Our bank currently has a large portfolio of balloon loans. Unfortunately, we do not qualify for any of the exemptions under the new QM/ATR rules due to our organizational structure. Management has decided that they only want to do QMs going forward. Therefore, they want to MODIFY these existing balloon loans as they come due by converting them to ARMs since many of these customers will not qualify for a QM under the new rules.

However, based on the Official Staff Interpretations of 1026.20(a), we are concerned that these 'modifications' constitute a refinancing because we are adding a variable-rate feature that was not previously disclosed (even though we are not cancelling the old obligation and substituting a new one).

If this the case, then we are really back to square one. Thoughts?

You are correct - you cannot convert them to ARMs and consider the action not a refinancing.