On March 22, the CFPB issued an interim final rule that will allow more small creditors to qualify for special rural or underserved crediting provisions and exemptions. The rule implements Congress’ December 2015 Helping Expand Lending Practices in Rural Communities (HELP) Act, which offers relief to small creditors that operate in rural and underserved areas. The new rule takes effect on March 31, 2016.
The interim final rule broadens the number of small creditors allowed to originate qualified mortgages with balloon-payments, even though the Ability-to-Repay rule generally precludes loans that that have features deemed to be risky such as balloon-payments from being considered qualified mortgages. Similarly, the special provisions broaden the class of small creditors that may issue high-cost mortgages with balloon-payments. The interim final rule also expands the cohort of small creditors eligible for the exemption from the requirement to establish an escrow account for higher-priced mortgages.
Before the HELP Act, only small creditors (i.e., lenders that made no more than 2,000 first-lien covered transactions in the previous year and have less than $2 billion in assets) that operate predominantly in rural or underserved areas were eligible for these special provisions and exemptions. Moreover, the prior rules interpreted “predominantly” to mean that a small creditor made more than 50 percent of its covered mortgage loans on properties located in rural or underserved areas during the prior calendar year. The new rule relaxes the eligibility criteria for small creditors by removing the limitation that such creditors must operate predominantly in such areas.
Under the new rule, creditors are able to take advantage of the special provisions and exemption if they originate a single mortgage loan on a property in a rural or underserved area in the previous 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. As a result, the final rule significantly expands the number of small creditors eligible for these special provisions and for the escrow exemption.
Based on 2013 data, the CFPB estimated that 4,100 out of the 10,400 creditors considered small creditors would qualify for the rural and underserved carve-outs under the prior rule. The CFPB estimates that an additional 6,000 small creditors will now be eligible for these special provisions under the new final interim rule. In addition, the CFPB anticipates that the remaining 300 small creditors that did not make any loans in rural or underserved areas will do so in the future to take advantage of the special provisions and exemption.
The final interim rule is the second of two rules the CFPB issued to implement the HELP Act. On March 3, 2016, the CFPB published a rule that establishes a process by which a creditor may identify an area that has not been designated by the CFPB as a rural area and apply for such area to be so designated. On account of the new rule, the CFPB believes that this petition process will be of limited value because only small creditors that do not make even a single loan in a census block or county which is already designated as rural will find it helpful.
A copy of the final rule is available at: http://files.consumerfinance.gov/f/201603_cfpb_operations-in-rural-areas-under-the-truth-in-lending-act-regulation-z-interim-final.pdf.