The Consumer Financial Protection Bureau (CFPB) has dramatically reduced the requirements for qualifying as small creditor serving rural or underserved areas under Regulation Z.
The CFPB’s 2013 Ability to Repay rule permitted small creditors operating predominantly in rural or underserved areas to originate qualified mortgages and high-cost mortgages with balloon-payment features and to exempt them from the escrow account requirement for higher-priced mortgage loans. To qualify for these exceptions, small creditors had to show that over half of their mortgages were secured by properties in areas that the CFPB had designated as “rural or underserved.” There was a temporary exception permitting small creditors to make balloon loans, regardless of location, but that exception expired on April 1, 2016.
Under the FAST Act, enacted at the end of 2015, Congress removed the word “predominantly” from this test. The CFPB’s rule implementing this change establishes that a small creditor need originate just one covered transaction in a rural or underserved area to qualify for these exceptions.
Small Creditor Test
A creditor is a small creditor if, during the prior calendar year:
- The creditor and its affiliates together originated no more than 2,000 first-lien covered transactions that were sold, assigned or otherwise transferred (with no limit on loans held in portfolio), and
- The creditor, together with its affiliates that regularly extend first-lien covered transactions, have less than $2 billion in assets (adjusted annually for inflation).
Generally, a covered transaction is a consumer credit transaction that is secured by a dwelling. Certain mortgage loans that are exempt from the Ability to Repay Rule, such as open-end lines of credit, are not covered transactions.
Rural-or-Underserved Test
The former test required small creditors to extend more than half of their covered residential mortgage loans on properties located in rural or underserved areas.
The new test requires just one covered residential mortgage loan to be made in a rural or underserved area in order to qualify for these exceptions — with respect to all of the lender’s residential mortgages. This change became effective March 31, 2016.
Grace Period
Additionally, there is a grace period. For loan applications received before April 1 of a particular year, a creditor may use either of the two prior calendar years to show that it qualifies as a small creditor or as serving a rural or underserved area.
The CFPB’s website contains a number of resources regarding its final rule, including a factsheet and a chart illustrating when a creditor is eligible to make different types of qualified mortgages.