Topic: Balloon Loans
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Under the new ability-to-repay and qualified mortgage rules, can we offer a five-year balloon loan to a customer who can afford a 20-year fixed rate at 5%? Can we offer an adjustable rate loan? We are not considered to be a “small creditor” under the mortgage servicing rules.
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Based on these facts, we believe you may offer a balloon loan that could pass under the ability-to-repay (ATR) analysis. However, as your financial institution is not a small creditor under the mortgage servicing rules, you would not be able to offer a balloon loan that would qualify as a qualified mortgage (QM). We also…
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We have a balloon loan that has matured, and we are not renewing the loan. The customer has not made the balloon payment. Did the new RESPA 120 day foreclosure grace period begin to run after the loan matured?
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Please note that this answer discusses the Illinois grace period notice requirement, which expired on July 1, 2016, pursuant to a sunset provision. Please see 735 ILCS 5/15-1502.5. Yes, we believe the loan should be considered “delinquent,” because it has matured and the borrower has not paid the balloon payment. The new RESPA servicing rules…
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We originate balloon loans, which we usually renew with three- or five-year balloons. Can we increase the interest rate on a renewal? Apparently some states do not allow interest rate increases on modifications (such as Michigan). And would the new ability to repay (ATR) rules apply to the renewals if we increase the interest rate?
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Illinois Laws on Increased Interest Rates We are not aware of any Illinois laws that would prevent you from increasing the interest rate with a loan modification. There are very few limitations on interest rates and fees charged by banks under Illinois law. Section 5e of the Banking Act states that a bank may “elect…
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If we have existing balloon loans that mature after 1/10/14 and the terms were less than 5 years must we refinance the loan into a 61 month balloon to qualify for QM? Or can we extend the existing maturity for less than 5 years? Presently we would just file a modification agreement and extend it for another 3 years.
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We do not believe that a balloon loan with a term of less than five years could be considered a qualified mortgage (QM). It may be possible to make a balloon loan with a term of less than five years, but it would have to otherwise satisfy the general ability-to-repay (ATR) requirements. Also, as discussed…
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In the CFPB’s upcoming ATR rules, does the threshold for a “higher-priced” balloon loan include a different threshold for jumbo loans?
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The CFPB’s ability-to-repay (ATR) rules include their own definition of a “higher-priced” loan. 12 CFR 1026.43(b)(4) (as of the June 12, 2013 amendment of the rule). The rule’s “higher-priced” definition does not include a separate interest rate threshold for jumbo loans, and instead sets the thresholds based on whether the loan is first-lien or subordinate-lien,…
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If we extend a balloon loan that has not yet matured but change the payment terms (by changing the term from three years to one year), would that be considered a refinance or a renewal?
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Whether a subsequent transaction related to the same loan should be treated as a refinancing with new TILA and RESPA disclosures depends on the loan documents. The general rule is that a refinancing occurs only when an existing obligation is “satisfied and replaced by a new obligation undertaken by the same consumer” (under Regulation Z)…
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Do you see any compliance problems with a short-term consumer loan secured by farm land?
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The loan you described may involve some risk of UDAAP or fair lending violations, but there are no specific federal or Illinois prohibitions of a consumer short-term balloon loan secured by real property that is not the consumer’s dwelling.[1] As you pointed out, Regulation Z’s restrictions on balloon loans would not apply to this loan,…
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Are higher-priced mortgage loans and three- and five-year balloon renewals treated as higher-priced mortgage loans, or are they just renewals of the same note?
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Whether a renewal of a loan is treated as a higher-priced mortgage loan depends on whether it is considered a “refinancing” under Regulation Z. Supplement I to Section 226, Paragraph 1(d)(5)-1 (“if the transaction were a modification of an existing obligation’s terms that does not constitute a refinance loan under §226.20(a), the final rules, including…