United States

The ups and downs of balloon payment QMs


The Consumer Financial Protection Bureau (CFPB or Bureau) amended certain mortgage rules originally issued in 2013. The final rule for these revisions became effective on Jan. 1, 2016. One of the amendments extended the transition period that had allowed small creditors to make balloon-payment qualified mortgages (QMs), regardless of whether they operated predominantly in a rural or underserved area under section 1026.43(e)(6) of Regulation Z. The original two-year transition period was set to expire Jan. 10, 2016, and covered only those transactions consummated prior to the expiration. The revised rule considered a covered transaction to be an application that was received before April 1, 2016.

With April 1 approaching, it appeared as if small creditors that did not meet the rural or underserved test would no longer be able to make balloon-payment QMs. But the rules have changed, and as a result more small creditors will be able to continue to make balloon-payment QMs. The CFPB issued an interim final rule that amends the rural and underserved test to only require a lender to have “extended a covered transaction as defined by §1026.43(b)(1), secured by a first lien on a property that is located in an area that is either ’rural‘ or ’underserved’….” The prior test required the lender to have extended more than 50 percent of its total covered transactions secured by first liens on properties that were located in areas that were either rural or underserved.

The interim final rule is effective March 31, 2016. The change to the rural or underserved test means that small creditors that could not meet the over 50 percent test, but had at least one covered transaction secured by a first lien in a rural or underserved area in the applicable time frame, and met all of the other requirements will still be able to make balloon-payment QMs under section 1026.43(f) of Reg Z after the temporary balloon-payment QM provisions expire. This change in the rural or underserved criteria also impacts the rules for making high-cost mortgages with balloon payments and the requirements to establish escrows for certain HPMLs.

In conjunction with these amendments, the Bureau has updated several of its guides and charts to reflect the changes. The updated materials may be found on the Title XIV Rule implementation page of the Bureau’s website.