HOEPA is Satan...

OK, that being said; I understand that home improvement loans are not exempt under the initial construction loan definition.

But, we are reeeeaaaaallllly struggling with how we should go about doing these types of loans now. Our program was a 6 month loan with an 8% rate that we paid off and termed out on the secondary market, at a much better rate. (We don't do in-house RE)

My understanding is if we hit the HOEPA limits, we can't do a balloon at 6 months under the term restrictions.

Has anyone else out there got a solution for these?

Can the customer waive the term restriction because it's in their best interest?

Can we have a pattern of that?

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Can the customer waive the term restriction because it's in their best interest?

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No.

I ran into this problem with a wealthy customer that wanted to do a "one-wall-standing" remodel of his existing home. He wanted to do construction draws with interest reserve for a one year term. Once you do the APR calculation under Appendix D, including the inspection fees, the APR was about 22%. HOEPA TIME!

Mind you, the customer's annual income was in the upper 6 figs, and the estimated value on the home was in the low 7 figs. Not exactly your typical target of "Predatory Lending."

We wound up doing a HELOC instead.

Bad news is, you're going to have to figure out a way to set up the rate and fees to be under the HOEPA triggers.

Just a thought (reaching actually) ...

Is there a legal definition difference between "Balloon" and "Single-pay"?

A balloon assumes a payment schedule that does not fully amortize the loan, while a single-pay makes no such assumption. (looking for a loop hole)

A balloon is generally defined as a the final payment is more than twice the regular amortized payment.

I would stick with the definition found in 226.32:

"Balloon payment. For a loan with a term of less than five years, a payment schedule with regular periodic payments that when aggregated do not fully amortize the outstanding principal balance."

A single pay note definitely does not have regular periodic payments.

So would a single pay be different since you don't amortize payments? (I'm making this up as I go.)

Speculations are my own, not my employers.

A single pay would always be considered a balloon payment since it doesn't amortize the loan and is not regularly periodic.

I have never treated, nor considered, a "single-pay" the same as a balloon note.

A single pay loan is simply that, it is a loan with a term of X and the principal and interest payment is due on X. The principal and interest payment "amortizes" the loan in 1 payment at maturity.

A ballon loan, normally, is set up with a defined maturity date with the amoritzation set up on a longer time period, thus the payments do not "amortize" the loan at maturity, thus the "balloon" payment.

As long as they are not requiring 5 monthly payments (other than interest only payments) and 1 final payment at the end of the six months, I do not believe they have to worry about a balloon payment in this scenario. They still have to worry about HOEPA disclosures, but I do not think the balloon prohibition applies.

Is that your final answer?

So the only way to do a 6 month single pay (bridge) type home improvement loan is to lower the interest rate to a below HOEPA trigger level?

Pray for me while I relay that to management.

Sorry, I got interrupted in the middle of my previous reply and missed yours.

So if we set these up as 6 month single pay notes (no payment schedule - interest or otherwise) they won't meet the balloon definition?

Don the cape and be my hero here...

Randy and I have differences of opinion on this issue, and I have a lot of respect for Randy's opinions. But I do not feel HOEPA will prevent you from making a "single pay" loan secured by the borrower's principal residence. As I said, if it meets the tests you will have to give the HOEPA disclosure, but I still don't think the balloon payment prohibition applies.

Superman lives!!!!

I have no problem with the disclosures or any of the other restrictions, it's just that this doesn't seem to help the customer out. Why would they want to stay in a 5 year term balloon loan with a higher rate, when we can get them a much better rate on the secondary market. It feels like someone really missed this scenario entirely.

Mary, I'm no Superman and if you don't believe me, ask my ex., I just gave you the answer you were looking for. Please be sure to read my disclaimer at the bottom.

Copy that!... and thanks.

Sec. 226.32 Requirements for certain closed-end home mortgages.

(b) Definitions. For purposes of this subpart, the following definitions apply:

(3) Regular payment; balloon payment.
1. General. The regular payment is the amount due from the borrower at regular intervals, such as monthly, bimonthly, quarterly, or annually. There must be at least two payments , and the payments must be in an amount and at such intervals that they fully amortize the amount owed. In disclosing the regular payment, creditors may rely on the rules set forth in § 226.18(g); however, the amounts for voluntary items, such as credit life insurance, may be included in the regular payment disclosure only if the consumer has previously agreed to the amounts.

Ok, under this definition, a single pay loan does not fall within the balloon payment prohibitions.

I read that too. Intended or not, I believe that single pays are the loop hole. I'm sure hoping so. Management has indicated to me that if we can't find a way, we won't be doing these anymore... score that Regs 1 - Customer 0.

I was going to discuss this with our regulator next week.

Speculations are my own, not my employers'.

I would be interested to know what your regulator says. But for now, I'm sticking with my opinion that single pay loans are not balloon notes.

Dpersfull,

I too have gained much respect for your opinions, but we may have found an area in which we agree to disagree. Let’s take the cite that you quoted: “The regular payment is the amount due from the borrower at regular intervals, such as monthly, bimonthly, quarterly, or annually. There must be at least two payments, and the payments must be in an amount and at such intervals that they fully amortize the amount owed.” What I think this is telling us is that in order for the loan to be assumed to have “regular payments” there has to be at least two payments involved. As such, a single pay loan does not have “regular payments”.

