Which statement best describes the relationship between balloon QM portfolio requirements and small creditors?

• A. Small creditors must hold balloon QM in portfolio for 3 years.
• B. All balloon QM must be sold immediately.
• C. Only large creditors are subject to balloon QM requirements.
• D. Balloon QM cannot be held in a portfolio.

Answer: (A)

Balloon QM loans exist as a special safe harbor for certain mortgages with a balloon payment, but the key condition for small creditors is that they must keep the loan in their own portfolio for a certain period. Specifically, to qualify a balloon loan as a Balloon QM for small creditors, the lender must retain the loan in its portfolio for at least three years. This requirement ties the credit risk to the originating lender for a defined period, ensuring the loan remains on the lender’s books rather than being quickly sold to bypass the rules.

So the statement that small creditors must hold balloon QM in portfolio for three years reflects how the Balloon QM exemption works: it allows these lenders to offer a balloon-payment loan while maintaining compliance, provided they hold the loan themselves for three years. The other ideas conflict with this framework: balloon burdens aren’t required to be sold immediately; small creditors—not only large ones—can use this pathway; and balloon QM loans can be held in portfolio under this rule.