John, thank you. I think I should have clarified my post, to say that I believe this to be the rules if the bank no longer meets all three tests under the small creditor rules. Is that correct or am I just totally misunderstanding it.

There are two small creditor balloon payment QM loan sections in section 1026.43. The primary one is in 1026.43(f), which requires the lender to meet three criteria (below total assets and sold loan volume caps and making more than half of covered first lien loans in rural or underserved areas). That rule isn't changing, although the criteria (in 1026.35) have changed.

Then there is the temporary balloon payment QM provision in 1026.43(e)(6) which is the same as 1026.43(f) except that the rural or underserved loan criterion is omitted. This provision is only available for applications received before 4/1/2016.

If you are in the group of banks that can't qualify for making balloon-payment QMs under 1026.43(f), but can qualify under the temporary rule, you can continue making those QMs for applications received through 3/31/2016. After that date, if you want to make a balloon payment loan, it cannot be a QM, so you will have to meet the general ATR requirements in 1026.43(c), and, for a balloon payment loan, you have to know whether it will be a higher-priced covered transaction (HPCT). That's because if it is an HPCT balloon payment loan, the balloon payment must be included in your determination of the debt-to-income ratio.

My point in my earlier post was that whether or not the loan is an HPML is irrelevant.

My bank has been using the temporary balloon payment QM provision. We are unable to make small creditor balloon payment QM's since we do NOT meet the "predominately rural or underserved" criteria.

The FAST Law which passed last year eliminates the word "Predominately" from the ability-to-repay and the escrow sections of Reg. Z.

The sentence should then read "operates in rural or underserved areas".

So am I correct in that depending on how this is interpreted by the CFPB, we MIGHT be able to make small creditor balloon payment QM's if we meet the "below total assets, sold loan volume caps and whatever the CFPB comes up with regarding rural & underserved areas"?

Thanks in advance

Most definitely. Before, with "predominantly" in the two applicable sections of the TILA, the CFPB really had to require that more than half of a lender's originations of covered loans be on property located in rural or underserved areas. But there's a lot of room for interpretation of "operates in" such an area. It could mean you have an office there. It could mean you make some number of loans there. We simply don't know what the Bureau is likely to say.

In the meantime, you could look at the option of originating non-QM balloon payment loans.