CFPB Adopts Rule that Expands Provisions for Small Lenders in Rural Areas
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CFPB Adopts Rule that Expands Provisions for Small Lenders in Rural Areas

March 23, 2016

A rule adopted by the Consumer Financial Protection Bureau (CFPB) will help small creditors operate in rural and underserved areas by expanding provisions that will make it easier for these creditors to approve loans.

The interim final rule will go into effect on March 31 and will be available for public comment for 30 days after its publication in the Federal Register.

Lending rules adopted in 2013 protect consumers by requiring lenders to make a reasonable and good-faith determination that prospective borrowers can repay their loans. Under the rule, a category of loans called Qualified Mortgages, which cannot include certain risky loan features for consumers, are presumed to comply with ability-to-repay requirements.

Certain provisions in the rules allow small creditors a little more leeway in order to help serve borrowers in rural and underserved areas. For instance, small creditors that predominantly operate in such areas can originate Qualified Mortgages with balloon payments even though balloon payments are otherwise not allowed with Qualified Mortgages. Similarly, under the Bureau's Home Ownership and Equity Protection Act rule, such creditors can originate high-cost mortgages with balloon payments. And under the Bureau's Escrow rule, these creditors are not required to establish escrow accounts for higher-priced mortgages.

Since issuing the rules, the CFPB continued to monitor the mortgage market and seek public feedback. The result is the Helping Expand Lending Practices in Rural Communities (HELP) Act, which now has broadened even further the category of rural small creditors that may be eligible for certain provisions under the Truth in Lending Act.

Prior to the HELP Act, a small creditor was only eligible for these provisions if it operated predominantly in rural or underserved areas. The Bureau's prior rules had interpreted that to mean that the small creditor made more than half of its covered mortgage loans on properties located in rural or underserved areas in the prior calendar year. In the HELP Act, Congress amended the statute to provide that a small creditor now will be eligible for these provisions if it operates in a rural or underserved area, even if that is not the predominant area of its operations.

The interim final rule the Bureau is issuing implements that amendment by providing that as of March 31, 2016, a small creditor will be eligible for the special provisions if it originates at least one covered mortgage loan on a property located in a rural or underserved area in the prior calendar year. The CFPB will continue to monitor the mortgage market and may adjust its rules in the future to ensure they have a positive impact on consumers and the mortgage market.

A copy of the final rule is available here.