Balloon Loans Under Current & Revised Rules
Existing restrictions make balloon lending difficult and new requirements, effective January 14, 2014, increase the difficulty for most lenders. This program reveals the narrow path that leads to balloon loans that comply with regulatory restrictions.
Many financial institutions have offered mortgage loans with a balloon payment for decades. For several years the balloon product has been under attack by Congress and the Federal financial institution regulatory agencies.
- At present, it is fairly simple to offer a balloon loan for a transaction that is not subject to Section 32 (HOEPA loans) or Section 35 (HPMLs) of Regulation Z. It is impossible to make a balloon loan with a term of less than seven years under either Section 32 or 35 without the possibility of significant liability.
- Starting on January 20, 2014, with the effective date of several Dodd-Frank revisions to Regulation Z, it will become even more difficult for most financial institutions to make mortgage loans that have a balloon payment.
- The current rules that require a creditor to verify the borrower’s ability to repay any loan made under Section 32 (HOEPA loans) or Section 35 (HPMLs) of Regulation Z;
- The new rules contained in Section 1026.43 of Regulation Z that require a creditor to verify the borrower’s ability to repay a consumer credit transaction secured by a dwelling;
- The restrictions on balloon loans in:
- §1026.43 © – General ability to repay rules;
- §1026.43 (d) – Refinancing of non-standard mortgages;
- §1026.43 (e) – Qualified mortgages (QM);
- §1026.43 (e)(4) – Interim special QM rules;
- §1026.43 (f) – Balloon QMs; and
- Proposed §1026.43 (e)(5) – Small Creditor Portfolio Loans.
- How to structure a balloon loan to be acceptable under current rules and final rules that are effective in January 2014; and
- The liability that may result from a non-compliant balloon loan.
Managers, loan originators, loan officers, lending assistants, compliance officers, auditors and others with responsibilities for originating mortgage loans.
Jack Holzknecht, CRCM, a principal with Pegasus Educational Services, LLC, has has been delivering the word on lending compliance for 37 years. Jack’s career began as a federal bank examiner. He also headed the form and software division of a regional consulting company and spent seven years in charge of their education division. He also developed and delivered training for the FDIC and OTS.
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