[jennielittle]

We do not ordinarily do home equity loans in our bank, so this one is stumping us. The attorney’s office we use to draw docs is telling us that we cannot do a 15-year amort., 5-year balloon on a home equity loan (which is also a HPML). Is this true? We are located in Texas, so I don’t know if that makes a difference.

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[JGo9]

jennielittle,

Let me start off by saying that i’m not familiar with any kind of TX law.

You can indeed do a 5 yr balloon (closed-end) Home Equity loan. Where your Attorney is coming from is that for the Presumption of Compliance you must us the largest payment of principal and interest scheduled in the first seven years in determining the consumer’s repayment ability. (see page 242 if you have the 2011 Real Estate Lending Compliance Seminar manual from Jack)

This was an item of large concern and debate in the industry when it first came out. The Fed later came out and tried to clarify the issue in saying that their intent was not to do away with balloon loans that with terms shorter than 7 years. The Fed issued a statement back in 11-2009 that addressed this issue. Here are the main points from that statement that apply to your question:

3. Question: What must the creditor do, then, to verify the borrower’s ability to repay a short-term balloon loan?
Answer: In addition to verifying the consumer’s ability to make regular monthly payments, a creditor should verify that the consumer would likely be able to satisfy the balloon payment obligation by refinancing the loan or through income or assets other than the collateral.
4. Question: How does the creditor verify, when it originates a short-term balloon loan, whether the consumer could qualify for a refinancing before the balloon payment is due?
Answer: The creditor has an affirmative duty to engage in prudent underwriting. 5 Thus, the creditor should consider factors such as the loan-to-value ratio and the borrower’s debt-to-income ratio or residual income—all as of the time of consummation. A borrower with a high debt-to-income ratio, and/or with little or no equity in the property, will be less likely to be able to refinance the loan before the balloon payment comes due than a borrower with lower debt-to-income and loan-to-value ratios. The creditor is not required to predict the consumer’s future financial circumstances, interest rate environment, and home value.

Here is a link to the Federal Reserve Board’s Consumer Affairs Letter: https://www.federalreserve.gov/boarddocs/caletters/2009/0912/caltr0912.htm

Granted it would be best to have the presumption of compliance as stated in the regulation, but it doesn’t mean that you can’t do the 5yr Home Equity loan.

I hope this helps!

[BDyess]

It is my understanding that the Texas Constitution specifically prohibits balloon payments on home equity – see https://www.statutes.legis.state.tx.us/Docs/CN/htm/CN.16.htm#16.50 – Article 16, Section 50(a)(6)(L)(i) where it states that the home equity loan must be scheduled to be repaid

in substantially equal successive periodic installments, not more often than every 14 days and not less often than monthly, beginning no later than two months from the date the extension of credit is made, each of which equals or exceeds the amount of accrued interest as of the date of the scheduled installment…

BUT you REALLY need to seek legal advice when doing TX home equity.

[jholzknecht]

Thanks for the excellent post. The original answer from JGo9 was completely accurate, but he acknowledged that he was not familiar with Texas law. Your answer completes the picture. That is the value of this Forum – various voices coming together with different experiences to provide accurate and complete answers.

[Author]

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