Once again, the CFPB has waited until the eleventh hour to issue an interim final rule that many community bankers worked countless hours to prepare for!  On Tuesday, March 22, 2016, the Bureau released the interim final rule to amend Regulation Z and implement provisions that many banks would have appreciated months ago.
The interim final rule will implement Congress’s intent to expand the number of small creditors eligible to meet the special provisions under Regulation Z to operate in “rural or underserved” areas and remove the limitation that eligible creditors must operate “predominately” in these areas.
Under the interim rule, a creditor satisfies the rural or underserved component if it originates one first-lien covered transaction secured by property located in a rural or underserved area in the preceding calendar year (or, if the application for the transaction was received before April 1 of the current calendar year, during either of the two preceding calendar years).  Under the existing rules, a creditor is required to originate more than half of their first-lien covered transactions in rural or underserved areas to qualify as a small creditor.
So how does this interim final rule impact your financial institution?

  • If you are a creditor still originating balloon loans under the Temporary Balloon Payment Qualified Mortgage rules (set to expire April 1, 2016), you may now qualify as a small creditor and be able to continue to originate balloon payment qualified mortgages under the Balloon Payment Qualified Mortgage option (1026.43(f)).
  • The current eligibility criteria for the escrow exemptions will be amended by this interim final rule which will allow some creditors that established escrow accounts solely to comply with the current rule to be eligible for an exemption.
  • The interim final rule defines the types of areas (counties or census blocks) for which a creditor may “apply” to the CFPB to receive a designation of “rural”. (Link to March 3rd blog article discussing application process)

The interim final rule is effective March 31, 2016, the day prior to expiration of the April 1st provision to eliminate balloon loans for many banks.  The CFPB implied that the goal was to get this interim final rule implemented quickly, “to avoid imposing unnecessary burdens and costs on newly eligible small creditors by having to change their business practices prior to April 1, 2016”.  The reality is most banks didn’t wait until the 11th hour, as the CFPB did, to prepare for this significant change; they have been working on this for months and many have already eliminated balloon loans from their loan product menu!  While this may be good news for many, it would have been even better news had it been delivered sooner.
Stay tuned, the interim final rule leaves the door open for more change down the road.
Submitted by Kelly Owsley