On September 21, 2015, the CFPB issued a final rule amending the definitions of "small creditor" and "rural and underserved areas" which should be beneficial to many community banks and other small mortgage lenders. Small creditors operating predominately in rural and underserved areas are exempt from compliance with certain provisions of the 2013 mortgage rules. For example, the current rules extend Qualified Mortgage status to loans that small creditors hold in their portfolio even if the consumer's debt to income ratio exceeds 43%, and small creditors can originate Qualified Mortgages with a balloon payment under a temporary exception. Small creditors that serve predominantly rural and underserved areas can originate Qualified Mortgages with a balloon payment, can originate high-cost mortgages with a balloon payment, and are not required to establish escrow accounts for higher-priced mortgages. The CFPB's stated goal for changing the definitions is to "increase the number of financial institutions able to offer certain types of mortgages in rural and underserved areas, and give small creditors time to adjust their business practice to comply with the rule."
The final rule will increase the origination limit from 500 first-lien mortgage loans to 2000. This amount will not include loans held in portfolio by the creditor and its affiliates. The CFPB made this change because of the importance of small creditors making portfolio loans that larger creditors may not be willing to make or for which a secondary market may not be available.
The current $2 billion asset limit for small-creditor status will remain, but the final rule requires that assets of mortgage originating affiliates now be included in this calculation. This is based on the creditor's total assets as of the end of the preceding calendar year, and the threshold will continue to be adjusted annually for inflation. The CFPB also expanded the definition of "rural area" to include census blocks that are not in an urban area, as opposed to the current list including counties only. Two new safe harbors are also added for making the determination of rural areas. First, a creditor may rely on two new automated tools that will be on the CFPB's website. Creditors may also continue to rely on the county lists on the CFPB's website. The determination of whether a creditor operates predominately in rural or underserved areas has been changed from any of the three preceding years to the immediately preceding year.
The final rule establishes a grace period for creditors that either exceed the origination limit, asset limit or fail to operate predominately in rural and underserved areas. If the determination is made as of December 31 of a certain year that the creditor no longer meets one or more of the requirements for treatment as a small creditor, then the creditor may continue to treat applications received before April 1 of the following year as though the small creditor status remains in place. In other words, the creditor will have until April 1 to comply with all requirements in place for lenders without small creditor status.
The temporary exemption for small creditors to make balloon-payment Qualified Mortgages currently is set to expire on January 10, 2016; however, the new, final rule extends the exemption to applications received before April 1, 2016.
These changes go into effect as of January 1, 2016.
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