• Are Your Farmers Too Urban for Balloon Loans?
  • July 16, 2013 | Author: David Brown
  • Law Firm: Weltman, Weinberg & Reis Co., L.P.A. - Cleveland Office
  • According to the Consumer Financial Protection Bureau's (CFPB) ability-to-repay rules, farmers all across the United States may be a little too urban to take advantage of non-traditional loans offered by community banks. In other words, they don't live or operate in "rural" counties - as defined by Washington bureaucrats - even though they're "surrounded by cows, pigs, chickens and soybeans".1

    In an effort to end predatory lending and to promote responsible lending practices, the CFPB drafted the ability-to-repay rules which are aimed at preventing a second economic meltdown like the one we our country just survived. Unfortunately, the CFPB seems to be overreaching by also regulating non-traditional loans and mortgages issued by the nations' community banks to farmers who cannot otherwise obtain commercial credit.

    The CFPB's determination of which counties are rural, and which counties are not, is crucial in this respect as community banks in rural counties often offer short-term or balloon mortgages to farmers who use the funds to purchase property, livestock, equipment, seeds, labor, etc. These non-traditional loans are not eligible to be sold into the secondary market, so they are usually kept on the bank's books, giving community banks a vested interest in the loans and allowing them to work out a solution if repayment problems arise.2 As a result, restrictions on these types of loans are often viewed as unnecessary regulatory burdens by the community banking industry.

    Under the CFPB's new ability-to-repay rules, only balloon loans made by small creditors that operate predominantly in rural or underserved areas are deemed to be qualified mortgages. Unfortunately, as the Independent Community Bankers of America (ICBA) pointed out, the CFPBs definition of "rural" is too narrow, leaving out too many communities and unnecessarily cutting off access to credit.

    Ohio serves as the perfect example of the CFPB's restrictive stance. In that state, 44 of the 88 counties are normally considered rural for census and state government purposes.3 According to the CFPB, though, only 20 of Ohio's 88 counties are considered rural. This comes as a shock to farmers living in Van Wert, Wayne, Huron, Carroll and Auglaize counties - among others. Similarly, only 16 of Pennsylvania's 67 counties were designated as rural by the CFPB. WWR's remaining footprint states look like this: Florida (18/67); Illinois (52/102); Indiana (25/92); Kentucky (75/102); Michigan (49/83); New Jersey (0/21).4

    Moreover, "among the 75% of respondent community banks that currently make balloon-payment mortgage loans, less than half (46%) would qualify for the rule's provision for balloon mortgages."5 Also, 44% of self-identifying rural community banks do not qualify as "rural" under the CFPB's ability-to-repay rules.6

    Fortunately, the CFPB has announced that it will delay implementation of the new ability-to-repay rules for at least two years for banks that have less than $2 billion in assets and give fewer than 500 first-lien mortgages a year.7 During this two year "transition 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 types of products, such as adjustable-rate mortgages".8

    1 Stephen Koff, What is rural? Most Ohio farm counties still don't qualify, despite update, Cleveland.com, May 21, 2013 at 10:00 p.m., http://www.cleveland.com/open/index.ssf/2013/05/what-is-rural-updated-mortgage.html
    2 Staff Report, Survey: New mortgage rules would limit access to credit in rural areas, June 3, 2013, http://biz570.com/economy/banking/survey-new-mortgage-rules-would-limit-access-to-credit-in-rural-areas-1.1499310
    3 Stephen Koff, supra.
    4 CFPB, Final list of rural and underserved counties for 2013, http://files.consumerfinance.gov/f/201305-cfpb-final-list-2013-rural-or-underserved-counties.pdf
    5 Heather Anderson, Banker Survey: CFPB's QM Exemption Too Narrowly Defines 'Rural, Credit Union Times, May 10, 2013, http://www.cutimes.com/2013/05/10/banker-survey-cfpbs-qm-exemption-too-narrowly-defi
    6 Id.
    7Stephen Koff, What is rural? It won't matter, say regulators who grant reprieve for community banks, Cleveland.com, May 29, 2013 at 3:25 p.m., http://www.cleveland.com/open/index.ssf/2013/05/what-is-rural-it-wont-matter-s.html
    8 Id.