We have a customer who has requested a second mortgage to do home improvement. The loan amount is small. $21,500. This is causing the loan to be in a HOEPA status. The term is 9 months. It will be an interest only closed end line of credit. He does not have enough equity in his home to do a HELOC. It is my understanding that we are unable to do a balloon payment under HOEPA. Also we have not originated any HOEPA loans in the past. We are still with in 3 days of application and are trying to determine if we can accommodate this request. We did not originate 50% of our mortgage loans in a rural or underserved area. So I believe this is preventing us from the small creditor exemption. ( I am not really sure if that is relevant ) As I believe the balloon payment could not be in 9 months. Please let me know if any of you are doing home improvement second loans and how you are accomplishing it when it tests positive for HOEPA.

You need to lower the finance charges or extend the term to get it out of Section 32 - small creditor or not - a Section 32 loan cannot contain a balloon.

Thank you for your suggestion. If we lengthen out the term, should we decide to do this for all Jr Lien Home Improvement loans. I feel like if we establish a dollar threshold-

For example all loan under $90K, will have a term of 61 months- will that seem to someone reviewing our files that we have done the following:

 You cannot purposely structure a transaction to evade HOEPA coverage (for example, splitting a loan into two loans to divide the loan fees to avoid the points-and-fees threshold). (§ 1026.34(b) and comments 34(b)-1 and -2)
IV.

Lengthening the term of the loan (getting rid of the balloon) doesn't make it not a HOEPA loan...it just avoids the forbidden balloon payment.

Should I be concerned if it also has the effect of taking a HOEPA loan and turning it into a non HOEPA loan. The issue for us will be the APR and not the fees.

Not sure what your point is, most banks structure their products so they never make a HOEPA loan.

Thank you for your patience. My point is - should all of my Jr. lien home improvements have the longer term, not just loans of small sizes. We would typically do a term of 1 year.

The point is--you are required by regulation NOT to have a balloon on a HOEPA loan--you don't have to change every non-HOEPA loan you originate to meet the same requirement. As Randy suggests, here we simply don't originate HOEPA loans--problem solved.