Topic: Balloon Loans
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We made a commercial construction loan that converted to a closed-end mortgage loan with a balloon payment. The loan was for the construction of a condo unit that the developer initially intended to sell or rent out for income. After origination, the developer decided to move into the property as their primary residence. The loan is now reaching maturity. Can we extend the maturity date without triggering the requirement to provide TRID disclosures?
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We believe you may modify the mortgage loan to extend the maturity date without providing disclosures under the TILA-RESPA Integrated Disclosure (TRID) rule, provided that you do not satisfy and replace the existing mortgage loan with a new transaction. Under Regulation Z, if a business purpose loan is later rewritten for consumer purposes, “[s]uch a…
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If a consumer balloon mortgage is past maturity and we extend the maturity date, increase the fixed interest rate, and charge a small fee, can we consider this a modification instead of a new transaction requiring new disclosures (i.e., a refinancing)? Does it make a difference if the loan is past maturity? We do not want to replace the original loan.
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Yes, we believe you may extend a consumer balloon mortgage, increase the fixed interest rate, and charge a small fee without the transaction being considered a refinancing requiring new disclosures, provided that your modification agreement does not satisfy and replace the existing mortgage loan with a new transaction. Further, we do not believe this answer…
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Our bank offers balloon mortgages with initial terms of sixty-one months and amortization terms of twenty years. We typically extend them for one, two, or three years. With interest rates increasing, we may have to substantially increase the interest rates on these extensions, which would increase the loan payments. To keep payments down, we want to re-amortize these loans at amortization terms of twenty years. This would not increase the balloon payment. Would this be a an unfair, deceptive, or abusive act or practice? Would we be violating any laws if we substantially increase the interest rate?
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No, we do not believe that extending, increasing the interest rate of, and re-amortizing your balloon loans would be considered an unfair, deceptive, or abusive act or practice, provided that these changes are clearly and conspicuously disclosed and agreed to by your customers. However, such a modification could be considered a “refinancing” under Regulation Z…
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A private group is developing a subdivision and has been unable to sell the new homes. The group wants to partner with us to offer incentives to promote more sales in the subdivision. Our bank wants to offer special terms to the first four customers who buy one of the new homes in the developer’s subdivision — such as balloon loans that would be interest-free for the first three years of the loan term. Would there be any fair lending issues associated with offering these loan incentives only to customers who want to buy homes in this subdivision?
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Yes, we believe there may be fair lending issues associated with offering favorable loan terms only to customers who buy one of the developer’s new homes, since the basis for qualifying for the incentive would be the geographic location of the property securing the loan. It appears that this incentive would violate the Illinois Fairness…
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Can we use a change in terms agreement to extend the term and increase the interest rate on a consumer balloon mortgage that is reaching maturity without the transaction being considered a refinancing? The interest rate is currently fixed and will continue to be fixed after the increase. Would the answer change if we extend and increase the interest rate after a consumer home equity line of credit (HELOC) has already matured? If allowed, what must be addressed or disclosed within the change in terms in addition to the new rate?
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Yes, we believe you may extend and increase the fixed interest rate on a consumer balloon mortgage without the transaction being considered a refinancing, provided that your modification agreement does not satisfy and replace the existing mortgage loan with a new transaction. Further, we do not believe this answer would change if you extend and…
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Do we need to determine whether a loan will be considered a higher-priced mortgage loan (HPML) when modifying the loan with a change-in-terms agreement? We have a borrower with a balloon note that is maturing soon, and we are trying to determine whether to modify the loan or refinance it. If we refinance the loan, the fees will be higher, and we would require an escrow account as the loan likely would qualify as an HPML.
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No, we do not believe you need to determine whether an existing loan would be considered an HPML when merely modifying, and not refinancing, the loan. However, you are correct that you would need to make this determination if the loan is refinanced — unless an exception applies, as discussed below. The Federal Reserve Board…
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Our bank issues balloon notes that we frequently extend on maturity. When considering an extension, our loan review policy requires us to examine the borrower’s credit (without obtaining their consent), and we have always run hard credit inquiries for these reviews. We would like to switch to using soft credit inquiries that do not appear on our customers’ credit reports. Are there any rules that would prohibit us from using soft credit inquiries for these reviews, and do we need the borrowers’ consent to pull their credit? An examiner once advised us to do credit checks before renewing loans, and an auditor recommended a hard credit pull for new loans, but a representative from the Federal Reserve said we could use soft credit pulls in this case.
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No, we are not aware of any law or regulation that would prohibit you from using “soft pulls” for your loan reviews conducted before renewing loans. We do not believe that you need to obtain borrowers’ consent when pulling credit for purposes of deciding whether to offer a loan extension for the balloon notes. Under…
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Does amending or extending the terms of a balloon note after maturity require a new note and new disclosures? Do the rules differ for different loan types?
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Generally, whether amending and extending a balloon loan (or other type of loan) after maturity requires a new note and new disclosures depends on whether you are modifying or refinancing the loan. For consumer balloon (and other) loans, Regulation Z requires new disclosures when an existing loan is “refinanced,” which Regulation Z treats as a…
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We are extending a balloon mortgage loan secured by farmland that includes several grain bins and sheds. Our original flood zone determination had the property as Zone X, meaning that flood insurance was not required. But our new flood determination, prepared by a different vendor, found that one of the metal grain bins sits on the line of a special flood hazard area (SFHA) rated as “Zone AE,” meaning that flood insurance now is required. Other than obtaining a letter of map amendment (LOMA), is there any way remove the grain bin from the SFHA so that flood insurance is not required? The value of the grain bin is not necessary to support the loan amount.
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Yes, there are alternative methods for obtaining a revised map to remove the grain bin from the SFHA. Additionally, your borrower may qualify for a reduced flood insurance premium under the “Grandfather Rule” described below, or your bank may choose to remove the grain bin from the collateral securing the loan to avoid the mandatory…
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We have consumer mortgage loans secured by balloon notes that will be converted to adjustable rate notes prior to maturity. Under Regulation Z, these transactions must be disclosed as refinances. Some of the borrowers have large second mortgages, and we are concerned that these transactions could result in the loss of our priority lien position. The amounts of the loans will not be increasing, and the original mortgages will not be released, but we will be entering into new notes with the borrowers. Under Illinois law, can we replace an original note with a new note without extinguishing the original mortgage lien? Must we record a new mortgage with a new note, or can we record a modification of mortgage instead?
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Yes, a lender may replace an original note with a new note without extinguishing the lender’s original lien — but the facts in each case and the language in the loan documents are crucial. Consequently, irrespective of our general guidance here, we recommend consulting with your bank counsel to determine how these refinancings can be…