Legal Q&A: Can Banks Originate QM Balloon Loans?

Q: Can Banks Originate Qualified Mortgage Balloon Loans?

A: Yes. Small creditors can originate Qualified Mortgages (QM) under the general and temporary QM definitions. WBA has received numerous questions on the definition of “small creditor.” As such, this Q&A will focus on that definition rather than the general and temporary QM definitions.

First, WBA reminds banks that no rule or regulation prohibits origination of a non-QM status balloon loans. So long as bank's own loan policy permits it, if a bank does not meet the small lender status for QM balloon loans, the bank can still do balloon loans. Such loans will not have the QM status under the Ability to Repay (ATR) rules.

If a financial institution desires to originate a QM balloon loan, it must be a small creditor. Originally, CFPB expected banks to operate “predominantly” in a rural or underserved area to obtain small creditor status (predominantly meaning 50 percent or more loans). CFPB changed that test to instead require “at least one” transaction in a rural or underserved area in the previous year.

An area is rural if it is within a census block that is not in an urban area, as defined by the U.S. Census Bureau using the latest decennial census of the United States. The most recent delineation of urban areas was published by the U.S. Census Bureau in 2012. When considering whether an area is "rural,” banks have options. One option, that of “urban area,” is updated every 10 years. Specifically, an area can be rural if not in a non-urban area. Thus, for purposes of small creditor status, even if an area is not rural, a financial institution can still use the U.S. Census Bureau’s 2012 delineation of urban areas to determine whether it's in a "rural" area for purposes of the ATR/QM rule.

As a final option, financial institutions also have the ability to apply to the CFPB for the area to be designated as rural.

Note: The above information is not intended to provide legal advice; rather, it is intended to provide general information about banking issues. Consult your institution's attorney for special legal advice or assistance.

By, Scott Birrenkott