Variable rate or fixed balloon mortgage

I'm having difficulty determining if one of our loan products would be considered a variable rate mortgage.

The loans appear to be 5 year balloon mortgages, amortized over 15, 20, or 30 years. The interest rate is internally derived and not based on a public index. The TIL discloses a payment stream of 59 payments of x and 1 payment of balloon. The note discloses the same, and states that the lender is under no obligation to refinance the loan at maturity (after 5 years).

There is a "Balloon Note Addendum" that states that the loan will be due and payable unless the bank and borrower agree to a new rate and payment. The addendum also provides for a rate cap at the end of each 5 year period and over the life of the loan.

We also are providing a "Renegotiable Rate Mortagage Disclosure" that basically mirrors the content of the note addendum - plus includes a worst case scenario based on $10,000 borrowed and a history of the bank's loan rates for this product.

In practice, while the bank is under no obligation to refinance, we always offer a renegotiated rate after each 5 year period and unless the borrower declines and pays off the loan, the term extends for another 5 years.

What do we have - a variable rate loan or fixed 5 year balloon?

Since the bank is not unconditionally obligated to renew, it is not a variable rate transaction:

11. Examples of variable-rate transactions. Variable-rate transactions include:

• Renewable balloon-payment instruments where the creditor is both unconditionally obligated to renew the balloon-payment loan at the consumer's option (or is obligated to renew subject to conditions within the consumer's control) and has the option of increasing the interest rate at the time of renewal.

One follow up question. What disclosures do we need to provide after the 5 years have elapsed and the bank and borrowers agree on a new rate for the next 5? All Reg Z and RESPA disclosures as if its a new loan?

As long as the transaction does not rise to the level of a refinancing, it would not require new disclosure if you meet the following condition:

Paragraph 20(a) Refinancings.

3. Variable-rate.

i. If a variable-rate feature was properly disclosed under the regulation, a rate change in accord with those disclosures is not a refinancing. For example, no new disclosures are required when the variable-rate feature is invoked on a renewable balloon-payment mortgage that was previously disclosed as a variable-rate transaction.

You'll have to excuse my ignorance - I haven't had much lending compliance experience.

So even though we don't have a variable rate loan in the example I provided above (because the bank isn't unconditionally obligated to renew), if we gave all the disclosures required for a variable rate loan per 226.19(b), we don't have a refinancing and don't need all new disclosures after every 5 years?

Oh - sorry - forgot the context of this question - need more coffee this morning

It would solely be based on whether this a refinance or not.

I guess that's my question then...is the loan in my situation a refinancing after each 5 years has elapsed and how do I determine whether it is or not?

I'm totally

You have to to examine the transaction against the refinancing definition - you may want to ask your legal counsel for assistance as depending on how you do it and possibly State law, it may impact the determination.

Paragraph 20(a) Refinancings.

1. Definition. A refinancing is a new transaction requiring a complete new set of disclosures. Whether a refinancing has occurred is determined by reference to whether the original obligation has been satisfied or extinguished and replaced by a new obligation, based on the parties' contract and applicable law. The refinancing may involve the consolidation of several existing obligations, disbursement of new money to the consumer or on the consumer's behalf, or the rescheduling of payments under an existing obligation. In any form, the new obligation must completely replace the prior one.

• Changes in the terms of an existing obligation, such as the deferral of individual installments, will not constitute a refinancing unless accomplished by the cancellation of that obligation and the substitution of a new obligation.

• A substitution of agreements that meets the refinancing definition will require new disclosures, even if the substitution does not substantially alter the prior credit terms.

On the new GFE that we'll need to begin using, under the "Summary of your loan" section:

Would we complete the both of these sections for the loan I mentioned in the original post:

Can your interest rate rise? - due to the renewal/renegotiation at the end of 5 years and...

Does your loan have a balloon payment?