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Balloon HPML & ATR

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  • #5343
    rcooper
    Keymaster

    A question we received from a member:

    Under the Ability to Repay Requirements can we make a HPML that has a balloon feature? For example doing a 15 year fixed rate loan amortized over 30 years. We are considered a Smaller Servicer because we originated less than 500 mortgage loans in the previous years and our assets are less than $2 billion.

    #5344
    rcooper
    Keymaster

    It will depend…not the easy answer you were probably hoping for. Your HPMLs need to comply with the ability to repay requirements of 1026.43, so if you do that then yes you can have an HPML with a balloon.

    Under the ATR section you need to determine if a loan is an HPCT (Higher Priced Covered Transaction). This will affect either the payment calculation if you plan to use the general ATR or it will affect your safe harbor status if you are making a QM. A 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. In some cases a loan may be both an HPML (principal dwelling secured) and a HPCT (dwelling secured) but not always so be sure to apply the tests independent of one another.

    There are three balloon loan options under the ATR rules.
    1)Balloon under general ATR – 1026.43(c):
    You must calculate the payment using:
    (a) The maximum payment scheduled during the first five years after the date on which the first regular periodic payment will be due (typically the 61st payment) for a loan that is not a higher-priced covered transaction; or
    (b) The maximum payment in the payment schedule, including any balloon payment, for a higher-priced covered transaction;

    2)Temporary Balloon QM – 126.43(e)(6):
    This QM applies to covered transactions consummated on or before 1-10-16 with 500 or fewer originations and assets of less than $2 billion.

    *(Applies to Temporary Balloon QM and Balloon QM):
    You must determine that the consumer will be able to make the scheduled periodic payments (including mortgage-related obligations) other than the balloon payment. Unlike the calculation of balloon loan monthly payments for determining ATR the Balloon-Payment QM calculation excludes the balloon payment even if the loan is a higher-priced loan.

    Among other things, the balloon loan must provide for:
    a)scheduled payments that are substantially equal, calculated using an amortization period that doesn’t exceed 30 years;
    b)The loan must have a term of five years or longer; and
    c)a loan term of five years of longer

    A QM that is higher-priced covered transaction (see definition above) will have a presumption of compliance rather than a safe harbor.

    3)Balloon QM – 1026.43(f):
    As a creditor you must also meet the rural underserved requirements (more than 50% of originations in counties designated as rural or underserved) as well as having 500 or fewer origination and assets of less than $2 billion.

    See *Temporary Balloon QM above for payment requirements.

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