We currently do 5 year balloon loans. After 1.10.2014, what are our options for these loans when they are maturing, if we cannot prove the borrower's ability to repay?

I am thinking that we could modify the loan before maturity extending it out another 5 years. An attorney suggested that if we cannot prove ability to repay, then we should modify as a workout with the condition that in 18 months the customer be able to provide documentation proving ability to repay. But I thought in order to have a workout, the customer must be in default of the obligation or be delinquent. In addition, there is no guaranty that a person can change their financial situation in 18 months.

Can we consummate a loan (in a refinance situation for a matured loan in our portfolio) where we cannot prove ability to repay? Or must a loan be originated under the ATR or QM rules, no exceptions?

Any suggestions would be appreciated!

What we normally do with our balloons is modify them. Modifications are only covered if they are considered a “refinancing” under Regulation Z. If a loan modification is not subject to Regulation Z, it will not be subject to the ATR/
QM rules. If a modification does meet the definition of “refinance” under Regulation Z, the ATR-QM rule will apply.

If you execute a new note and pay the existing one off, you would need to apply. However, if you leave the original note in place and the borrower signs some kind of modification agreement, extension agreement, ect it would not trigger ATR/QM.

^^ We do the same as above.

Under these modifications - can you increase the rate on the existing loan or does that have to stay the same? (Finally getting management to talk about what we're going to do)

Our modification does allow us to modify the rate if needed. At the time of the renewal, the rate is determined based on our current rates.

Ditto this question, and does anyone have experience with charging (and financing) fees for doing the modification? I've been chasing through the regs, commentary, infovault, and the threads trying to find those answers but have not had much luck.

We have decided to modify existing non-ATR qualifiable loans...but we will not increase the rate even in a rising rate environment. I do not see how that can fit a 'renewal of original note' and I also can see it as abusive...particularly a customer who already is outside the qualifications.

I know it's done. I don't believe it is legal. I'd love to be wrong, but I believe it stretches beyond the definitions and in to refinance territory, and have always been taught the same.

I would echo ahk's response; in general the rate is based on current rate as of the date of action. Otherwise it becomes a fair lending concern in my book. It's hard to keep track of who got what rate and why unless you keep it black and white. I haven't given much thought to the ATR/QM aspect though...

We were afraid that changing the rate via modification would cause an examiner to look at it either as a variable rate feature or a refi.

As long as you do not trigger a refinance under Regulation Z you do not trigger the ATR rules.

RR Becca--the only fee charged to a borrower for a modification is a flood determination fee if one is pulled.

You need to pay close attention to the rules re what is/is not a refinance at 1026.20(a). If you violate that you have a new obligation requiring new disclosures.

You would have to convince me how increasing (as opposed to decreasing) a rate is not 'replacing' the original obligation.

Also, if you did not originally disclose the loan as a variable rate...you should consider the meaning and intent behind this statement in the commentary. Place emphasis on the "If":


3. Variable-rate. i. If a variable-rate feature was properly disclosed under the regulation, a rate change in accord with those disclosures is not a refinancing. For example, no new disclosures are required when the variable-rate feature is invoked on a renewable balloon-payment mortgage that was previously disclosed as a variable-rate transaction.

Food for thought: if a borrower cannot demonstrate ability to repay at maturity, do you not have a safety and soundness issue in renewing and hence a workout?

You have no "first way out" of the loan and the loan is collateral dependent.

I'm not sure I'm following you. Can you elaborate a bit more on your second paragraph before I comment?

Thank you, Kay! Exactly what I needed.

Do you mean me? By no first way out, borrower cash flow to pay the loan is a first way out, sale of collateral is secondary. Banks are NOT supposed to make collateral dependent loans.

(If you -RRJ -were questioning because "not" was missing, it is fixed.)

I would also consider if any of the transactions might be TDRs.

Not to put words in your mouth, but I believe you mean to say that banks are NOT supposed to make collateral dependent loans, hence ATR/QM requirements.

Thanks. I will fix that. Typing on my phone.

We always appreciate the quick responses! Just trying to head off any confusion.

We have quite a few borrowers who pay ok, but would not meet our internal loan policy DTI requirements. Rather than have loans that potentially don't meet general ATR, and potentional regulatory issues...I'd rather modify than explain. I also like the less paperwork aspect of it.

I don't like the practice in the least, but have pointed to the below, from proposed rules on 9/24/10, when questioned and we haven't had any issues yet. I know it is not regulation, but it has worked so far.


http://www.federalreserve.gov/reportforms/formsreview/REGZ(R1390)_20100924_ifr.pdf

"To avoid long-term interest rate risk, some creditors that hold loans in portfolio will structure mortgage transactions as short term balloon loans, which they modify shortly before the balloon comes due on the note. The modification may include an increase in the consumer’s interest rate, but may not be a refinancing under current Regulation Z. Some creditors may provide TILA disclosures in these circumstances, but they need not do so,
and the protections in § 226.35 for higher-priced mortgage loans do not apply."

My point is that the decisions are bank and case specific, and banks need to think it through when making decisions.

Agree, Kathleen.

dblack...the only way I can see that legally being done (and pay attention to the use of the word "may" throughout).

It 'may not' be a refinancing if the original note allows for a VR feature. Without it...I don't think you can increase a rate and it not be a refinance.

Kaybee - This is where I'm unsure how to proceed. I think we have a legitimate workout situation on a maturing HELOC that does not qualify for our normal program but borrower cannot pay it off. In the commentary for 1026.20(a)(4), it states that a workout agreement is not a refinancing unless the APR is increased or additional amounts are advanced. But that leaves me with another conundrum because our HELOCs are variable rates, subject to change daily, with a ceiling rate of 17.9%. How do I determine if I am increasing the APR and thus nullifying the workout exemption? What APR on the existing HELOC do I use to compare to - the rate in effect at maturity or the ceiling rate or something else?