The Consumer Financial Protection Bureau (“CFPB”) this week issued a final rule making a series of changes to its mortgage guidelines for small creditors and creditors in rural and underserved communities.

In a series of rulemakings issued pursuant to the Dodd-Frank Act, the CFPB has applied special standards for mortgages extended by small creditors and creditors operating in rural and underserved communities.  In these rulemakings, the CFPB stated that it likely would revisit its regulatory definitions of small creditors and creditors operating in rural and underserved communities.  Several rules issued by the CFPB, including those related to escrow requirements for higher-priced mortgage loans (“HPML”), ability-to-repay requirements (“ATR”), and requirements under the Home Ownership and Equity Protection Act (“HOEPA”), contain these terms and are thus subject to the CFPB’s regulatory definitions. 

Under the final rule issued Sept. 21, covered creditors will see the following changes:

The definition of rural will be expanded to include census blocks that are not in an urban area as defined by the Census Bureau, effectively adding a second prong to the definition.  This is a major change from the current definition, under which a property must be located in a county defined as rural to qualify for certain exemptions.  With the above rule, a property may be defined as rural either by the county-based approach or by the census-block approach.  Additionally, creditors will be allowed to rely on automated tools provided on the Census Bureau’s website to determine whether properties are located in rural or underserved areas and whether a particular property is located in an urban area.

  • The loan origination limit for small-creditor status will be raised from 500 first-lien covered transactions to 2,000 first-lien covered transactions.  This applies to loans originated by a creditor or its affiliates. Of additional significance, covered transactions will exclude loans held in portfolio by a creditor and its affiliates.
  • The $2 billion asset limit for small-creditor status will now encompass both a creditor’s assets and the assets of its affiliates that originate mortgage loans – a new “anti-evasion” measure designed to stop larger entities from structuring transactions to allow its affiliates to receive small creditor status. In calculating assets for the asset limit, a creditor will count only the assets of those affiliates that regularly extended first-lien covered transactions and not the assets of other affiliates.  A creditor that exceeded that asset limit in the previous calendar year may operate as a small creditor for purposes of transactions for which applications were received before April 1 of the current calendar year, under some circumstances. This grace period is available to creditors that exceeded the asset limit in the preceding calendar year but had not exceeded it in the calendar year before the preceding calendar year.
  • The time period for determining whether a creditor operates predominantly in a rural or underserved area has changed from any of the three preceding calendar years to only the immediately preceding calendar year.  As with small-creditor status, there is a grace period for creditors that did not receive the status of a creditor serving rural or underserved areas in the preceding calendar to operate under this status for purposes of transactions for which applications were received before April 1 of the current calendar year.  As stated in the final rule, “a creditor could find out on or close to December 31st that it was not operating predominantly in rural or underserved areas during that calendar year,” and such a creditor could not easily shift its practices to apply to comply with HPML standards.  Accordingly, the new rule allows creditors to rely on transactions from either the preceding calendar year or the next-to-last calendar year when making a higher-priced mortgage before April 1.
  • Creditors who established escrow accounts to comply with the higher-priced mortgage loan escrow requirement may receive an exemption from that requirement, available to small creditors operating in rural and underserved areas, if they are now eligible for the exemption under the expanded definitions of small creditor and creditor operating in rural and underserved areas.
  • The rule creates a four-month extension for a current transition period that allows some small creditors to make balloon-payment qualified mortgages and balloon-payment high-cost mortgages –  as currently defined under the CFPB’s mortgage rules – regardless of whether they operate predominantly in rural or underserved areas.  The new transition period will include covered transactions for which the application was received before April 1, 2016, rather than covered transactions consummated on or before January 10, 2016.

The final rule will take effect January 1, 2016.