By Katalina M. Bianco, J.D.
The Consumer Financial Protection Bureau has issued an interim final rule that broadens the availability of certain special provisions for small creditors that operate in rural or underserved areas. The interim rule, which takes effect March 31, 2016, implements Congress’s recent legislation, the Helping Expand Lending Practices in Rural Communities (HELP) Act.
The HELP Act was a legislative response to concerns that the CFPB’s series of mortgage regulations issued in January and May 2013 had impacted small creditors operating in rural or underserved areas.
“Predominantly operated." Although the 2013 mortgage regulations imposed, among other things, an ability-to-repay requirement, a qualified mortgages provision, a prohibition on balloon payments for high-cost mortgages, and required escrow accounts for higher-priced mortgages, the CFPB fine-tuned the mortgage regulations to allow small creditors that “predominantly operated” in rural or underserved areas to originate qualified mortgages and high-cost mortgages with balloon payments. The small creditor provisions also did not require these creditors to establish escrow accounts for higher-priced mortgages. The bureau construed “predominantly operated” to mean that the small creditor made more than half of its covered mortgage loans on properties located in rural or underserved areas in the prior calendar year.
The HELP Act amended the “predominantly operated” requirement to provide that a small creditor now will be eligible for these provisions if it operates in a rural or underserved area, even if that is not the predominant area of its operations.
Cordray comments. CFPB Director Richard Cordray said, “The Consumer Bureau today has acted to implement the recent law that extends to more small creditors the specific provisions for operating in rural or underserved areas. This rule provides broader eligibility for lenders serving those areas to originate balloon-payment qualified and high-cost mortgages.”
ICBA weighs in. The Independent Community Bankers of America voiced its support of the CFPB rule, stating that the bureau's "updated rule expands the number of community banks eligible for exemptions on mandatory escrows for higher-priced mortgages and Qualified Mortgage safe harbor status for balloon payment mortgages they hold in portfolio. Community banks that are small creditors will be able to continue to offer balloon payment mortgages and be exempt from mandatory escrow rules for higher-priced mortgages if they make at least one loan in a rural or underserved area. This will allow many more community banks in rural or underserved areas to meet the needs of their customers and communities." The ICBA added, "“The CFPB rule marks another important step in the enactment of ICBA-advocated regulatory changes broadening small-creditor and rural designations under the CFPB’s Regulation Z mortgage rules."
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