Why it matters

Seeking to reassure smaller financial institutions struggling to cope with regulatory changes in the mortgage industry, the Consumer Financial Protection Bureau (CFPB) proposed changes intended to facilitate lending by small creditors. “Responsible lending by community banks and credit unions did not cause the financial crisis, and our mortgage rules reflect the fact that small institutions play a vital role in many communities,” CFPB Director Richard Cordray said in a press release. The proposed measures would broaden the definition of “small creditor” and “rural” under the Bureau’s mortgage rules, add a grace period for lenders to continue to operate as a small creditor under certain circumstances, and briefly extend the exemption allowing eligible small creditors to make balloon-payment qualified mortgages.

Detailed discussion

In 2013, the CFPB unveiled several new mortgage rules, most of which took effect in January 2014. One particularly troubling rule for smaller institution is the Ability-to-Repay rule. The CFPB’s new requirement mandated that lenders must make a reasonable and good faith determination that a borrower has the ability to repay his or her loan. Within the rule, the Bureau also established a category of loans presumed to comply with the Ability-to-Repay requirements known as qualified mortgages, or QMs.

Small creditors – a defined term under the rules – were granted certain leeway. After a year of implementation, and following a public comment period regarding the origination limit for small credit status, the CFPB proposed some tweaks to the rules.

In the most significant change, the proposal would expand two definitions under the mortgage rules. What constitutes a “small creditor” is changed, both pushing the loan origination limit from 500 first-lien mortgage loans to 2,000, and, most significantly, changing the way this number is calculated so as to exclude loans held in portfolio by the creditor and its affiliates. What constitutes “rural” is broadened to include any areas not defined as urban by the Census Bureau.

Mortgage affiliates would be included in the calculation of small creditor status, although the asset limit (of less than $2 billion in total assets as of the end of the preceding calendar year) would not be adjusted.

The CFPB proposal would add three-month grace periods for a bank’s status as a small creditor or rural or underserved creditor. If a small creditor exceeded the origination limit or asset-size limit in the preceding calendar year, it would still be allowed to operate under certain circumstances as a small creditor with respect to mortgage transactions with applications received prior to April 1 of the current calendar year. Creditors that no longer operated in rural or underserved areas during the prior calendar year would receive the same grace period.

Currently, the time period used to determine whether a creditor qualifies for rural or underserved creditor status by operating predominantly in rural or underserved areas is any of the three preceding calendar years. The Bureau’s proposed changes would narrow this to just the preceding calendar year.

Finally, the proposal would briefly extend the exemption that allows eligible small creditors to make balloon-payment QMs regardless of where they operate, from its currently scheduled January 10, 2016, expiration date to applications received before April 1, 2016, “giving creditors more time to understand how any changes will affect their status, and to adjust their business practices.”

To read the proposed rule changes, click here.