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From Banking and Finance Law Daily, January 29, 2015

CFPB moves to expand mortgage availability in rural, underserved areas

By Richard A. Roth, J.D.

The Consumer Financial Protection Bureau is proposing regulation amendments that would broaden the definition of “small creditor” in a way the bureau believes will encourage responsible lending in rural and underserved markets. Small creditors are permitted by the CFPB’s Ability-to-Repay and Home Ownership and Equity Protection Act rules to make mortgage loans with features that other lenders may not use, and the proposal would expand this ability to a larger group of lenders.

The Ability-to-Repay rule, created by amendments to Reg. Z—Truth in Lending (12 CFR Part 1026), generally requires mortgage lenders to undertake an analysis to determine that a borrower has the ability to repay a loan before extending credit. The rule also sets the criteria for what is a Qualified Mortgage, prohibits QMs from including features seen as risky or abusive, and provides that a lender that makes a QM is presumed to have carried out the ability to repay analysis.

The CFPB pointed to four ways its rules currently ease restrictions on small creditors:

  1. A small creditor can treat a loan as a QM even though the borrower’s debt-to-income ratio exceeds 43 percent if the loan is held in the creditor’s portfolio.

  2. Small creditors in rural or underserved areas can make QMs with balloon payments, which otherwise is not permitted.

  3. Small creditors in rural or underserved areas can originate high-cost mortgages with balloon payments, which otherwise is not permitted.

  4. Small creditors in rural or underserved areas need not require escrow accounts for higher-priced mortgages.

The proposal would allow more lenders to take advantage of these reduced restrictions.

Expanded coverage. The CFPB is proposing to raise the limit on what is considered to be a small creditor. Currently, a small creditor is one that, together with its affiliates, originated no more than 500 first-lien mortgage loans during the previous year. The bureau is proposing to quadruple that limit to 2,000. Moreover, loans held in portfolio would not count toward the limit.

On the other hand, a second criterion would be tightened. A small creditor now must have less than $2 billion in assets at the end of the previous year. Under the proposal, the assets of any mortgage-lending affiliates would be included in that total. The proposal emphasizes that only assets of mortgage-lending affiliates would be considered; assets of other affiliates would not count. The $2 billion threshold would continue to be subject to an annual adjustment for inflation.

The proposal also would allow more creditors to be considered to be operating in rural areas. The definition of “rural” would be expanded to include all census blocks not in urban areas.

Implementation changes. Under the proposal, the time period used to determine whether a creditor is operating in a rural or underserved area would be changed. Instead of the current standard of any of the three previous years, only the preceding year would be considered.

The bureau also wants to give creditors a grace period if their operations grow or change so that they would lose their small creditor or rural or underserved area benefits. A small creditor that exceeds the origination or asset thresholds at the end of a year will, in some circumstances, be permitted to rely on its prior status for mortgage loans applied for until April 1 of the following year. Creditors that in the past operated predominantly in rural or underserved areas would receive a comparable grace period.

Also, small creditors would be given a few more months during which they could make mortgage loans with balloon payments. Currently, that ability is scheduled to expire on Jan. 10, 2016. The proposal would extend the deadline to April 1, 2016.

The deadline for comments on the proposal is March 30, 2015.

ICBA support. The Independent Community Bankers of America strongly praised the proposal, saying it will help community banks meet customers’ mortgage needs. According to the ICBA, increasing the loan origination threshold would ease community bank compliance burdens. Expanding the definition of “rural” would help banks meet rural homeowners’ “unique mortgage needs” by allowing the banks to make QMs with balloon features.

MainStory: TopStory ConsumerCredit CFPB Loans Mortgages TruthInLending

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