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#2069712 - 03/16/16 08:59 PM Balloon Loans post April 1st
Owlman Offline
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The more I read, the more confused it is all getting.

Currently we offer 62 month balloon loan and qualify for the temporary exemption. After April 1st we will no longer qualify for this loan to be a QM due to not meeting the rural or underserved definition (in current form).

In making a non-QM balloon loan AFTER April 1st would we need to include the balloon payment as part of our calculation, or does the fact that the term is longer than 5 years make any difference?

In reading the CFPB Small Entity Compliance Guide under how to calculate debt it states: "For non-higher-priced balloon loans: Use the maximum payment scheduled during the first five years after the first regular periodic payment comes due." It's confusing because it states prior to discussing the special rules regarding balloons: "You must base your calculations on substantially equal monthly payments that would fully amortize the loan."

So as long as it is not a HPML would we be okay with continuing to make 62 month balloon loans (non-QM)?

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#2069754 - 03/17/16 01:20 PM Re: Balloon Loans post April 1st Owlman
John Burnett Offline
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Don't conflate the definitions of HPMLs and HPCTs. They are two different definitions with some overlap, but it is the HPCT definition in section 1026.43 that matters here.

Under the ATR rules in 1026.43, you can make a balloon loan and only consider in your calculation of the borrower's monthly debt (in the ATR determination) the first five years' payments on that loan UNLESS the balloon loan is a higher-priced covered transaction (HPCT). If it is an HPCT, you have to include the balloon payment in the calculation, regardless of when it's scheduled.

That clearly makes it almost impossible to meet the ATR requirement with an HPCT balloon payment loan.
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#2069887 - 03/17/16 10:39 PM Re: Balloon Loans post April 1st Owlman
nikki_compliance Offline
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NM
Sorry I am also confused.... We do 62 month balloon loans that are HPML's we are a small creditor, but as of now we are not considered "rural and underserved". Does this mean we cannot make these types of loan. Can you point me to what our options are please.

Thank you

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#2069888 - 03/17/16 10:40 PM Re: Balloon Loans post April 1st Owlman
nikki_compliance Offline
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NM
We are wanting to comply with the ATR rules... probably not making any QM's?

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#2069914 - 03/18/16 02:28 PM Re: Balloon Loans post April 1st Owlman
John Burnett Offline
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The "rural and underserved" criterion for small creditors has nothing to do with the location of the creditor and everything to do with the location of the properties on which the creditor made first-lien covered transactions in the previous calendar year (or either of the previous calendar year, if the application in question is received before April 1 of the current year. If more than half of your first-lien covered transactions were on properties located in rural or underserved areas, you meet that criterion, and, if you also meet the criterion on total asset size (as of the prior year end) -- currently less than $2.052 billion -- and the criterion on volume of sold first-lien covered loans (under 2,000 and portfolio loans don't count), you can make balloon-payment QMs under section 1026.43(f).

If you don't meet one of the three criteria -- such as the "more than half of first-lien covered transactions in rural or underserved areas" criterion, you can't make balloon-payment QMs. But you do qualify to make balloon-payment loans under the general ATR rules in section 1026.43(c). When doing the calculation of the monthly debts that will be used in the debt/income ratio, if the loan is not going to be a Higher-Priced Covered Transaction (HPCT), you look at the payments for the first five years, and can ignore the balloon payment if it is scheduled after the end of that five-year period. But if the loan will be an HPCT, you have to use the balloon payment regardless of when it's scheduled (5, 7, 10, 15 years, it doesn't matter). That makes it very difficult, if not impossible, for a balloon-payment HPCT to pass ATR requirements.
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#2069923 - 03/18/16 02:54 PM Re: Balloon Loans post April 1st John Burnett
Ski Offline
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South Louisiana
John, thanks for that succinct explanation.

The only caveat for making a non-HPCT balloon payment loan under the general ability-to-repay rules, if I understand it correctly, is that you have no safe harbor or presumption of compliance for the ATR.

Am I correct?

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#2069937 - 03/18/16 03:17 PM Re: Balloon Loans post April 1st Owlman
Owlman Offline
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What I was told from a state association representative is that there is "no problem doing the balloon. Won't be QM and still must do ATR." However, in looking at basic ATR requirements state "...monthly, fully-amortizing payments that are substantially equal." Which tell me balloons will never meet ATR. So this will cause the balloon to become a HPCT, which will basically eliminate the ability to make balloon loans (other than those small creditor banks that meet the rural and underserved definitions).

Is this (maybe over simplification) summary correct?

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#2069938 - 03/18/16 03:19 PM Re: Balloon Loans post April 1st Owlman
Skittles Online
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I asked our EIC this question due to conflicting statements and he stated that if we make an HPCT for a loan with an application date after 4/1/16 then we would be in violation of Regulation Z since we would not be meeting the ATR guidelines/requirements.
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#2069959 - 03/18/16 04:29 PM Re: Balloon Loans post April 1st Owlman
nikki_compliance Offline
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NM
so if your interest rate is over the 1.5% APOR than it is considered an HCPT? Therefore you have to consider the balloon payment?

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#2069976 - 03/18/16 05:14 PM Re: Balloon Loans post April 1st Owlman
Skittles Online
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Yes - if it is over the 1.5% for a first lien.
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#2070020 - 03/18/16 07:29 PM Re: Balloon Loans post April 1st Owlman
Owlman Offline
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So, follow up question. Since balloon loans are out of the question, what loan products will you be offering your borrowers after April 1st?

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#2070028 - 03/18/16 07:52 PM Re: Balloon Loans post April 1st Owlman
Skittles Online
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I would answer that question if I was included in the conversations and meetings. I would 'assume' ARMs, but we're not ready for those either. We may do some balloons; however they cannot be HPCTs - but I have no idea.

Sorry - getting off of my soapbox now. As you can tell I'm very unhappy that this is being discussed without compliance involved.
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#2174516 - 04/20/18 06:32 PM Re: Balloon Loans post April 1st Owlman
MBTCompliance Offline
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Joined: Apr 2015
Posts: 346
Bringing up this old thread with questions on the following terms:

10-year balloon up to 30 year amortization
ATR complied with
Possible HPML
Extended at least one loan in a rural underserved county
Less than 2,000 covered loans originated
Less than 2 Billion in assets
Loans held in portfolio

Questions:

1. Could borrowers be qualified without having to consider the balloon payment since it is more than a 5 year balloon?

2. Would the QM safe harbor apply?

3. If the QM safe harbor would apply, and the rate is fixed, could a pre-payment penalty be charged if the loans were priced to avoid HPML?
Last edited by MBTCompliance; 04/20/18 06:34 PM.
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