The CFPB has issued a final rule that revises the definitions of “small creditor” and “rural areas” under Regulation Z of the Truth in Lending Act (TILA). The final rule is effective January 1, 2016. We previously reported on the CFPB proposal to adopt these amendments.

The CFPB believes that small creditors play an important role in the mortgage industry because they generally try to maintain ongoing relationships with customers in a single community. The CFPB created special small creditor provisions with regard to certain Regulation Z requirements. Certain provisions apply to small creditors in general, while other provisions apply to small creditors that operate predominantly in rural or undeserved areas.

More specifically, small creditors are able to do the following:

  • Extend qualified mortgages that are not subject to the 43 percent debt-to-income ratio or the underwriting requirements of Appendix Q under the ability to repay (ATR) rule, if the loans are retained in portfolio;
  • Extend balloon-payment qualified mortgages, if they operate predominantly in rural or underserved areas;
  • Extend balloon payment qualified mortgages under a temporary provision whether or not they operate predominantly in rural or underserved areas;
  • Include balloon-payment features in high-cost mortgage loans that satisfy certain small creditor qualified mortgage loan provisions; and
  • Avoid the requirement to establish escrow accounts for certain higher-priced mortgage loans.

Additionally, the annual percentage rate ceiling for a first lien loan to be a non-higher priced mortgage loan that is eligible for the qualified mortgage safe harbor under the ATR rule is higher for small creditors than other creditors (i.e., less than 3.5 percentage points above a benchmark rate as opposed to less than 1.5 percentage points above the benchmark rate).

To increase the number of financial institutions eligible for these special provisions under Regulation Z, the final rule does the following:

  • Revises the definition of “small creditor” by increasing the loan origination limit for determining eligibility for small-creditor status from 500 originations of covered transactions secured by a first lien to 2,000 originations. Significantly, originated loans held in portfolio by the creditor and its affiliates are excluded from the 2,000 loan cap.
  • Includes the assets of the creditor’s affiliates that regularly extended covered transactions in the calculation of the $2 billion asset limit for small-creditor status. The CFPB took this step to prevent larger creditors from attempting to fit within the small creditor provisions through organizational changes.
  • Expands the definition of “rural area” to include either: (a) a county that meets the current definition of a rural county; or (b) a census block that is not in an urban area as defined by the U.S. Census Bureau. Additionally, the rule allows creditors to rely on a new automated tool provided on the CFPB website to determine whether properties are located in rural or underserved areas, or on the Census Bureau’s website to assess whether a particular property is located in an urban area (based on the Census Bureau’s definition).

However, the final rule reduces the time period used to determine whether a creditor is operating predominantly in rural or underserved areas from any of the three preceding calendar years to the preceding calendar year. To address burdens based on this change the rule adds a grace period in some circumstances, allowing a creditor that does not meet one or more of the requirements for a small creditor or a creditor that operates predominantly in rural or underserved areas in the preceding calendar year to still act as such a creditor with respect to applications for covered transactions received before April 1 of the current year.

With regard to the exemption from the requirement to establish an escrow account for a higher priced mortgage loan, the rule ensures that creditors who established escrow accounts solely to comply with the current rule will still be eligible for this exemption if they qualify under the rule as a small creditor operating predominantly in rural or underserved areas.

Finally, the rule extends the sunset date of the temporary provisions for small creditors to make balloon-payment qualified mortgage loans and high cost mortgage loans without regard to whether they operate predominantly in rural or underserved areas to transactions with applications received before April 1, 2016.