CFPB Expands Rural & Small Creditor Definitions

As it said it would, the Consumer Financial Protection Bureau (CFPB) has taken steps to assist small lenders, particularly those in rural areas, comply more easily with the new mortgage rules that took effect at the beginning of last year.  Changes were proposed on Thursday to the ability-to-repay rule and its category of loans called Qualified Mortgages (QM) which CFPB said would, if enacted, increase the number of financial institutions able to offer certain types of mortgages in rural and underserved areas and help small creditors adjust their business practices to comply with the new rules.

Ability-to-repay requires that lenders generally make a reasonable and good faith determination that a borrower is able to pay back a loan.  Loans that qualify as QMs are presumed to comply with ability-to-repay requirements because of that category's laundry list of prohibited risky loan features. 

Because compliance with either ability to repay or QM presents particular changes for small and/or rural creditors they are allowed certain exceptions to the CFPB rules.  For instance, a provision in the ability-to-repay rule extends Qualified Mortgage status to loans that small creditors hold in their own portfolios, even if consumers' debt-to-income ratio exceeds 43 percent. Small creditors in rural or underserved areas can originate Qualified Mortgages with balloon payments even though balloon payments are otherwise not allowed. Also, under the Bureau's Escrows rule, eligible small creditors that operate predominantly in rural or underserved areas are not required to establish escrow accounts for higher-priced mortgages.

CFPB says it has monitored the mortgage market and has sought public feedback on these rules and in May of 2013 said it would study whether the definitions of rural and underserved should be adjusted.  In May 2014 the Bureau requested comments on the limit of originations that determined small creditor status.  The following proposed changes reflect the information CFPB has gathered.

• The loan origination limit for small-creditor status would be raised from 500 first-lien mortgage loans to 2,000 and would not count loans held by the creditor or its affiliates in its portfolio.

• The current asset limit for small-creditor status would remain at less than $2 billion (adjusted annually) in total assets as of the end of the preceding calendar year. However, the proposal would include the assets of the creditor's mortgage-originating affiliates in calculating whether a creditor is under the limit.

• The proposal would expand the definition of rural areas to include census blocks that are not in an urban area as defined by the Census Bureau.

• Creditors that exceeded the origination limit or asset-size limit in the preceding calendar year would be permitted a grace period and allowed to continue to operate as a small creditor in certain circumstances with respect to mortgage transactions with applications received prior to April 1 of the current calendar year. The proposal would create a similar grace period for creditors that no longer operated predominantly in rural or underserved areas during the preceding calendar year.

• The proposal would adjust the time period used in determining whether a creditor is operating predominately in rural or underserved areas, from any of the three preceding calendar years to the preceding calendar year.

• The temporary exception allowing eligible small creditors to make balloon-payment Qualified Mortgages and balloon-payment high-cost mortgages regardless of where they operate is scheduled to expire on January 10, 2016. CFB proposes to extend that exception to include balloon-payment mortgage transactions with applications received before April 1, 2016, giving creditors more time to understand how any changes will affect their status, and to adjust their business practices.

CFPB said there are other small or technical changes included in the proposal which can be read in its entirety on CFPB's website.  The Bureau is inviting public comment on the changes and these will be received until March 30, 2015.