Mortgage Guidelines: CFPB Announces More Relaxed Rules for Smaller Rural Lenders

Mortgage GuidelinesThe Consumer Financial Protection Bureau announced late last week that it is planning to ease some of its guidelines for home loans, pursuant to making it easier for smaller, rural-based lenders to serve the areas they are located in.

These smaller lenders include, but are not limited to community banks and credit unions, and in this n new set of guidelines, the CFPB is changing its definition of the term “small creditor” – this would now encompass any lender that originates a maximum of 2,000 loans annually. This total does not take into account mortgages that the financial institution and its affiliates are holding in portfolio. Prior to the change in definition, lenders had to originate less than 500 first-lien mortgages to qualify as “small.” But with the definition now updated, the CFPB’s main hope is that the number of financial institutions who offer certain mortgage products to rural consumers would increase substantially.

The CFPB’s press release also makes it clear that the new guidelines do not have any bearing on the asset limit for small creditor consideration; that would still remain at less than $2 billion in total assets as of December 31 of the calendar year prior. The proposed rules require that the creditor’s mortgage originating affiliates have their assets included when it comes to determining whether a creditor is “small” or not.

As for the definition of the word “rural,” the CFPB’s proposal expands on it, as it now includes census blocks that the Census Bureau deems as outside of an urban part of town. This, in other words, would expand the geographical reach of rural areas where small creditors can operate.

Also very interesting to note is how the CFPB’s proposal allows small creditors in rural parts of town to originate qualified mortgages with balloon payments, something that otherwise would not be permitted as part of the bureau’s QM reform of 2014.

Although the CFPB’s proposal features a significant easing of rules for so-called “undeserved borrowers,” the bureau said that it does not have any plans of loosening things to a point similar to the time when risky lending practices were the norm. It was these practices, after all, that partly contributed to the massive financial crisis of 2008 that affected the U.S. housing market, and caused the “bubble” to burst.

“Responsible lending by community banks and credit unions did not cause the financial crisis, and our mortgage rules reflect the fact that small institutions play a vital role in many communities,” read the comments prepared by CFPB director Richard Cordray in the organization’s press release. “(This) proposal will help consumers in rural or underserved areas access the mortgage credit they need while still maintaining these important new consumer protections.”

American Bankers Association senior vice president of mortgage markets Robert Davis had his own prepared statement that lauded the CFPB for releasing the proposed changes. “We appreciate that the CFPB responded favorably to ABA’s recommendations to expand the definitions of ‘rural area’ and to increase the number of loans an institution can make before falling out of the ‘small’ category,” read his statement. “If these proposals become final rules, many communities will enjoy more choice and expanded competition for mortgage credit.”