Our bank qualifies as a small creditor. We have one branch located in a Metropolitan Statistical Area (MSA), and all other branches are in rural or underserved areas, where we do the majority of our lending. Do we qualify as operating in a rural or underserved area for purposes of the qualified mortgage (QM) rule? For example, could we make an ARM loan that qualifies as a QM if the borrower’s debt-to-income ratio is 44%? We would hold the loan in portfolio, and it would not include any nontraditional characteristics (such as a balloon payment or interest-only payments).

Yes, we believe that your bank qualifies as a small, rural lender. The CFPB recently amended Regulation Z to establish that a small creditor just needs to originate one covered transaction in a rural or underserved area to qualify for the special provisions in Regulation Z for small, rural lenders. Because your bank is a small creditor that originated at least one consumer mortgage loan in a rural or underserved area in the last calendar year, it will qualify as a small, rural lender.

Also, as a small creditor, your bank qualifies for a special provision in Regulation Z permitting small creditors to originate portfolio QMs without applying the 43% debt-to-income ratio test — regardless of your lending activities in rural or underserved counties. A small creditor portfolio QM must be held in portfolio (with some exceptions) and must meet several other QM requirements, such as a prohibition on interest-only payments and a requirement to “consider at or before consummation the consumer’s monthly debt-to-income ratio or residual income and verifies the debt obligations and income . . . .” If you have considered and verified a borrower’s monthly debt-to-income ratio, the fact that it slightly exceeds 43% will not disqualify the loan from consideration as a small creditor portfolio QM loan.

For resources related to our guidance, please see:

Regulation Z, 12 CFR 1026.35(b)(2)(iii)(A) (To qualify as serving a rural or underserved area, a creditor must meet this test: “During the preceding calendar year, or, if the application for the transaction was received before April 1 of the current calendar year, during either of the two preceding calendar years, the creditor extended a covered transaction, as defined by § 1026.43(b)(1), secured by a first lien on a property that is located in an area that is either ‘rural’ or ‘underserved,’ as set forth in paragraph (b)(2)(iv) of this section.”)

CFPB Final Rule, Operations in Rural Areas Under Regulation Z, 81 Fed. Reg. 16074, 16078 (March 25, 2016) (“Under these revisions, a creditor operates in a rural or underserved area if the creditor extended at least one first-lien covered transaction on a property that is located in a rural or underserved area in the previous calendar year, or if the application for the transaction was received before April 1 of the current calendar year, during either of the two preceding calendar years.”)

CFPB Final Rule, Operations in Rural Areas Under Regulation Z, 81 Fed. Reg. 16074, 16075 (March 25, 2016) (“This interim final rule is implementing Congress’s intention to expand the cohort of small creditors that are eligible for a special provision of Regulation Z that permits origination of balloon-payment qualified mortgages under § 1026.43(f) and for an exemption from the requirement to establish an escrow account for higher-priced mortgages (escrow exemption) under § 1026.35(b)(2)(iii). . . . [T]he interim final rule also expands eligibility for a special provision which allows rural, small creditors to originate high cost mortgages with balloon-payment terms (balloon-payment high cost mortgages) under § 1026.32(d)(1)(ii)(C).”)

Regulation Z, 12 CFR 1026.43(e)(5)(i)(D) (The small creditor portfolio QM provisions define a “small creditor” as satisfying “the requirements stated in § 1026.35(b)(2)(iii)(B) and (C)” — having less than $2 billion in assets and originating no more than 2,000 first-lien covered transactions that subsequently were sold over the last calendar year. However, the small creditor portfolio QM provisions do not require a small creditor to serve a rural or underserved area — they omit any reference the rural/underserved provisions in § 1026.35(b)(2)(iii)(A).)

Regulation Z, 12 CFR 1026.43(e)(5)(i)(B) (Among many other requirements for a small creditor portfolio QM, the creditor must consider the consumer's monthly debt-to-income ratio or residual income and verify “the debt obligations and income used to determine that ratio,” and “the calculation of the payment on the covered transaction . . . shall be determined in accordance with paragraph (e)(2)(iv) .”)

Regulation Z, 12 CFR 1026.43(e)(2)(iv) (When calculating an applicant’s monthly payment, the creditor must take into account “the maximum interest rate that may apply during the first five years after the date on which the first regular periodic payment will be due; . . .”)