A Deeper Dive into the CFPB’s Proposed Amendments on Small Creditors

Written by Brandy Bruyere, Regulatory Compliance Counsel

Monday’s blog provided a brief overview of the Consumer Financial Protection Bureau’s (CFPB’s) recently proposed amendments to its exemptions for small creditors including adjusting the definition of rural areas. We did not want to bog everyone down on a Monday, so today we will go a little more in depth on this proposal.

First, recall that three mortgage rules have exemptions or other carve-outs for small creditors:

• the rule pertaining to high-cost mortgages has a prohibition against balloon payment features on some of these mortgages but contains an exemption for small creditors;
• the ability-to-repay/qualified mortgage (ATR/QM) rule allows small creditors to make certain portfolio and balloon payment QMs; and
• the higher-priced mortgage loan (HPML) escrow account rule which also has an exemption for small creditors.

Currently, the HPML escrow requirement, located at section 1026.35(b), sets forth the small creditor thresholds that are cross-referenced by the high-cost mortgage and ATR/QM rules.  Under the HPML rule, certain small creditors operating in rural or underserved areas that do not have a forward commitment to sell their loans are not required to establish an escrow account for HPMLs. Specifically, the rule contains a four-part test:

1. The Credit Union Operates Predominately in Rural or Underserved Areas: A credit union – in the preceding three years – must have originated more than 50% of its first lien mortgages in counties that are determined to be “rural” or “underserved.” Currently, the CFPB makes “rural” designations for entire counties. A county is “rural” if it is not in a metropolitan statistical area (MSA) or in a micropolitan statistical area that is adjacent to an MSA. See, 12 C.F.R. 1026.35(b)(2)(iv)(A).
2. Total Annual Mortgage Originations: A credit union – together with its affiliates (e.g., credit union service organizations (CUSOs)) – must have originated 500 or fewer first lien mortgage loans in the preceding calendar year.
3. Asset Size Threshold: The credit union must have an asset size that is less than $2.060 billion at the end of the preceding calendar year.
4. Do Not Currently Escrow for Mortgage Loans: Even if a credit union meets these three requirements, the credit union (or its CUSO) will not qualify for the HPML escrow rule’s small creditor exemption where the credit union regularly establishes escrow accounts for its mortgage loans.

The proposal would make substantive amendments to the first three parts of this test.

Expanded Definition of “Rural” Areas. Under the proposal, a county will be considered rural if it meets the rule’s current definition, or is in a census block that is not in an urban area as defined by the U.S. Census Bureau. The proposal would change the word “counties” to “areas” in order to be less limiting in which locations will be considered rural. This would allow for loans made in rural sections of counties that are not in their totality considered rural to count towards a credit union’s number of loans made in rural areas.

Total Annual Mortgage Originations Amendment. As we noted on Monday, the proposed rule would increase the total annual mortgage loan originations threshold from 500 to 2,000, and exclude portfolio loans from this total. The proposal would also add a grace period from calendar year to calendar year allowing a credit union that exceeds the origination limit in the preceding calendar year to temporarily continue to operate as a small creditor. This would allow the credit union to operate as though it had not exceeded the origination limit for applications received prior to April 1 of the current calendar year, with certain special provisions and exemptions.

Asset Size Threshold Amendment. While the current rule does not include affiliates’ assets in the threshold calculation, the proposed rule would require the credit union to include the assets of its affiliates that originate mortgage loans. Unfortunately, it is unclear precisely how this proposal would impact credit unions with CUSOs. For example, the proposal does not address how to address situations where multiple credit unions hold equity interest in a single CUSO.

Impact on Qualified Mortgages. These changes also impact the ATR/QM rule because the rule utilizes the asset size and total mortgage origination thresholds from section 1026.35. Specifically, these thresholds determine which credit unions are “small creditors” for the purposes of the ATR/QM rule. Specifically, certain portfolio and balloon-payment loans by small creditors can still receive treatment as QMs even without meeting some of the rule’s other requirements such as the 43% debt-to-income ratio requirement. The proposal would also extend the temporary timeframe for small creditors to make balloon payment QMs from January 10, 2016 until April 1, 2016.

Palate Cleanser. Sometimes Nolan seems like he just does not know what to make of Lemmy. Of course, who can blame him, Lemmy’s head is about as big as Nolan!