Consumer Watchdog Makes Changes to Mortgage Rules

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By Jeff Bater

Sept. 21 — More small banks can offer certain types of mortgages in rural and underserved areas under changes the Consumer Financial Protection Bureau finalized to standards it approved in 2013 to prevent risky lending.

The changes are part of a new rule that was proposed in January and finalized Sept. 21 as part of the bureau’s ongoing study of the mortgage market and outreach to stakeholders. Community banks had called for broader exemptions to the bureau's mortgage rules not long after the CFPB rolled out the new regulations, which were issued in 2013 and became effective in 2014.

Among those regulations, the ability-to-repay rule protects consumers from irresponsible mortgage lending by requiring that lenders generally make a reasonable and good-faith determination that prospective borrowers have the ability to repay their loans. Under that rule, a category of loans called qualified mortgages (QM) prohibit certain risky loan features for consumers and are presumed to comply with ability-to-repay requirements.

Expands Small-Creditor Definition 

The ability-to-repay rule allows a looser definition of qualified mortgages for certain lenders that meet “small creditor” status. The changes finalized by the CFPB Sept. 21 expand that definition by raising the loan origination limit for small-creditor status from 500 first-lien mortgage loans to 2,000 and excludes loans held in portfolio by the creditor and its affiliates from that limit.

The Independent Community Bankers of America (ICBA), in seeking broader exemptions, had pointed out there are community banks that would be considered small financial institutions due to their asset size but that still didn't qualify for the small creditor exemption because they exceed the loan volume threshold; 500 first-lien originations a year translates to about nine first-lien mortgages a week.

Small Banks React 

ICBA welcomed the final rule that broadens the small-creditor designation under the agency's QM rule. The change will allow more community banks to receive QM legal safe-harbor protection for mortgage loans they originate and retain in portfolio, the industry group said.

Jack Hartings, who is president of The Peoples Bank Co. in Coldwater, Ohio, and is serving as chairman of ICBA, said in a news release the CFPB's new changes to its QM rules “will help ensure community banks can continue making mortgage loans in their communities.”

“The additional flexibility CFPB has provided will enable community banks to better meet the mortgage credit needs of their customers who may not fit a standardized mold,” Hartings added.

Other Changes to Standards 

The final rule does not change the current asset limit for small-creditor status, which is set at less than $2 billion, adjusted annually, in total assets as of the end of the preceding calendar year. But under the new rule the assets of the creditor’s mortgage-originating affiliates are included in calculating whether a creditor is under the limit.

The final rule expand the definition of “rural” areas to include census blocks that are not in an urban area as defined by the Census Bureau. It adds two safe harbors for determining whether a property location meets the definition of rural.

Furthermore, the final rule provides grace periods for small creditor and rural or underserved creditor status. Creditors that exceed the origination limit or asset-size limit in the preceding calendar year will be allowed to operate, in certain circumstances, as a small creditor with respect to mortgage transactions with applications received prior to April 1 of the current calendar year. The final rule creates a similar grace period for creditors that no longer operated predominantly in rural or underserved areas during the preceding calendar year.

The final rule also provides more implementation time for banks. Currently, eligible small creditors can make balloon-payment qualified mortgages and balloon-payment high-cost mortgages regardless of where they operate, under a temporary exemption scheduled to expire Jan. 10, 2016. The final rule extends that period to include balloon-payment mortgage transactions with applications received before April 1, 2016, giving creditors more time to understand how any changes will affect their status, and to adjust their business practices.

In a news release, the CFPB said its new final rule, which becomes effective Jan. 1, 2016, will increase the number of financial institutions able to offer certain types of mortgages in rural and underserved areas, and gives small creditors time to adjust their business practices to comply with the rules. Richard Cordray, the CFPB director, said the new changes will help consumers in rural or underserved areas access the mortgage credit they need while still maintaining the important new protections.

To contact the reporter on this story: Jeff Bater in Washington at

To contact the editor responsible for this story: Seth Stern at

The CFPB news release and rule can be read at ICBA's news release is available at