Small Rural CreditorsOn March 3, 2016, the Consumer Financial Protection Bureau (“CFPB”) promulgated a rule (“the Rule”) establishing a process for the public to request additional areas to be recognized as “rural” areas for purposes of federal consumer financial laws.  The designation of an area as “rural” provides relief for creditors in those areas from certain requirements under the Truth in Lending Act (“TILA”) and its implementing Regulation Z, as explained below.  Under the Rule, a person may submit an application to the CFPB for recognition of a new area as “rural” for those purposes.  The Rule thus has the potential to open new avenues for small rural creditors to extend certain mortgage loans to their communities.

Interplay Between Regulation Z and Rural Designation

As indicated above, certain creditors making mortgage loans in rural areas may be relieved from compliance with certain TILA/Regulation Z requirements.  For instance, Regulation Z generally

(i) During the preceding calendar year the creditor extended a first-lien transaction secured by property in an area that is either rural (or underserved);

(ii) During the preceding calendar year, the creditor and its affiliates together originated fewer than 2,000 first-lien loans secured by a dwelling;

(iii) As of the end of the preceding calendar year the creditor had total assets of less than $2,000,000,000; and

(iv) Neither the creditor nor its affiliate maintains an escrow account for property taxes and insurance for any real property-secured extension of credit, other than accounts established for higher-priced mortgage loans between April 1, 2010 and May 1, 2016 (or accounts established after consummation to assist distressed consumers in avoiding default or foreclosure).

(A new rule grants creditors a transition period, allowing them to maintain their exempt status temporarily if they fail to meet those criteria for a particular year.)  Thus, assuming the other criteria are satisfied, a small creditor extending a first-lien higher-priced mortgage loan in a rural area is exempt from the Regulation Z requirement to establish an escrow account.  The CFPB believes that by reducing the significant administrative and compliance costs of escrow accounts, those creditors can pass those benefits through to their customers and communities.

Regulation Z also allows certain small portfolio creditors in rural areas to make balloon payment loans that constitute qualified mortgages (“QMs”), although in general QMs must not contain balloon payment features.  For those creditors, a QM may provide for a balloon payment if, among other important criteria, the loan satisfies all other applicable QM and ability-to-repay requirements, and the loan is not subject to a commitment to be purchased by a person other than a small creditor.  By providing an avenue for small portfolio creditors to originate QM loans with a balloon payment feature in rural areas, the Rule expands the creditors’ ability to manage interest-rate risk and offer certain adjustable-rate products.

Rule’s Application Procedure For New Rural Areas

Currently, the CFPB defines “rural” areas based on several objective criteria.  Under Regulation Z, a county is “rural” during a calendar year when it is neither in a metropolitan statistical area nor in a micropolitan statistical area, as those terms are defined by the U.S. Office of Management and Budget and applied under the current Urban Influence Codes established by the U.S. Department of Agriculture’s Economic Research Service, or is in a census block that is not defined as “urban” by the Census Bureau.  The CFPB issues a list of those rural counties, and creditors may use that list as a safe harbor.

Some creditors and others have argued, however, that the CFPB’s list of rural areas is underinclusive, and is preventing the origination of mortgage loans in other areas that should be considered rural. Recognizing the importance of that rural designation, recent legislation (the HELP in Rural Communities Act, enacted in December 2015) required the CFPB to establish a process for designating additional areas as rural.  The CFPB’s Rule for that purpose requires an applicant to identify the subject area (or contiguous areas) and address six points to justify why the area or areas should be recognized as rural.  In fact, an applicant has a potentially extensive research burden, because it must explain why several government agencies (including the Census Bureau, the Office of Management and Budget, the Department of Agriculture, and the state banking agency) arrived at their classification decisions regarding the area.  While the Act largely established those application criteria, the CFPB did not use its authority or discretion to explain how a small rural creditor with limited demographic research resources can meet those requirements.

The CFPB will publish applications in the Federal Register within 60 days of receipt, and applications will be open for public comment for 90 days.  The CFPB will then grant or deny the application within 90 days after the comment period ends.  The CFPB must also publish the approval or denial, along with an explanation, in the Federal Register.

The CFPB began accepting applications on March 31, 2016.  The CFPB intends to terminate the application process on December 4, 2017.