If a balloon payment is due for a HELOC and due to judgements placed on the property the borrower does not qualify for a new loan to refinance do the ability to repay rules apply? Even though it would be done as a modification it would be a new transaction since it is going from open end to closed end.

We are having similar discussions at my bank but not limited to judgments. Prior to 1/10/14, we had an interest-only, 3-year balloon which we moved borrowers to who did not re-qualify for our 'normal' HELOC program due to significantly lower property value, DTI issues, etc., but were not able to pay off the current balance.

Now in the ATR world, we cannot demonstrate ATR on these, and they mostly likely would be prohibited anyway - definitely would be prohibited if you only wanted to make QMs (we are not a small creditor).

I have about convinced myself that these matured or maturing HELOCs would be considered 'workouts' because the credit agreement clearly states that the loan must be paid in full at maturity. If borrower is unable to pay in full, he is in default of the agreement and therefore it is a workout. I also noted a comment by Kathleen Blanchard on another similar thread in which she stated, "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."

SO then, if we go to 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. If the transaction is not a refinancing, it is not subject to ATR/QM rules. But that leaves us 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 loan do I use to compare to - the rate in effect at maturity or the ceiling rate? Any takers on this question?

Further to my "food for thought", if you offer them a deal they cannot get elsewhere, do you have a TDR?

I can answer that. 1026.20(a)(4) does not apply on anything that you do with a HELOC. It is found in Subpart C and the HELOC is only governed by Subpart B. There are no refinancing exceptions of any kind on open-end credit. If you change an open-end credit to a closed-end credit - it is a new loan.

I agree that def of refi is closed end only, just haven't gotten back to this today.

Some banks are modifying within open end, not changing to closed end.

I personally think it is very important to sit with experienced legal counsel to work out a process for these problems coming up more frequently now on loans (seems to be short term HELOCs causing the anguish) that perhaps should not have been made in the first place. And I have seen more than 1 this past year that was classified as a TDR after conferring with counsel and external financial auditors.

Thanks, rlcarey. I realize .20 covers closed-end loans, but if we rewrite a maturing HELOC into a closed-end loan, can we use that workout exemption for the closed-end piece? Or am I trying to read the reg too liberally to cover our situation without violating ATR?

We are also discussing what options are available at the end (maturity) of our typical 5-yr HELOCs. The issue isn't what to do with situations where you could keep going (as open-end, as rlcarey states previously). If I'm connecting the dots, it looks as if "there are no refinancing exceptions of any kind on open-end credit" (rlc, also "no refinancing OPTIONS"?). Must the lender then foreclose? So back to the OP's question, is there a workout option of any kind in Subpart B?

, but if we rewrite a maturing HELOC into a closed-end loan, can we use that workout exemption for the closed-end piece?

No. It's a new closed-end credit and as Randy stated you have to provide all new closed-end disclosures.



CountryBanker: I'm not sure I'm following your question. You would have the option to modify the payment terms if you do so before maturity. If you do so after maturity it would be consider a new plan and new disclosures would be required.

However if you are modifying it to a closed-end credit then you would have to follow the closed-end credit disclosure requirements.

The open-end credit workout requirements are found in 1026.9.

After reading the various sections some more, I think I'm understanding how 1026.9 provides most of the workout framework, but there are so many references in it to 1026.40 (for example, "The rules in §1026.40(f) relating to home-equity plans limit the ability of a creditor to change the terms of such plans" from Commentary to 1026.9(c)(i)) that you really need them both. I was taking Randy's earlier comment that "the HELOC is only governed by Subpart B" a bit too literally.

BTW, we are not in danger of trying to modify/renew/extend AFTER maturity. We're looking at applying options outlined by 1026.40(f)(3)(vi) B and C, and Commentary for .40(f)(3) for situations that may arise in the future.

We have a similar conundrum on our portfolio. We are taking the position currently that if the HELOC matures, there is no issue with complications possibly related to converting open ended credit to closed end as the loan is no longer an open ended credit loan. It's in default as the loan has matured and not paid off. We are modifying these loans where the borrower(s) can't pay them off or refinance out of them using the Fannie/Freddie Waterfall hierarchy.

One continuing saga we have is a portion of our portfolio that we have due to an acquisition last year. These HELOCs were ten year draw period due in ten. OUR HELOC's were (Are) ten year draw and then terms out to a 15 year repayment stream. To the benefit of the borrowers on the acquired portfolio we are trying to offer them the option of automatic conversion to a 15 year repayment period but have been advised by counsel that to do that, we should extend the draw period of their loan for 12 months and THEN convert to the repay period of 15 years. While my head spins at trying to make sense of all of the nuances, they are telling us that this would satisfy most regulators and the CFPB.

@tlevandoski - Aren't all consumer loans collateral dependent by definition?

I was taking Randy's earlier comment that "the HELOC is only governed by Subpart B" a bit too literally.

