In determining repayment ability, is this only applicable to variable rate loans? We have a resource that we have been using that states:

"In order to obtain a presumption of compliance with the rule's repayment requirement, a lender must evaluate the borrower's ability to repay a variable rate loan using the largest scheduled payment of principal and interest in the first seven years of the loan."

I going back and rereading sections 35 and 35 and not finding it specifically addressing just variable rate loans. Is the above correct?

Also, for an interest-only fixed rate loan, how would we calculate the repayment? Thank you very much.

Yes, presumption applies to fixed-rate loans. When a loan has a fixed rate and a fixed payment that fully amortizes the loan over its contractual term to maturity, there is no ambiguity about the rate and payment at which the lender should assess repayment ability: the lender will use the fixed rate and the fixed payment.

No.



Yes. That statement does not however imply the rule only applies to variable rate loans. It simply points out that you have to use the highest scheduled payment (based on the fully indexed rate at the time of consummation) within the first 7 years to calculate your ability to pay.

Thank you very much for clearing that up for me. I see that now. Regarding interest-only loans; the examples in the rules use a fixed-rate interest only for 5 years (with 30 year terms). However we have "short-term" I/O (18 months) and then it will balloon. Would we have to change this to 84 months in order to retain the presumption of compliance or is there another way to address these?

If the loan is not exempt from the HPML requirements, in order to maintain the presumption of compliance you have to document the borrower's capacity to repay the highest scheduled principal and interest payment within 7 years.

In your scenario your highest scheduled principal and interest payment will be the balloon payment due in 18 months. However, I have an email from my FDIC EIC from 2004 that states a single payment loan with interest only payments does not constitute a balloon payment. Some on here disagree with that interpretation and others agree.

I would advise you to get the opinion of your examiner. I have sent the copy of the 2004 email to our new EIC to see if they still hold the same opinion but have yet to hear back from him, but again I just sent the email yesterday.

Thank you. We are also FDIC so I can check with them. Did the EIC give you a specific regulatory reference that I could use in my communication?

Copy of the email

Sorry it took so long to get back to you. I do get time off once-in-a-while. ; )

Discussions I have had with other examiners agree that a single pay loan is not a balloon loan. Also, Staff Commentary to Section 32(d) below further defines a periodic payment.

Commentary
32(d) Limitations
Paragraph 32(d)(1)(i) Balloon payment.
1. Regular periodic payments. The repayment schedule for a § 226.32 mortgage loan with a term of less than five years must fully amortize the outstanding principal balance through "regular periodic payments." A payment is a "regular periodic payment" if it is not more than twice the amount of other payments.

I hope that helps.


My email to the EIC and the state's DFI


From the Official Staff Commentary to Regulation Z's 226.32:
Paragraph 32(c)(3) Regular payment; balloon payment.

1. General. The regular payment is the amount due from the borrower at regular intervals, such as monthly, bimonthly, quarterly, or annually. There must be at least two payments, and the payments must be in an amount and at such intervals that they fully amortize the amount owed. In disclosing the regular payment, creditors may rely on the rules set forth in §226.18(g); however, the amounts for voluntary items, such as credit life insurance, may be included in the regular payment disclosure only if the consumer has previously agreed to the amounts.

From the IC 24-4.5-3-402;

1. With respect to a consumer loan, other than one pursuant to a revolving loan account or one on which only loan finance charges are payable prior to the time that the final scheduled payment is due, if any scheduled payment is more than twice as large as the average of earlier scheduled payments, . . . .

At seminars, and in other discussions, the consensus was a single payment loan constitutes a balloon payment and therefore would not be allowed if the loan's APR, or fees and charges causes the loan to be subject to the Section 32 Disclosures. Section 32 does not allow a balloon loan with a term less than 5 years if the loan is subject to the disclosures.

After review of the Regulations and Statutes, I am wondering how a single pay loan would constitute a balloon payment. There is only one scheduled payment, unless the interest only payments would constitute regularly scheduled payments, therefore there is no one payment larger than any other scheduled payment. The one scheduled payment fully "amortizes" the loan.

Some short-term loans, secured by the borrower's primary dwelling, are being denied due to the interpretation that single pay loans are not allowed if they meet the Section 32 thresholds. The short term of these loan causes the APR to exceed the HOEPA thresholds; and lowering the rate, and/or charges would not be cost affective for the bank.

It is my understanding as a financial institution regulated by the FDIC, and chartered under the laws of IN, we are exempt, except for IC 24-9-3-7(3), from the notice requirements of Article 9 enacted under IN House Bill 1229. Therefore, would a single-payment loan secured by the borrower's primary dwelling be allowable if the APR, or the fees and charges exceeded the Section 32 thresholds as long as the required Section 32 notices were given to the borrower?

I am asking for both opinions, Federal and State, because IN primarily does not regulate first lien mortgages, only subordinate lien mortgages.