Yes, small, rural creditors can originate a qualified mortgage with a balloon-payment feature, and these loans are deemed to comply with Regulation Z’s ability-to-repay requirements as long as the loans have an APR of less than 3.5% over APOR for a comparable transaction.

However, a loan that is 3.5% or more above APOR constitutes a higher-priced covered transaction (which is not subject to the qualified mortgage safe harbor protection), regardless of whether the transaction has a balloon-payment feature or is originated by a small creditor.

For resources related to our guidance, please see:

• 12 CFR 1026.43(f)  (Permitting small creditors in rural or underserved areas to originate qualified mortgages with balloon payment features)

• 12 CFR 1026.43(b)(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.”)

• 78 Federal Register 35429, 35479 (June 12, 2013) (“In this final rule the Bureau uses its TILA section 105(a) adjustment authority to further expand the safe harbor to include certain covered transactions (those subject to the qualified mortgage definition under paragraph (e)(5), (e)(6) or (f)) that have an APR that exceeds the prime offer rate for a comparable transaction as of the date the interest rate is set by 3.5 percentage points for a first-lien covered transaction.”)

• 81 Federal Register 16074, 16081 (March 31, 2016) (“Rural small creditors can originate qualified mortgages with balloon-payment features, as long as these loans are kept in portfolio and other requirements are met. These qualified mortgages with balloon-payment features are deemed to comply with the ability-to-repay requirement as long as these loans have an APR of less than 3.5 percentage points over APOR for a comparable transaction. Also, rural small creditors are generally allowed to originate higher-priced mortgage loans without setting up an escrow account for property taxes and insurance.”)