Small Creditors and High-Priced Mortgages

August 2016 | Article

Regulation Z, Truth in Lending Act, was made effective July 1, 1969. Its primary purpose is to require certain disclosures about cost and term of credit, in addition to prohibiting specific acts and practices relating to the extension of credit. It has had many revisions, including the more recent Dodd-Frank Act brought about due to the severe U.S. recession beginning December 2007. The Dodd-Frank Act was signed into law on July 21, 2010, drastically changing requirements governing mortgage practices.

Throughout the changes encompassed within the Dodd-Frank Act, Congress gave authority to the Consumer Financial Protection Bureau (CFPB) to make changes with respect to small creditors, operating predominantly in rural or underserved areas, in order to lighten the burden imposed by the act. One of the main exemptions for these small creditors via the Dodd-Frank Act was the provision allowing origination of balloon-payment qualified mortgages and, more recently, balloon-payment high-priced mortgages. 

Amendments in Recent Years
There have been many recent changes to make things easier for smaller creditors. First, in two separate releases during 2013, the CFPB allowed for a two-year transition period allowing for small creditors to originate balloon-payment qualified and high-priced mortgages. This allowed certain small creditors who did not predominantly operate in rural or underserved areas some time to transition out of their then current practices in order to ensure compliance. Also, in the fall of 2015 the CFPB added certain revisions regarding escrow exemptions in which they relaxed the requirements for maintaining “small creditor” status. With this exemption, small creditors originating no more than 2,000 applicable loans were no longer required to establish an escrow account for certain mortgage loans. This was a major increase from the previous 500-loan maximum to be considered a small creditor. Finally, they broadened the definition of “rural” by adding that all census blocks that are not classified as in an urban area shall be considered rural. These provisions were again extended, but expired April 1, 2016.

Current Changes and What This Means for Small Creditors
The changes now in effect will provide for even more provisions to those small creditors. The final rule addresses two main concerns: the eligibility of small creditors in rural or underserved areas, and how to determine whether an area is rural for the purposes of Regulation Z.

First, due to the Helping Expand Lending Practices in Rural Communities Act of 2015 (HELP Rural Communities Act), the class of small creditors eligible for provisions was again broadened. Now, many more small creditors in the process of transitioning out of origination of balloon-payment mortgages will again qualify for this provision. This is being accomplished by eliminating TILA’s prior limitation that creditors operate predominantly in rural or underserved areas. Under the final rule, a creditor “satisfies the rural-or-underserved component of the eligibility criteria if the creditor originated a covered transaction secured by a property located in a rural or underserved area in 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” (1026.35(b)(2)(iii)(A)). This means that rather than 50 percent or more of loans being from rural or underserved areas, a creditor will qualify for this provision as long as they originate just a single qualified mortgage loan. They also allowed for the escrow exemption provided establishing eligibility under the same criteria.

In regards to whether an area is rural for the purposes of Regulation Z, before the changes came into effect on March 31, 2016, only counties or census blocks were eligible “rural” areas. The rule now says any area designated as rural through the application process classifies this area as rural for the purposes of Regulation Z. So as mentioned above, all census blocks not classified as urban, shall be considered rural.

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