Alright all you smart cookies, I need your help.

I've now seen, from a couple of highly respected sources, this statement:

"For any non-qualified mortgage that is also an HPML, any balloon payment must be included in determining the ability to repay."

I simply cannot validate this, and honestly, I disagree. Where is this coming from?

I'm well aware of the HPCT threshold for counting a balloon payment in the DTI; as well as the balloon-is-5-years-from-pymt-date inclusion... but this HPML requirement for ATR underwriting has me befuddled.

Any ideas? Thank you!

Edited to add: I really think they mean "HPCT" and not "HPML". Just want to make sure I'm not crazy... at least not about this!

Is it that generally if a loan is an HPCT it is also HPML?

Hello my friend!

Hmmmm, good point! I'd definitely say yes for subordinate liens (APOR +3.5%), but first liens are a little different... although maybe not enough to really be truly different for non-QMs. Only the jumbo loan size would be a factor. A jumbo loan could NOT be an HPML, but still be an HPCT. Interesting. I really think they misinterpreted "higher priced" in 1026.43(c)(5)(ii).

I hope you are well!

Well, (c)(5)(ii) is pretty clear. There is a distinct dividing line on the treatment of a balloon payment on a non-HPCT and a HPCT.

(ii) Special rules for loans with a balloon payment, interest-only loans, and negative amortization loans. A creditor must make the consideration required under paragraph (c)(2)(iii) of this section for:

(A) A loan with a balloon payment, as defined in § 1026.18(s)(5)(i), using:

(1) The maximum payment scheduled during the first five years after the date on which the first regular periodic payment will be due for a loan that is not a higher-priced covered transaction; or

(2) The maximum payment in the payment schedule, including any balloon payment, for a higher-priced covered transaction;

Then you have the definition:

(4) Higher-priced covered transaction means a covered transaction with an annual percentage rate that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set by 1.5 or more percentage points for a first-lien covered transaction, other than a qualified mortgage under paragraph (e)(5), (e)(6), or (f) of this section; by 3.5 or more percentage points for a first-lien covered transaction that is a qualified mortgage under paragraph (e)(5), (e)(6), or (f) of this section; or by 3.5 or more percentage points for a subordinate-lien covered transaction.

So - there are only a couple of scenarios when a HPCT may not also be a HMPL or visa-versa.

One is a jumbo first lien loan as the HPML threshold is 2.5%, and;

The other is if the loan is a QM under (e)(5), (e)(6), or (f) as the threshold for those first lien transactions for a HPCT is 3.5%.

Thanks Randy! Astute and thorough as always.