Existing Balloon Loans Maturing After 1/9/16

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Question:

The ability for small banks to make balloon loans is set to expire on 1/9/16. If we have existing balloon loans maturing after 1/9/16, can we modify the balloon loan and keep it as a balloon loan or will we still have to convert that loan to an ARM or loan term fixed rate product? We would not be extinguishing the note and not initiating a new loan.

Answer:

There are currently two sections of Regulation Z section 1026.43 that allow certain small creditors to make balloon loan that are qualified mortgage loans (QMs). The permanent provision in 1026.43(f) has one qualifying criterion that isn't required by section 1026.43(e)(6). Section 43(e)(6) only applies to loans consummated on or before January 10, 2016 (a Sunday). If your institution meets the criteria in sections 1026.35(b)(2)(iii)(A), (B) and (C), you can continue making balloon payment QMs (assuming you also meet other criteria common to both .43(e)(6) and .43(f)).

If, however, you don't meet the requirements of all three of those paragraphs, you won't be able to make any NEW balloon payment QMs. However, if you are able to modify maturing balloon payment QMs before they mature to extend their maturity dates in a way that doesn't create a refinancing under 1026.20(a), you should be OK.

Check with bank counsel concerning the details of how to correctly modify the loans under applicable state law.