Reg Z Ability to Repay-ARM

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Question:

Our bank is looking into offering mortgages with an initial fixed rate, short term loan (5-7yrs) with a balloon payment, then financing the balloon balance into a longer term (20yr) ARM. Can we do this without determining Ability to Repay for the initial short term portion? Also, would this be dependent on if the bank is considered a small creditor and serves only rural or underserved areas?

Answer:

by Randy Carey:

A short term loan (5-7yrs) with a balloon payment would not be exempt from the ability to repay requirements under 1026.43(a). For calculating the payment to include in the ATR, refer to 1026.43(c)(5). Whether you qualify to make temporary balloon-payment qualified mortgage loans under 1026.43(f) is a separate issue.

Answer:

by Jim Bedsole:

Keep in mind the provisions of the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (S.2155). Section 101 of this law (Public Law 115-174 enacted in May 2018) substantially broadens what loans will be considered Safe Harbor QM loans (which automatically means you've got compliance with ATR). Final regulations have not been implemented for this provision of the act by the CFPB, but some attorneys are of the opinion that the relief in this clause was effective upon signing of the act into law. Consult your legal counsel to see if you can take advantage of these provisions to treat the 5-7 year balloon loan as a Safe Harbor QM loan.