Written by Eliott C. Ponte, Regulatory Compliance Counsel
QM Balloon Loans and Rural or Underserved Areas
Yesterday, the CFPB issued an interim final rule that expands certain special provisions for small creditors that operate in rural or underserved areas. The CFPB issued these changes to implement the Helping Expand Lending Practices in Rural Communities Act of 2015 (HELP Rural Communities Act of 2015), which Congress enacted on December 4, 2015. The amendments affect Regulation Z in two ways.
First, the amendment changes the definition of “rural.” Regular blog readers may recall that we discussed a previous change to the definition of small creditor, including what is meant by “rural” area, last year. The interim final rule establishes a new temporary application process — or third method — to have an area designated by the CFPB as a rural area for purposes of Regulation Z. This temporary application process will expire on December 4, 2017. Any area classified under this method will no longer be effective after December 4th..
Second, the amendment changes the eligibility of certain small creditors that operate in a rural or underserved areas for special provision that permit the (i) origination of balloon-payment qualified mortgages, (ii) balloon-payment high cost mortgages, and (iii) for an exemption requirement to establish a higher-priced mortgage. Prior to the HELP Rural Communities Act of 2015, the TILA escrow rule offered relief for small creditors operating predominantly in rural or underserved markets. Predominantly was defined as a credit union, in the preceding year, that originated more than 50% of its first lien mortgages in counties that are determined to be “rural” or “underserved.” The interim final rule removes the word predominantly from the definition of small creditor. Thus, as of March 31, 2016, a credit union in the preceding year that originated at least one first lien mortgage in counties that are determined to be “rural” or “underserved” (instead of over 50%) is eligible for the “small creditor” exemption. Note that this change does not affect small creditor qualified mortgages, as this type of qualified mortgage does not require a loan be made in a rural or underserved market. See 12 C.F.R. § 1026.43(e)(5)(i)(D).
So why is this important? Right now, all credit unions that meet the current asset and loan origination threshold requirements (assets below $2.060 billion, non-portfolio mortgage originations below 2,000, both as combined with certain affiliates), as detailed in section 1026.35(b)(2)(vi)(B) and (C), may make loans that are qualified mortgages with a balloon payment feature, as detailed in section 1026.43(f). After April 1, 2016, only the “small creditor” credit unions that also meet the rural standard set forth in section 1026.35(b)(2)(vi)(A) will continue to be able to make balloon payment qualified mortgages. By implementing this statutory change, more credit unions may qualify for the flexibility of the permanent balloon payment QM by offering at least one first lien mortgage in a rural or underserved area and continuing to meet the rule’s asset and origination thresholds. For a good discussion on these different kinds of QM loans, check out this article from the Minneapolis Federal Reserve.
Update: Shortly after this blog posted, the CFPB released an executive summary on the interim final rule. Compliance officers briefing executives on the interim final rule may find this resource helpful.
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Compliance School 2016!
If you attended the NAFCU Regulatory Compliance School last week, it was a pleasure seeing you! I thoroughly enjoyed getting to know everyone; please keep in touch. If you are one of our blog readers who did not attend this year’s compliance school, look at all the fun you missed:
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