Topic: Balloon Loans
-
We have a five-year balloon mortgage loan secured by the borrower’s primary residence that has matured. Can we renew this loan, or does it need to be refinanced since the loan has matured?
—
by
Yes, we believe that you may renew a balloon loan after its maturity date without it falling within Regulation Z’s definition of a “refinancing” (which would require new disclosures under the TRID requirements). However, the language that you use in the loan modification documents is important in order to achieve this result. The Seventh Circuit…
-
Can you modify credit from open-end to closed-end without it being considered a refinance, which would trigger an ability-to-repay (ATR) analysis? When a HELOC has matured, we extend a one-year renewal and provide closed-end disclosures, after which we modify the HELOC into a closed-end balloon loan, without new disclosures. If the HELOC has not yet matured, we extend a renewal (either one year or multiple years with a balloon payment) and do not provide new disclosures. However, in either case, we do not perform an ATR analysis. Is this correct?
—
by
No, we do not believe a HELOC can be converted after maturity into a closed-end loan as a modification; such a conversion would be considered a refinancing and require an ATR analysis. However, we do believe a HELOC can be converted to a closed-end loan prior to maturity as a modification, which would not trigger…
-
When we extend our in-house balloon mortgage loans, we reevaluate the property. The evaluations usually consist of driving by the property and concluding either that the property value is consistent with our original appraisal or that it has deteriorated. We document the evaluations and retain the documentation in our loan files. Are we required to provide a copy of these evaluations to the applicants and obtain their signatures of receipt?
—
by
Yes, we believe that your bank should provide copies of these evaluations to applicants requesting renewals of loans secured by a first lien on a dwelling. While the applicants’ signatures are not required, obtaining their signatures would be a prudent step for documenting your compliance with this requirement. Regulation B requires creditors to provide applicants…
-
We have a number of balloon loans that will be maturing soon. Can we extend the maturity dates, increase the interest rates and switch from fixed interest rates to variable interest rates without triggering a refinancing (requiring new disclosures, new notes, etc.)? Also, would we have to redo the ability-to-repay analysis for each balloon loan?
—
by
If you are adding a variable rate feature, you will have to treat these transactions as refinancings, requiring all new disclosures under Regulation Z. A refinancing is a transaction in which an existing obligation is satisfied and replaced by a new obligation, and several Illinois courts have clarified what it means to “satisfy and replace”…
-
Our bank offers a three-year, interest only home equity line of credit (HELOC) with a balloon feature, and a ten-year HELOC with a monthly payment of 1% of the balance and a balloon feature. Can we modify these loans to extend their maturity date another three or ten years and add an amortization schedule? Or would that be considered a refinancing? Does it matter if the modification occurs before or after maturity?
—
by
We believe that you may modify the HELOCS in the way that you described before or after maturity without treating the changes as a “refinancing.” However, the language that you use in the loan modification documents will determine whether you achieve this result. The Seventh Circuit has considered a similar issue, albeit in the context…
-
Can you give me the list of disclosures I would need to perform a mortgage loan renewal for a closed-end balloon loan? Can we charge the customer for an appraisal? We are not advancing new money to the borrower.
—
by
We are not aware of any laws or regulations that require you to provide specific disclosures when renewing a mortgage loan (versus refinancing a mortgage loan, which would require new TILA and RESPA disclosures). We do recommend consulting with your bank counsel when creating the loan renewal agreement and any other legal documents. In addition,…
-
We are in the process of modifying an existing home equity balloon loan to extend the term from five years to ten years and to begin amortization. The loan has matured. Can we modify the loan without providing the new TRID disclosures, or should we treat it as a refinancing?
—
by
We believe that you may renew a balloon loan after its maturity date without it falling within Regulation Z’s definition of a “refinancing” (which would require new disclosures under the TRID requirements). However, the language that you use in the loan modification documents is important in order to achieve this result. The Seventh Circuit has…
-
We have a customer with an existing balloon mortgage loan that was originated in 2008 and is coming up for renewal soon. If we renew this loan, will it fall under the TRID requirements?
—
by
We believe that you may renew a balloon loan before its maturity date without it falling within Regulation Z’s definition of a “refinancing” (which would require new disclosures under the TRID requirements). However, the language that you use in the loan modification documents is important in order to achieve this result. The general rule is…
-
We offer higher priced mortgage loans that are balloon loans with a 61-month fixed rate term and an amortization of up to 30 years. Which Federal Financial Institutions Examination Council (FFIEC) table should we use to determine average prime offer rates (Average Prime Offer Rates – Fixed or Average Prime Offer Rates – Adjustable)?
—
by
You should use the FFIEC’s fixed-rate table for the loans you described. The balloon payment at the end of loan term does not change the fact that the loans have a fixed rather than adjustable interest rate. A fixed-rate mortgage is defined as a transaction secured by real property or a dwelling that is not…
-
We’re a small, rural community bank. Do our balloon loans that have an annual percentage rate (APR) of less than 3.5% above the average prime offer rate (APOR) constitute qualified mortgages that qualify for the safe harbor under the ability-to-repay rules?
—
by
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…