Please help me understand something. We are a small creditor and make loans with ballon payments. If the interest rate on an HPML is equal to or greater than the APOR by more than 3.5% does it then become an HPCT? If so, then are we correct in our understanding that the balloon payment would have to be considered in the cash flow per HPCT requirements?

Let me first say, my bank doesn't make HPML or higher loans, so I haven't concentrated on those rules all that much...but if memory serves me...the allowance for the 3.5% relates to it being able to be a QM, if it meets the other QM requirements, thus giving you conclusive, rather than rebuttable compliance.

EDITED: It appears that so long as it is a QM, you would not have to consider the balloon payment.

The only way you can make a balloon loan under the new guidelines is if it complies with QM (e)(6) or (f).

I don't think that is an accurate statement, gms. You can have a balloon payment under general ATR as well...it's the 'count' or 'don't count' the highest payment in 5 years that varies from regular to HPML loans.

ETA: You could make a shorter term balloon under ATR if you feel you can satisfy the legal and regulatory risks, for that matter.

That statement is a little misleading too.

Under General ATR:
Non-HPCT Balloons- count highest payment within first five years
HPCT Balloons- Count highest payment regardless of term.

How so? Where did we differ?

Here's where I am at in my research today. Please someone tell me if I am following down the wrong path.

From the CFPB's Small Entity Compliance Guide - Ability to Repay and Qualified Mortgage Rule:

Small Creditor QM - page 33- My bank will make loans meeting this criteria.

Baloon Payment QM - page 34 - My bank will make small creditor balloon QMs under these rules.

Top of page 35 - first bullet point last sentence reads "the balloon-payment QM calculation excludes the balloon payment even if the loan is a higher-priced loan.

I believe for these types of loans, we will exclude the ballon calculation when calculating payments under the ATR standard for the loan. Having a higher priced balloon QM will mean that my bank will only have a rebuttal presumption of compliance rather than safe harbor.

Maybe I am just reading your post wrong.

"it's the 'count' or 'don't count' the highest payment in 5 years that varies from regular to HPML loans."

I was taking that part as saying:
for HPCTs, use the highest payment in 5 years.

I just wanted to clarify that it is highest in 5 years for Non-HPCTs and highest over the whole loan for HPCTs.

You were probably saying that, I just wasn't reading it that way.

That is my understanding for balloon payment QMs

Again, not my area of concentration, but didn't the "if you are under 3.5% on a 1st lien, and it's a QM, you will gain conclusive compliance, not rebuttable...with the recent changes?