Ability to Repay

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    I’m sure you receive many questions daily regarding the regulation changes. After meeting with our Chief Lending Officer today he proposed several questions, especially under the Ability-to-Repay and Qualified Mortgage Rules:

    While our Secondary Mortgage Department would meet the Qualified Mortgage Rule, our issue is what happens to our balloon mortgages we have on our books when they come up for refinance? So…these are the questions:

    1. What happens to the balloon mortgages that we have on the books when they come up for renewal?
    2. What about the consumer that can’t meet the qualifications (43% DTI)
    3. ARM loans – while we are not offering ARMS at the present time, what about 5 or 7 year ARMS? What about the draw back to ARM loans?

    Is there still consideration on changing the regulation for Rural Balloon-Payment Qualified Mortgages? We are considered rural in all categories except that our branches are located in a MSA for HMDA purposes.


    1) At one case you inquire about what happens to a balloon loan that is refinanced. In the other you inquire about a balloon note that is renewed. The questions are similar, but the answers are very different. A refinance is a new loan, therefore you must verify the borrowers ability to repay under one of the six different ability-to-repay rules. A renew is not a new transaction therefore it does not have to new e ability-to-repay rules.
    2) if the consumer does not meet one of the standards, such as the 43% debt-to-income ratio, then the loan does not meet the standard for a qualified mortgage. In that case you must qualify the borrower under one of the other ability-to-repay options.
    3) ARM loans are generally easy to qualify under various ability-to-repay options. For the QM option you must underwrite using the highest rate in the first five years.

    To determine whether your loans qualify under the balloon QM rules check the CFPB’s list of rural and undeserved counties. If most of your bank’s lending occurs in such counties you meet that requirement. Your must also look at other factors such as the size of your bank and the volume of originations. You must also hold the balloon loans in your portfolio for at least three years.

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