• CFPB Proposal to Expand Mortgage Lending in Rural and Underserved Areas
  • March 30, 2015 | Author: Craig N. Landrum
  • Law Firm: Jones Walker LLP - Jackson Office
  • In the several mortgage rules issued in 2013, the CFPB incorporated a variety of provisions affecting small creditors, including those that operate predominately in rural or underserved areas. For instance, Qualified Mortgage status may be granted to loans that small creditors (defined as $2 billion or less, among other requirements) hold in their own portfolios, even if the consumer’s debt-to-income ratio exceeds 43%. Small creditors in rural or underserved areas can originate Qualified Mortgages with balloon payments even though balloon payments are not otherwise allowed with Qualified Mortgages. Similarly, small creditors that operate predominately in rural or underserved areas can originate certain high-cost mortgages with balloon payments. Finally, eligible small creditors that operate predominately in rural or underserved areas are not required to establish escrow accounts for higher-priced loans.

    As a result of its study announced in May 2013 of whether the definition of "rural" or "underserved" should be adjusted, the CFPB proposed on January 29, 2015, a number of proposed amendments to the mortgage rules affecting small creditors. Under the proposal:

    • The origination limit for small creditor status would be raised from 500 first-lien mortgage loans to 2,000 mortgage loans and would exclude loans held in portfolio by the creditor and its affiliates;
    • The definition of "rural" is expanded to include census blocks that are not in an urban area as defined by the Census Bureau;
    • Creditors that exceed the origination limit or asset size limit of $2 billion in the preceding calendar year would be allowed to operate as a small creditor with respect to applications received prior to April 1 of the current calendar year; and
    • Small creditors making balloon payment Qualified Mortgages and balloon payment high-cost mortgages, regardless of where they operate, under a temporary exemption set to expire on January 10, 2016, would be extended to April 1, 2016.
    It is estimated that the number of small creditors that qualify under the proposed rules would increase from approximately 9,700 to approximately 10,400 of the 11,150 creditors estimated by the CFPB to be engaged in mortgage lending. These 700 creditors originated about 10% of the mortgage loans originated in 2013. The number of rural small creditors would increase from about 2,400 to about 4,100. These lenders originated about 220,000 mortgages. Consumers are expected to benefit from an anticipated increase in access to credit although there may be a potential cost from the reduction in consumer protection.

    Since balloon loans held in portfolio are a staple of small creditors, the proposed changes should enhance credit availability for creditors operating in markets that make it difficult to offer conventional mortgages sold in the secondary market. Also, such credit may avoid costs associated with installing and maintaining variable rate mortgages as well as the risk associated with rate increases.