I just want to confirm I'm on the right track here. A HELOC with the option for the customer to make interest-only payments would qualify as a "non-standard" mortgage under the ATR/QM rules, correct? And that would then allow it to be refinanced into a "standard" mortgage (as defined in Reg Z) without regard to the ability-to-repay or QM requirements?

I don't think that a HELOC can ever be considered a non-standard mortgage. There are no open-end citations included with the definition:

(i) Non-standard mortgage. The term non-standard mortgage means a covered transaction that is:

(A) An adjustable-rate mortgage, as defined in § 1026.18(s)(7)
(i), with an introductory fixed interest rate for a period of one year or longer;

(B) An interest-only loan, as defined in § 1026.18(s)(7)(iv); or

(C) A negative amortization loan, as defined in § 1026.18(s)(7)(v).

Thanks Randy. After a bit more digging, I agree.

1026.43(d)(1)(i)(B) refers to covered transactions, which leads to 1026.43(b)(1), which in turns leads to 1026.43(a)(1), which explicitly excludes HELOCs.

Unfortunately, that is the sort of twisted path to answers that is often needed to get to answers in the new rules.

So if we refinance a HELOC into a Closed End Home Equity don't we have to comply with the ATR rule?

Yes

Ok, this just went over my head. If the refinance is now a closed-end home equity loan how does that not require ATR ? Are you saying this is because it started out as a HELOC and HELOCs are not covered by ATR? This happens with us quite a bit so I want to be sure I understand.

Thank you for your help!

I don't see any exemption for a true refinancing of a HELOC into a closed end home equity loan. It seems to fit quite nicely into the definition of a covered transaction under 1026.43.

What about HELOCs that get termed out and set at a fixed rate as a workout option for borrowers who can't make their HELOC payments? We stopped doing these because we can't figure out how to get around ATR. Is there any way to NOT consider this a refinance?

If it's a workout, take a look at section 1026.20(a) and the commentary regarding modifications and refinances and what counts as a refinance under Reg. Z.

Thanks manimal! I thought 1026.20(a) was only for closed-end to closed-end. I originally thought 1026.20(a)(4) would be applicable, until someone told me that it didn't apply because HELOCs are not closed-end; therefore, we need to treat making HELOCs closed-end as a new originations subject to all the ATR requirements.

DAniya - that is correct. 1020 is a closed-end rule (Subpart C). There is no guidance that indicates a refinance of a HELOC (Subpart B) into a closed end transaction in a workout situation would be subject to the exemptions allowed under 1020. If you choose to go that route, I suggest doing it with the guidance of legal counsel.

Thanks! That confirms what we suspected. Looks like we won't be offerring this type of workout going forward.