CFPB Loosens Rules For Small Creditors Serving Rural Areas

Posted by Patrick Barnard on January 30, 2015 No Comments
Categories : Residential Mortgage

The Consumer Financial Protection Bureau (CFPB) is relaxing some of its mortgage rules in order to make it easier for small lenders – including community banks and credit unions – to serve rural and underserved areas.

Among the most significant of the changes, the CFPB is changing the definition of ‘small creditor’ in its rules to include lenders that originate up to 2,000 loans per year. Previously, a lender had to originate fewer than 500 first-lien mortgage loans per year in order to meet this definition. The new definition excludes loans held in portfolio by the creditor and its affiliates.

The CFPB hopes that by changing the definition, it will expand the number of lenders able to offer certain types of mortgages in rural and underserved areas.

As per a press release, the proposal would not change the current asset limit for small-creditor status, which is set at less than $2 billion (adjusted annually) in total assets as of the end of the preceding calendar year. However, it would include the assets of the creditor's mortgage-originating affiliates in calculating whether a creditor is under the limit.

In addition, the CFPB is proposing to expand the definition of ‘rural’ areas to include census blocks that are not in an urban area, as defined by the Census Bureau. This should significantly widen the geographical area in which small creditors can offer loans.

The CFPB is quick to point out that although it is loosening the credit box somewhat for underserved borrowers, this is, by no means, a regression back to the risky lending practices that helped bring about the financial crisis that began in 2008.

‘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,’ says Richard Cordray, director of the CFPB, in the release. ‘[This] proposal will help consumers in rural or underserved areas access the mortgage credit they need while still maintaining these important new consumer protections.’

The CFPB points out that these small creditors already enjoy exemptions from certain CFPB rules that apply to larger lenders. For example, small creditors operating in rural areas are exempt from the bureau's ability-to-repay rule in that they can originate loans that exceed a debt-to-income ratio of 43% and still have them qualify under the bureau's qualified mortgage (QM) rules, providing those loans are held in portfolio.

What's more, small creditors in rural or underserved areas can originate QMs with balloon payments, even though balloon payments are otherwise not allowed with QMs.

Similarly, under the bureau's Home Ownership and Equity Protection Act, small creditors that operate predominantly in rural or underserved areas can originate high-cost mortgages with balloon payments. What's more, under the bureau's escrows rule, eligible small creditors that operate predominantly in rural or underserved areas are not required to establish escrow accounts for higher-priced mortgages.

The CFPB hopes that by expanding the areas where these small creditors can operate, as well as expanding the definition of ‘small creditor’ so more of them can participate, that it will result in increased uptake of mortgages by consumers.

The CFPB says in its release that the proposed rule changes are the result of feedback from the mortgage industry, which it began soliciting in May 2014.

In a statement, Bob Davis, executive vice president of mortgage markets for the American Bankers Association (ABA), says the proposed changes ‘are sensible measures that will make it easier for certain hometown bankers to meet the mortgage credit needs in their communities.’

‘We appreciate that the CFPB responded favorably to ABA's recommendations to expand the definitions of 'rural area' and to increase the number of loans an institution can make before falling out of the 'small' category,’ Davis says. ‘If these proposals become final rules, many communities will enjoy more choice and expanded competition for mortgage credit.

‘[The] ABA intends to maintain its constructive engagement with the bureau and the Congress to achieve broader relief for the more than 60 percent of the U.S. population not impacted by these changes,’ he adds. ‘Consumers in all parts of the nation deserve relief from overly restrictive rules and unintended consequences of recent reforms.’

The Association of Mortgage Professionals (NAMB) also praised the changes but took its comments one step further by advocating for more relaxation of the CFPB's mortgage rules – in particular, those that ‘unfairly’ target mortgage professionals.

‘Any regulation relief that helps a group of consumers is a good start,’ says John Councilman, president of NAMB, in a statement. ‘But it's way past time for Director Cordray and the CFPB to acknowledge that mortgage professionals were not responsible for causing the financial crisis.’

‘If Director Cordray truly wants to help serve the underserved and rural areas, he and his agency should offer real regulatory relief to the thousands of mortgage professionals who are both small business owners and the best advocates for consumers,’ Councilman says. ‘The real irony under the current set of rules is that many community banks and credit unions essentially act as mortgage brokers because they operate as indirect lenders by outsourcing their mortgage underwriting and using a warehouse line to fund loans.’

‘If Director Cordray truly wants to help consumers make sure that healthy market competition with consumer protections are maintained, he should use the authority given to the CFPB by the Dodd-Frank Act to eliminate the inclusion of creditor payments to mortgage brokerage entities in the 3 percent cap on points and fees,’ Councilman adds. ‘If the CFPB does not fix this issue soon, low and moderate income consumers may be harmed by paying a higher mortgage rate than they would otherwise qualify for, thereby creating a potential disparate impact.’

To check out the full set of proposed rules, click here.

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