On January 29, 2015 the Consumer Financial Protection Bureau (CFPB) proposed several changes to Regulation Z that impact small creditors, particularly in rural and underserved areas. The proposal would increase the number of financial institutions able to offer certain types of Qualified Mortgages (QM) in rural and underserved areas.
Ability -to-Repay rules, which took effect in January 2014, require lenders to make a reasonable and good-faith determination that prospective borrowers have the ability to repay their loans. Under the Ability-to-Repay rule, QMs are presumed to comply with ability-to-repay requirements.
There are a variety of provisions in the rules that affect small creditors, as well as small creditors that operate predominantly in rural or underserved areas.

  • 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 with Qualified Mortgages.
  • Under the Bureau’s Home Ownership and Equity Protection Act rule, small creditors that operate predominantly in rural or underserved areas can originate high-cost mortgages with balloon payments.
  • 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.

The proposed rule would:

  • Expand the definition of “small creditor”:Under the proposal, the loan origination limit for small-creditor status would be raised from 500 first-lien mortgage loans to 2,000 and would exclude loans held in portfolio by the creditor and its affiliates.
  • Include mortgage affiliates in calculation of small-creditor status:The proposal would not change the current asset limit for small-creditor status, which is set 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.
  • Expand the definition of “rural” areas:In addition to counties that are considered to be “rural” under the CFPB’s current mortgage rules, the proposal would expand the definition of “rural” to include census blocks that are not in an urban area as defined by the Census Bureau. good news.
  • Provide grace periods for small creditor and rural or underserved creditor status:Creditors that exceeded the origination limit or asset-size limit in the preceding calendar year would be allowed to operate, in certain circumstances, as a small creditor 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.
  • Create a one-year qualifying period for rural or underserved creditor status: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.
  • Provide additional implementation time for small creditors:Eligible small creditors are currently able to make balloon-payment Qualified Mortgages and balloon-payment high-cost mortgages regardless of where they operate, under a temporary exemption scheduled to expire on January 10, 2016. The proposal would extend that period 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.

The proposal contains a mix of good news and not so good news. Review the proposal carefully and submit a comment letter that extols of the virtues of the positions you support and condemns the rest.
The comment period ends on March 30, 2015. A copy of the proposal is available here.