I have found the CFPB release about the changes to the small creditor rules that took effect January 1 2016. Am I reading it correctly that the extension to make small creditor balloon QMs was extended until 04/01/2016?

Thank you.

Yes.

Our bank has been making HPML balloons based on the temporary exemption for small creditors. With the new definition of rural or underserved areas that leaves out the "predominately" making first mortgage loans in rural or underserved areas do we still need to
base whether or not we can continue to make these balloon loans for HPML on over 50% originated? If the loan is secured by a junior lien on the property rather than a first, is it also covered?

Yes, you do still have to meet the more than 50% criterion, or you will once section 1026.43(e)(6) sunsets on April 1, 2016. The law doesn't define what "operates" in a rural or underserved area means. That means that the Bureau has to interpret the requirement. Until it amends 1026.35(b)(2)(iii)(A), the criterion remains as found there.

As for junior liens, the count required by 1026.35(b)(2)(iii)(A) is of first lien covered transactions only. A junior lien loan isn't subject to the HPML escrow requirements anyhow. But, unless the lender is exempt under 1026.35(b)(2)(iii), a junior lien HPML could be subject to the HPML appraisal requirements in 1026.35(c) and the prohibitions in 1026.35(d).

Should our bank decide to continue to make non-QM balloon loans, after April, do you think it will cause us any examiner criticism? We would continue our ATR procedures and documentation of ability to repay and plan to make 62 month balloons.

You'll need to watch out for Higher Priced Covered Transactions (see the definition at 1026.43(b)(4)). Under 1026.43(c)(5)(ii)(A), you have to include the balloon payment in the payment calculation portion of the debt to income ratio.