On May 28, the Consumer Financial Protection Bureau (the "CFPB") finalized important amendments to its ability-to-repay rule. Among other things, the amendments are intended to help small creditors comply with the law and preserve consumer access to credit from such creditors. "Small creditor" is defined in the rule to generally mean a creditor with no more than $2 billion in assets that (along with affiliates) originates no more than 500 first-lien mortgages covered under the ability-to-repay rule per year.

Under the original ability-to-repay rule issued in January of this year, the CFPB authorized certain balloon-payment mortgages to be designated as qualified mortgages if originated and held in portfolio by "small creditors" operating predominantly in rural or underserved areas. The CFPB’s amendments to the January rule make changes to further benefit small creditors as follows:

New Small Creditor Qualified Mortgage

The final rule adopts a fourth category of qualified mortgages for loans originated and held in portfolio for at least three years by small creditors (subject to certain limited exceptions). This provision applies to small creditors even if they do not operate predominantly in rural or underserved areas. These loans are not subject to the debt-to-income ratio limit (i.e., no greater than 43 percent) under the general qualified mortgage definition. However, such loans must meet the general restrictions on qualified mortgages with respect to loan features and points and fees, and small creditors will still need to evaluate a consumer’s debt-to-income ratio or residual income.

Safe Harbor Protection for More Small Creditor Mortgage Loans

The final rule raises the "safe harbor" threshold for certain qualified mortgages made by small creditors. For balloon loans and portfolio loans that are qualified mortgages, the threshold separating those loans that receive a safe harbor as opposed to those that merely receive a rebuttable presumption of compliance is raised from 1.5 percent above the average prime offer rate (the "APOR") to 3.5 percent above the APOR.

Transition Period for Balloon Loans

The final rule provides for a two-year transition period during which balloon loans made by small creditors may meet the qualified mortgage requirements. In particular, for two years from the effective date of the final rule, small creditors that do not operate predominantly in rural or underserved areas can offer balloon-payment qualified mortgage loans if they hold them in portfolio. During this two-year period, the CFPB intends to study whether the definitions of "rural" or "underserved" should be adjusted and to work with small creditors to transition to other products, such as adjustable-rate mortgages, that satisfy other qualified mortgage definitions.

While these changes represent progress for community banks and credit unions, there are legitimate concerns that they do not go far enough. Of particular note, many community banks and credit unions have more than $2 billion in assets, or make more than 500 first-lien covered mortgages per year, or both, and will thus not get any benefit from these changes. Industry representatives will undoubtedly seek further easing of the ability-to-repay requirements to help smaller institutions.

The final rule is effective January 10, 2014.