CFPB steps toward mortgage-regulation relief for small banks

In the last two weeks, small banks have seen some accommodation from the Consumer Financial Protection Bureau on mortgage loans.

In the last two weeks, small banks have seen some accommodation from the Consumer Financial Protection Bureau on mortgage loans.

On May 29, the CFPB finalized an amendment to its Ability-to-Repay rule, granting qualified mortgage status to balloon loans created by small banks over a two-year transition period − from January 10, 2014 through January 10, 2016. For the purposes of the amendment, a small bank has less than $2 billion in assets and makes 500 or fewer first-lien mortgages each year. The modified rule generally extends qualified-mortgage status to balloon loans held in portfolio by these creditors, even if the consumers’ debt-to-income ratio exceeds 43 percent prescribed by the rule.

This is a substantial shift from the CFPB’s initial approach. Prior to this amendment, under the original Ability-to-Repay rule finalized on Jan. 10, community banks’ balloon mortgages are considered a qualified mortgage (thus receiving a safe harbor from litigation) only if the loan is made by a “small rural bank.” Under the Jan. 10 version, a small rural bank has no more than $2 billion in assets and makes no more than 500 mortgage loans per year. But it also originates at least half its first-lien mortgages in counties defined by the CFPB as “rural” or “underserved.” This “rural county” requirement has been removed by the May 29 amendment.

The modified Ability-to-Repay rule also gives small banks some leeway on pricing mortgages. It allows small creditors to charge a higher annual percentage rate for first-lien, qualified mortgages without losing the legal safe harbor.

While this transition buys small banks some time to continue to write balloon mortgage, the bureau may return to the Jan. 10 version of the Ability-to-Repay rule in 2016. The CFPB has instituted the transition period to study the existing definitions of rural and underserved to determine whether they adequately preserve consumers’ access to mortgage credit, the CFPB said in the amendment. The bureau also said the transition period will facilitate banks’ transition to alternatives to balloon-payment mortgages, such as adjustable-rate mortgages, a comment which hints that the CFPB still intends to curtail balloon-payments in areas outside counties it defines as rural or underserved.

On June 13, the CFPB also launched a regulatory implementation page for its mortgage rules.

The page offers bankers a consolidated source for all of the bureau’s 2013 mortgage rules and related implementation materials, such as: Mortgage rules at a glance, small entity compliance guides, videos, quick reference charts, 2013 rural or underserved counties list and other helpful materials.

“Our goal with this page is to provide access to our mortgage-related implementation resources though a single page that makes the rule content more accessible for a broad array of industry constituents,” the bureau said. The web page is designed for smaller banks with limited legal and compliance staff, the CFPB said.

Fredrikson & Byron Law