Sorry, I guess I need to remind myself that they moved HELOCs to 1026.40 and it is no longer in Subpart B as it had been for the last 25 years.........

we should extend the draw period of their loan for 12 months and THEN convert to the repay period of 15 years.

Why - what difference would that make. You can modify a HELOC prior to maturity in anyway you choose if you get the consumer to agree to it in writing and as long as you don't do something prohibited by regulation or State law.

I don't understand what the basis for such a recommendation might be???

@rlcarey - Why? Good question. Our complaince department somehow thinks that by extending the draw period of a HELOC at maturity, we would not be subject to converting open ended to closed ended. I don't pretend to understand the logic behind it. When the loan matures, in my opinion, we should simply ask them, "Do you have the intention to pay it off as the terms of the agreement state you must do? If not, you may opt to term this loan out for 15 years".

No underwriting, no qualifying, no fees to do it. It's to the benefit of the borrower and they have the option to pay it off or extend it.

Extending the draw period for another twelve months or so doesn't do anything that I can see to protect the consumer or the lender.

How will your regulator feel about a 15 year term loan with no underwriting?

@Kathleen - As a termout? I don't believe they would have an issue with it as our portfolio loans are ten year draws with fifteen year repay period after the draw. A bank we acquired structured their HELOCs with a ten year draw, due in ten. We are "Converting" these HELOCs to match the terms of our regular portfolio loans and thus far, have had no issues with the decision. It isn't mandatory, they are given the option, they have 90 days to choose to pay it off or, convert to the terms of our portfolio. And when I say no underwriting, while we don't underwrite the file, we do require 0X30 on the subject loan.

This is how we decided to go forward with these maturing HELOCs. That said, the recent twist as I mentioned earlier is that some in compliance think we should give the borrower an extension for 12 months on the draw period of their loan and then convert to a 15 year repay at the extended maturity date. I don't know what that is supposed to accomplish. It's still a work in progress.

I will assume that those offered conversion are paying as agreed.

Just a couple of observations:

If you modify the HELOC prior to maturity, the 15 year repayment period continues to be governed under all the open-end rules, including those that require you to send them a monthly periodic statement.

If you convert them to a payout after maturity, that 15 year loan will be treated under the closed-end rules and be covered by all the new closed-end mortgage regulations.

If you convert them to a 12 month draw and 15 year pay-out after maturity, you have a new HELOC plan you need to disclose.

So to summarize for my simple mind: we have a matured HELOC where borrower cannot payoff the maxed out balance nor can we prove abiltiy to repay if we convert to an ARM.

So our options are:
1) do the ARM anyway and have an ATR violation,
2) renew or extend the HELOC and have a safety and soundness isue, or
3) wait for foreclosure?

Any other options?

There really isn't much difference between 1 and 2, is there? Plus, how can you continue to give them a HELOC if they have limited ability to repay - you really want them to continue to draw on the line?

You either foreclose or make them a mortgage that is outside of ATR compliance and hope for the best. Either way, without an ability to repay, this is going to have to be a classified loan going forward.

Okay, after reading this conversation, I need some clarification. We have situation in which a HELOC was coming due and because one of the borrowers having a bankruptcy the bank re-wrote the HELOC into a closed end fixed loan as a jr. lien., in the joint borrowers name only.

My take on this was that the new loan had to comply with ATR or QM, but management thought because it is a loan to facilitate, it does not have to comply with ATR or QM. Is there any validity behind managements arguement?

I've been reading through this thread and see that we are not the only one dealing with these issues. I am wanting to get clarification on your statement about the new plan.



In your response earlier to "terpsfan", you stated that you could modify it any way you you choose as long as the consumer agrees to it in writing. I'm having a conversation with our credit manager about a similar scenario, the HELOC has not yet matured, but the borrower is having financially difficulties and the bank wants to "modify" into an arrangement similar to the above. I had first indicated that this would be a new plan. The credit manager said it's a modification if done before maturity and the borrower agrees to it. I think I'm getting new plan and modification mixed up. If the scenario in question is before maturity, is it a new plan or a modification? Hope that makes sense. Thank you.

You need to refer back to the HELOC rules. Changing the terms changes the "plan". Very limited as to what you can and cannot do with the HELOC. The bureau has already advised banks about the draw and repayment periods and maturing HELOCs. Be advised enough said.

As long as you and the borrower agree in writing to the change in terms before the maturity date then a new plan does not exist and new disclosures would not be required. See the Commentary to 1026.40(2).

If you however modify the HELOC from open-end credit to closed-end credit then you must treat it as a refinancing and provide all the applicable closed-end disclosures. See the Commentary to 1026.40(5)(iii).

Is this cite above (O.S.C. 1026.40(5)(iii))the same cite you rely on when the loan has matured and the bank wants to convert an open end loan to closed end?