If you look to the commentary regarding balloon payments, you find:

Paragraph 32(d)(1)(i) Balloon payment.

1. Regular periodic payments. The repayment schedule for a Sec. 226.32 mortgage loan with a term of less than five years must fully amortize the outstanding principal balance through ``regular periodic payments.'' A payment is a ``regular periodic payment'' if it is not more than twice the amount of other payments.

Again, I don’t think that a single pay note qualifies as a fully amortizing loan with “regular periodic payments”.

But again, this is just one humble compliance officer’s opinion.

I respect both your opinions, but I'm going to have to side with Randy on this one. I do not think you can have a single pay loan with a term of less than 5 years under Section 32 with one exception - a bridge loan connected with the acquisition or construction of a dwelling intended to become the consumer's principal dwelling.

Ok, Jim, I just spent the past 15 minutes or so typing up the following response and here you are jumping in Yours is another opinon I respect and if you are siding with Randy, then I will graciously bow to defeat, for now anyway.

I still don't think HOEPA was desinged to prevent these type loans scenarios, but I'm outnumbered.

OK, Randy, you make a very valid and convincing point. However, I still don’t think HOEPA was designed to prevent lenders from making “single pay” loans secured by the principal residence. If it was then there will be a lot of banks that would not be able to accommodate their customers, such as in the above scenario without totally revamping their pricing structures. If the loan meets HOEPA disclosures due to the “fees & charges” or the “APR” tests on these type loans then the banks would be prevented from making single pay notes due to the “balloon prohibition” therefore eliminating a valuable service to its customers.

I would argue that a single pay loan has 1 periodic payment, the amount of the principal and interest due at the end of the loan’s period. Since it is not more than twice the amount of other payments, it would not be a balloon payment. Your position is, or at least I think it is, that if the loan meets HOEPA triggers, then the loan must be completely amortized (in 2 or more payments or it does not qualify as a periodic payment) at the loan’s maturity if less than 5 years, or the loan cannot be made.

What about the customer, that wants to borrow X for X to put in a swimming pool, add a room or whatever. You know he will have the funds available to pay the loan at maturity but, due to your rate and fees for this type loan, HOEPA is triggered. Are you saying you cannot accommodate this customer if you are securing the loan with the primary residence? Again, I don’t think HOEPA was drafted to prevent this lending scenario.

From reading some of the posts on HOEPA, some people are under the impression that HOEPA prevents or discourages (which it probably was intended to discourage) you from making high priced loans, it simply says if you do, you have to disclose the fact you are and that there are certain thing you cannot contract for in the loan agreement.

I hope that Mary will get back to us after talking to her regulator and let us know how they view this issue.

Dan,

Since when did the regulations ever support accomodating knowledgable and well informed customers? These loans are still possible if you can keep them under the HOEPA limits. It may have been intentional or unintentional by the Fed. Bankers asked for a number of exemptions to the balloon limitation during the comment period, but the Fed settled on only one very specific exemption. They clearly did not want to leave this loophole allowing loans secured by some poor shmucks house and have the finance company set him up on no payments for a year and then force them to pay the whole amount or foreclose at the end of the period. You have to remember the class of consumers this was meant to protect. While protecting the B and C borrowers, they make it more difficult to accomodate the A borrowers with some of these flexible financing arrangements.

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Since when did the regulations ever support accomodating knowledgable and well informed customers?

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Point well taken!

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they make it more difficult to accomodate the A borrowers with some of these flexible financing arrangements.

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I guess they are trying to "set our pricing" for us.

I am fortunate, based on how we price our loans and our fee structures, our loans "should" never hit the HOEPA triggers unless credit insurance is sold.

Guess Mary will have to take my cape away.

I ran smack into this a few years ago, and we had to completely re-structure our loan to avoid the HOEPA triggers.

I even contact the FRB (our regulator at that time) and they concurred that we would not be able to do our loan in the manner that the customer wanted. Nevermind the fact the customer WANTED the loan structure, nevermind the fact that the customer's income was in the high 6 figures, nevermind the fact that the home would be worth well over $1MM - HOEPA had an unintended consequence.

I wrote a comment letter to the FRB, but never received a response. Perhaps that's why the California "Anti-Predatory" law has a loan amount cap. If the loan is more than the cap, the Anti-Predatory law does not apply.

Besides the fact that you may have HOEPA loans and your regulatory may cite violations, you run the risk of making a loan to someone who may take advantage of the HOEPA rules and, when all the improvement have been completed, sue you for all the interest and fees, etc., - remember the rescission rules.

In court, it would probably be the "naive" homeowner against the big, bad, greedy bank.

Then, word gets out to your other loan customers who then see a way to get interest free financing for their projects as well.

Taking it a step further, at that point you would have no choice but to discontinue the product, because the same customers who took advantage could come back and get the same loan again. Reg B would prevent you from denying them just because they successfully sued you. Remember one of the prohibited basis is the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. Try to prove it wasn't good faith and you'll wind up spending more money than you could have ever made on these loans in the first place.

The Law of Unintended Consequences is one of the Primary Laws that a Compliance Officer must consider.

I don't know which is more disturbing HOEPA or the fact that on our day off we're cruising the compliance threads. This is looking pretty grim. Our regulatory agency is FRB also.

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I don't know which is more disturbing HOEPA or the fact that on our day off we're cruising the compliance threads.

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Geez - now that you mention it, that IS pretty pathetic!