Compliance Center: CFPB Issues Interim Final Rule on Operations in Rural Areas Under Regulation Z

The Consumer Financial Protection Bureau (CFPB) issued an Interim Final Rule that broadens the availability of certain provisions for small creditors that operate in rural or underserved areas.  The new rule, which takes effect on March 31, 2016, implements recent congressional legislation, the Helping Expand Lending Practices in Rural Communities (HELP) Act, allowing more small creditors operating in rural or underserved areas to take advantage of these provisions.

How will the new rule define “small creditor?”

Prior to the HELP Act, to qualify for the relief for small creditors, a credit union would have to extend more than 50 percent of its total covered transactions secured by first liens on properties that are located in area that are either “rural” or “underserved.”

Under the CFPB’s new rule, the “rural” or “underserved” requirement is changed to originate at least one covered mortgage loan on a property that is located in a “rural” or “underserved” area.

Which means, to meet the new definition of a small creditor in 12 CFR 1026.35, a credit union must:

  1. 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, secured by a first lien on a property that is located in an area that is either “rural” or “underserved”;

  2. 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 and or its affiliates together extended no more that 2,000 covered transactions, secured by first liens that were sold, assigned, or otherwise transferred to another person, or that were subject at the time of consummation to a commitment to be acquired by another person; and

  3. As of the preceding December 31, or if the application for the transaction was received before April 1 of the current calendar year, as of either of the two preceding December 31sts, the credit and its affiliates that regularly extended covered transactions, secured by first liens, together, had total assets of less than $2,000,000,000.

What special provisions would this open up?

The Interim Final Rule expands the eligibility for the special provisions allowing balloon-payment qualified mortgage and balloon-payment high-cost mortgages, as well as for the higher-priced mortgage loan exemption from escrow.

When it comes to higher-priced mortgage loans (1026.35), a credit union must establish an escrow account before consummation for payment of property taxes and premiums for mortgage related insurance, unless the creditor meets the definition of a small creditor (above) and;

Neither the creditor nor its affiliate maintain an escrow account for any extension of consumer credit secured by real property, or a dwelling that the creditor or its affiliate currently services, other than:

(1) Escrow accounts established for first-lien higher-priced mortgage loans for which applications were received on or after April 1, 2010, and before May 1, 2016; or

(2) Escrow accounts established after consummation as an accommodation to distressed consumers to assist such consumers in avoiding default or foreclosure.

For credit unions that have only been setting up escrow accounts under the Higher-Priced Mortgage Loan (HMPL) requirements, the decision will be to either:

  • Continue to offer escrow accounts, and continue to be subject to the requirements for HPMLs and flood insurance;

  • No longer set up escrow accounts on new loans (other than for the HPML loans that already have escrow).

Additionally, balloon-payments are generally prohibited on high-cost mortgages per 1026.32, but a creditor that meets the above definition of a small creditor is permitted to have balloon-payment features on the high-cost mortgage, as long as they also meet the balloon-payment qualified mortgage requirements.

A creditor that meets the small creditor definition can also make balloon-payment qualified mortgages per 1026.43(f). The key here is that the creditor determines at or before consummation that the borrower can make all of the scheduled payments under the terms of the loan along with the member’s monthly payments for all mortgage-related obligations, but excluding the balloon-payment.

When will the rule be effective?

The final rule goes into effect on March 31, 2016.

Can we make comments regarding the Interim Final Rule?

Yes, the CFPB will be accepting comments about this rule for 30 days after it is published in the Federal Register.

You may submit comments, identified by Docket No. CFPB-2016-0013 or RIN 3170-AA59, by any of the following methods:

  • Email: FederalRegisterComments@cfpb.gov. Include Docket No. CFPB-2016-0013 or RIN 3170-AA59 in the subject line of the email.
  • Electronic: http://www.regulations.gov. Follow the instructions for submitting comments.
  • Mail: Monica Jackson, Office of the Executive Secretary, Consumer Financial Protection Bureau, 1700 G Street, NW., Washington, DC 20552.
  • Hand Delivery/Courier: Monica Jackson, Office of the Executive Secretary, Consumer Financial Protection Bureau, 1275 First Street, NE., Washington, DC 20002.

Instructions: All submissions should include the agency name and docket number or Regulatory Information Number (RIN) for this rulemaking. Because paper mail in the Washington, DC area and at the Consumer Financial Protection Bureau (Bureau) is subject to delay, commenters are encouraged to submit comments electronically. In general, all comments received will be posted without change to http://www.regulations.gov.

Where can I see the Interim Final Rule?

The CFPB has published the Interim Final Rule here, along with the Press Release they issued about the new rule.

If you have questions about the CFPB’s Interim Final Rule on small creditors operating in rural and underserved areas, contact the NWCUA’s compliance team at 800.546.4465, or compliance@nwcua.org

Questions? Contact the Compliance Hotline: 1.800.546.4465, compliance@nwcua.org.

Posted in Compliance News.