League InfoSight Highlight: Annual Payments on Consumer Real Estate Loans?

By Michael Christians, Regulatory Compliance Counsel at Michael Christians Consulting, LLC

A few credit unions have recently inquired about annual payments on closed-end home equity loans. In one instance, the applicant was a farmer and preferred to make payments annually instead of monthly. The credit union wanted to know if it was permissible to originate a closed-end home equity loan with annual payments.

Under federal law, it is. How the credit union contracts with the borrower for the repayment of the loan will be outlined in the terms and conditions of the promissory note. That said, there is one very important consideration for the credit union when establishing this type of repayment schedule.

Closed-end consumer credit transactions secured by a dwelling are subject to the ability to repay requirements found in Regulation Z. There are two ways in which the credit union can successfully comply with those requirements. First, the credit union can originate the loan as a qualified mortgage. However, a qualified mortgage requires repayment via regular, periodic payments that are substantially equal. Therefore, a loan contract that calls for annual payments could not be a qualified mortgage.

Instead, the credit union would need to satisfy Regulation Z’s ability to repay requirements by considering and documenting the eight ability-to-repay factors outlined below:

• The applicant’s income or assets,
• The applicant’s employment status,
• The monthly payment on the covered transaction,
• The monthly payment on any simultaneous loans that will be made,
• The applicant’s monthly payment for mortgage-related obligations,
• The applicant’s debt obligations, including alimony and/or child support payments,
• The applicant’s debt-to-income ratio or residual income, and
• The applicant’s credit history.
  

Credit unions are encouraged to check their respective state codes to determine whether this type of payment arrangement is permissible under applicable state law.

Remember to find more details about the qualified mortgages and the ability to repay requirements in InfoSight and CU PolicyPro.

As always, if you have any questions, comments, or concerns, please reach out to us at [email protected].