On September 21, 2015, the Consumer Financial Protection Bureau (CFPB) issued a final rule, Amendments Relating to Small Creditors and Rural or Underserved Areas under the Truth in Lending Act (Rule) which goes into effect January 1, 2016.   

Under the Rule, if a creditor and its affiliates together extend no more than 2,000 first-lien covered transactions during the preceding calendar year, the creditor may qualify as a small creditor in the current calendar year. Importantly, only first-lien covered transactions that are sold, assigned, or otherwise transferred, or are subject to a commitment to be acquired at the time of consummation are counted when determining whether a creditor and its affiliates extended more than 2,000 first-lien covered transactions. Loans held in a creditor’s portfolio are not counted toward the 2,000 loan origination limit, even if a first-lien covered transaction. 

While retaining the asset limit of $2 billion, the Rule now requires that a creditor count not only its assets but also the assets of any affiliate that regularly extended first-lien covered transactions in the preceding calendar year in determining small creditor status.

Currently, the Rule allows a creditor to be to be considered as operating predominantly in rural or underserved areas, if a creditor extends more than 50 percent of its total first-lien covered transactions on properties located in rural or underserved areas in any of the three preceding calendar years. The amendment to the Rule has reduced this timeframe and limits the applicability of a transaction to just the preceding calendar year.

To determine whether a property is located in a rural area, defined as (a) a county that meets the current definition of a rural county; or (b) a census block that is not in an urban area as defined by the U.S. Census Bureau; a creditor may now rely on an automated address look up tool available on the Census Bureau’s website or on a new automated tool that will be provided on the CFPB’s website. These two new safe harbors provide additional mechanisms to demonstrate compliance, in addition to the current safe harbor permitting reliance on the county lists available on the CFPB’s website. 

Finally, the Rule adds a grace period allowing a creditor that does not meet one or more of the above requirements for a small creditor or a creditor that operates predominantly in rural or underserved areas in the preceding calendar year to operate, in some circumstances, as such with respect to transactions with applications received before April 1 of the current year. For example, if a creditor exceeded the origination limit in the preceding calendar year but did not exceed it in the calendar year preceding that one, the creditor may still qualify as a small creditor for transactions with applications received before April 1 of the current calendar year. 

The Rule revises the Regulation Z definitions of “small creditor” and “rural area,” which will impact the availability of some special provisions and exemptions to Regulation Z’s Ability-to-Repay, high-cost mortgage, and higher-priced mortgage loan (HPML) escrow requirements, by expanding the overall number of eligible creditors for these provisions and exemptions. The sunset date of the temporary provisions for balloon-payment qualified mortgage loans available to a small creditor and the temporary exception regarding balloon-payment features in high-cost mortgages was updated to permit transactions with applications received before April 1, 2016. Also, a small creditor that operates predominantly in rural or underserved areas will be able to rely on the exception from the escrow requirement even if continuing to maintain escrow accounts established for first-lien HPMLs, if the applications for such HPMLs were received between April 1, 2010 and January 1, 2016 or if the escrow account was established as an accommodation to a distressed consumer.

In summary:

• The Rule raises the loan origination limit for determining eligibility for small creditor status from 500 first-lien covered transactions to 2,000 first-lien covered transactions, and excludes loans that the creditor or its affiliate originate and keep in its portfolio.
• The Rule includes the assets of a creditor’s affiliates that regularly extended first-lien covered transactions in the asset limit used to determine small creditor status.
• The Rule reduces the time period used to determine whether a creditor is operating predominantly in rural or underserved areas from any of the three preceding calendar years to the preceding calendar year.
• The definition of “rural area” has been expanded, but the definition of “rural county” was not expanded. 
• A printout or electronic copy from the CFPB’s automated tool or the Census Bureau’s website may be used as evidence that one or more properties are located in rural areas.
• The Rule adds a grace period allowing creditor that does not meet one or more of the requirements in the preceding calendar year to continue to operate as as a small creditor or small creditor that operates predominantly in rural or underserved areas with respect to transactions with applications received before April 1 of the current year.

Locke Lord has a dedicated team of financial services regulatory, compliance and litigation attorneys with significant experience handling various aspects of consumer finance, including Regulation Z’s Ability-to-Repay mortgage rules. Locke Lord attorneys regularly advise financial institutions on regulatory compliance matters, new product development and represent clients in regulatory enforcement matters, class actions and various lawsuits in the U.S. and abroad. Visit Locke Lord’s Financial Services Regulatory Practice Group website or contact the author with questions.