Banks have been operating under the CFPB's Ability-to-Repay Rule (ATR) since its effective date of January 10, 2014. The purpose of the Rule is to protect consumers from irresponsible lending practices by requiring lenders to make a good faith determination that the applicant has the ability to repay the loan for which he or she applies.

Under the ATR Rule, the CFPB created a special category of loans called "Qualified Mortgages" (QMs) which prohibit certain high-risk loan features.

When it adopted the ATR Rule and the QM Rule, the CFPB gave special treatment to certain small creditors, particularly small creditors that operated in predominantly rural or underserved areas.

For instance, the ATR Rule extended QM status to loans small creditors make and hold in their own portfolios, even if the debtor has a debt-to-income ratio in excess of 43%. Small creditors in rural or underserved areas can originate mortgage loans with balloon payments, despite the general prohibition on balloon payment loans and have those loans receive QM treatment. Similarly, the CFPB's HOEPA Rule allows small creditors operating in rural or underserved areas to originate those high-cost loans with balloon payments. Also, small creditors in rural or underserved areas are exempted under the CFPB's Escrow Rule from the requirement to establish escrow accounts for higher-priced mortgage loans.

After the January 10, 2014 effective date of the ATR and related rules, the CFPB continued to monitor the impact of those rules on the availability of credit, particularly in those rural or underserved markets serviced by small creditors.

In relatively quick fashion, the CFPB proposed certain amendments that impact, and for the most part, benefit, small creditors in rural or underserved markets. Those proposed amendments would:

  • Expand the definition of "small creditor;"
  • Include mortgage affiliates in the asset limit calculation for small creditor status;
  • Expand the definition of "rural" areas;
  • Provide grace periods when small creditors lose their rural or underserved status;
  • Create a one-year (as opposed to the current three-year) qualifying period for rural or underserved status; and
  • Provide eligible small creditors with additional time to make balloon payment loans.

Each of these proposed amendments is discussed below.

The CFPB's various Mortgage Rules make several concessions to "Small Creditors," particularly those that do a substantial portion of their business in "rural" or "underserved" areas. For instance, the ATR Rule extends QM status to loans that small creditors hold in their own portfolios, even when the borrower's debt-to-income ratio exceeds 43%. Small creditors in rural or underserved areas can originate Qualified Mortgages with balloon payments even though balloon payments are generally prohibited for Qualified Mortgages. Similarly, small creditors that operate predominantly in rural or underserved areas, under HOEPA, can originate high-cost loans with balloon payments. Also, under the CFPB's Escrow Rule, small creditors that operate predominately in rural or underserved areas are not required to establish escrow accounts for higher-priced mortgages. So there are significant potential benefits to being a "small creditor" doing substantial business in "rural" or "underserved" areas.

Today, a small creditor is defined as one that:

  • During the preceding three calendar years extended more than 50% of its total covered transactions secured by a first-lien on properties located in counties that are either "rural" or "underserved;"
  • During the preceding calendar year, together with its affiliates, originated 500 or fewer covered loan transactions; and
  • As of the end of the preceding calendar year had total assets of less than $2 billion.

Under the CFPB's proposal, a number of things would change. For instance, the loan origination limit would be increased from 500 to 2,000 and loans held in portfolio would be excluded. Loans made by an affiliate would be counted toward the 2,000 limit, but affiliate loans held in portfolio could be excluded.

The $2 billion asset limit would remain the same, but assets of any mortgage-originating affiliates would be included in the total.

In addition to the list of rural counties that the CFPB supplies, the definition of "rural" will include census blocks that are not in an urban area defined by the Census Bureau.

The proposal would provide a three month grace period into the next year for any creditor that exceeds either the origination limit or the asset limit in the previous year. Loan originated following the small creditor rules during the three month grace period would receive Qualified Mortgage status, thus giving the creditor time to adjust its policies and procedures.

Another change would adjust the time period for determining whether a creditor is operating in a rural or underserved area from any of the three preceding years to simply the immediate preceding year. While a simpler analysis, this could prove to be a more restrictive approach.

Finally, the January 10, 2016 expiration date for small creditors (no rural or underserved requirement) to make balloon-payment loans as Qualified Mortgages would be extended to April 1, 2016.

It is encouraging to see the CFPB take seriously the impact that its rules have on smaller banks. It is also good to note that the CFPB is concerned about the possibility that its rules could cause the availability of credit in smaller markets to contract. If adopted as proposed, these changes could help on both fronts. We will keep you posted as to the final outcome.

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