What are the repercussions if we go ahead and renew/refinance a loan after the January 2014 cutoff date that does not qualifiy or meet the ATR? I havene't read anything that gives us this information.

We have loans (balloon Loans) on the books now that are paying fine but may not meet the new standards. Now what? Are we suppose to all of sudden foreclose on loans that have been performing fine?

This exact question came up at a recent WBA meeting on Dodd-Frank. No one had an answer. The presenters (attorneys) just sat there and said 'you can't make the loan' while the audience (community bankers) basically freaked out. The bankers wanted to know why years of paying as agreed didn't seem to count towards viability of a new loan to these borrowers.

Hopefully the CFPB will hear from enough bankers to take a look at this situation prior to the January implementation. I'm going to look for an opportunity to ask my examiners about it when they're here later this year.

Yeah Truffle Royal this is all crazy !

Would these not fall under the exceptions for refinancing a risky loan?

What exceptions?

You can still comply with the ATR requirements. ATR requires the bank to consider eight underwriting criteria - there are no product-level restrictions. You can have a balloon, interest only, even negative amortization and still comply with the ATR requirement.

Product restrictions come into play if you are seeking to comply with the ATR requirements by originating a qualified mortgage. Also remember that if you operate in a predominantly rural or underserved area, you can even orignate qualified mortgages with balloon payments.

We do not meet the small creditor definition, we are in an MSA. So are you saying we can do ballon loans after the January cutoff date it just will not be a QM ?

Yes, there are no restrictions on balloons for non-QM loans. However, you do need to note that the payment calculation method for HPML balloons makes non-QM HPML balloons nigh impossible because you have to include the balloon payment in the payment calculation. So unless, the bank sets a DTI standard of 400+ percent, no non-QM HPML balloon loan will pass the DTI standard.

Addtionally, non-QM non-HPML balloons have to include the balloon payment if their term is less than 62 months for the same reason. So non-QM non-HPML balloons need to have a term of 62 months of more.

Yes. The ATR requirements apply to all creditors. There is an exemption for small creditors, that operate in predominantly rural and underserved areas, which allows them to orignate QMs with a balloon payment. The ATR rule does not restrict product features, unless you are seeking to originate a QM.

Try not to confuse ATR with QM. Determining a consumer's ATR is the overall purpose of the rule, which can be done by considering 8 specific underwriting criteria. Originating a QM is a specific way to meet the ATR requirements, but comes with product-level restrictions.

I feel like I'm on a merry-go-round ... I'm so confused.

OK so if we have a 1-4 balloon on the books now that will mature after the January cutoff date what can we do with it if it does not fall within the QM ... does it meet the ability to repay if we refinance it into an ARM and fix the rate for the first 61 payments? If not what can we do with them? Are you saying we can renew/refi even if they do not meet either (QM or ATR)...

I need a new job the more I read the more I'm confused.

Dani.. so if we want to make a balloon loan after the January cutoff we just need to make the term over 62 months then we do not have to include the balloon in the ATR... This applies to all creditors and not just the ones that meet the small creditor definition?

Since you are not a small creditor operating predominantly in a rural or underserved area, if you refinance into another balloon loan, it cannot be a qualified mortgage. To meet the ability to repay requirements, then, you must underwrite the loan using, at a minimum, the 8 criteria defined in the rule. As long as you underwrite to the ATR requirements, you are fine.

Here are the ways you can comply with the ATR rule:
1. Consider the minimum 8 underwriting criteria.
2. Originate a QM (can be traditional QM, temporary QM that simply qualifies for guarantee, insurance, or purchase by GSEs or other named Federal agencies, or the small creditor balloon QM).
3. Refinance a non-standard mortgage into a standard mortgage.

You can make a non-QM balloon, yes. You still want to meet ATR.

Regarding ATR literally including the balloon payment in the DTI on HPML, I still don't believe that's what they are implying. I look at it as it is today...you have to 'consider' the balloon...low DTI, likelihood of being able to refinance, assets, etc...but including it as the highest payment? I'm still not convinced on that.

As originally ask... what do we do if we are not a small creditor, it will not fall within the QM and will not meet the ATR but are currently paying fine... What do we do ?
I understand it will not be a QM. Do we just have to foreclose on a performing loan?

1026.43(c)(5)(A)A creditor must make the consideration required under paragraph (c)(2)(iii) of this section for:

(2) The maximum payment in the payment schedule, including any balloon payment, for a higher-priced covered transaction;

Joker, I'm not sure how that is not proof enough. It may not be what they intended, but it's what they said. They didn't say otherwise.

FWIW, I do hope that they didn't intend it that way and that they will come out and change it, BUT as it is written right now, I think it is pretty clear that you have to include the balloon in the payment calculation....not just consider it.

Are they only saying we have to include the Balloon amount if it will be a HPML?

ATR is just the bank setting underwriting standards and getting verifications of income. Do you have a DTI benchmark? Do you (will you) get copies of paystubs, tax returns, etc)? If you do and your customer meets your benchmark DTI, you will be fine. You may need to tweak the terms on the loan in order to meet the DTI benchmark (dependent on if you are doing a balloon), but as long as you are actually underwriting the loan using documentary evidence and meet your underwriting standards you should be fine.

Sort of. Non-HPML says this

(1) The maximum payment scheduled during the first five years after the date on which the first regular periodic payment will be due for a loan that is not a higher-priced covered transaction

If the balloon occurs anytime between origination and month 61, you have to include the balloon. If the balloon occurs in month 62 or later, then you don't.

http://www.bankersonline.com/forum/ubbthreads.php?ubb=showflat&Number=1789185#Post1789185

Here's a good thread to review for non-rural small creditors and balloons.

Dani, you are correct, if this is a HPML. However, if this is a non-HPML, you only need to consider the balloon if it occurs within 5 years of the first regular payment.

Anonymous, you only have to consider the DTI. There are no limits on what is acceptable except what your bank imposes on itself. How will this loan "not meet the ATR", as you claim?

I already said that. Look 2 posts above yours.

Yeah, I must be a slower typer than you. Ha.

ATR is just the bank setting underwriting standards and getting verifications of income. Do you have a DTI benchmark? Do you (will you) get copies of paystubs, tax returns, etc)? If you do and your customer meets your benchmark DTI, you will be fine. You may need to tweak the terms on the loan in order to meet the DTI benchmark (dependent on if you are doing a balloon), but as long as you are actually underwriting the loan using documentary evidence and meet your underwriting standards you should be fine.

Dani finally someone is answering my quesiton thank you ! Yes we have underwriting standards, we verify income and have a DTI benchmark below 43%. So you are saying as long as we document everything we can still do a balloon loan after the Jan 2014 date, it will not be a QM but we will have met the ATR... right?

Right. Just be sure to pay attention to the payment calculation on your balloon. If non-HPML, watch your loan term (ie, set it up as 62 months or more to exclude the balloon payment). If HPML, well, you probably won't be able to do it because the borrower won't pass your DTI benchmark.