but is amortized over 30 years. The monthly payment scheduled for 7 years is $733 with a balloon payment of remaining principal due at the end of 7 years. The creditor will retain the presumption of compliance if it assesses repayment ability based on the payment of $733.

In the supplementary materials it says “If the term is at least seven years, the creditor that underwrites the loan based on the regular payments (not the balloon payment) may retain the presumption of compliance.”

Return to Top
#1241055 - 08/28/09 02:01 PM Re: Regulation Z changes - 10-01-09 Bville
RR Joker Offline
10K Club
RR Joker
Joined: Nov 2002
Posts: 20,654
The Swamp
See, now this is what I was wanting to hear/read! This is how I feel. As far as do the chances of a law suit increase for a 7 vs 5, I wondered if that was meant to be decrease, but not sure.

I have a "gut" feeling they are perhaps using the old standard (which may still be a current statistic) of the average length of stay in a home being 5 - 7 years...therefore, there is a good chance someone will sell and move on prior to the balloon coming due.

I understand why community banks make short term loans with balloons and it all has to do with interest rate spread. They are just not in the business to be able to do long-term fixed rate loans. On the other hand, they want to serve their customer, so this is the alternative.

I think the attitude of "you just lose the presumption of compliance" issue is HUGE and being taken too lightly by many.
Last edited by RR joker; 08/28/09 02:02 PM.
_________________________
My opinion only. Not legal advice.

Say you'll haunt me - Stone Sour

Return to Top
Page 1 of 19 1 2 3 18 19

Moderator:  Andy_Z