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!