CFPB Issues Final Rule Expanding Definition of “small creditor” and “rural areas” under TILA

The CFPB has issued a final rule that revises the definitions of “small creditor” and “rural areas” under Regulation Z of the Truth in Lending Act (TILA). The final rule is effective January 1, 2016. We previously reported on the CFPB proposal to adopt these amendments.

The CFPB believes that small creditors play an important role in the mortgage industry because they generally try to maintain ongoing relationships with customers in a single community. The CFPB created special small creditor provisions with regard to certain Regulation Z requirements. Certain provisions apply to small creditors in general, while other provisions apply to small creditors that operate predominantly in rural or undeserved areas.

More specifically, small creditors are able to do the following:

  • Extend qualified mortgages that are not subject to the 43 percent debt-to-income ratio or the underwriting requirements of Appendix Q under the ability to repay (ATR) rule, if the loans are retained in portfolio;
  • Extend balloon-payment qualified mortgages, if they operate predominantly in rural or underserved areas;
  • Extend balloon payment qualified mortgages under a temporary provision whether or not they operate predominantly in rural or underserved areas
  • Include balloon-payment features in high-cost mortgage loans that satisfy certain small creditor qualified mortgage loan provisions; and
  • Avoid the requirement to establish escrow accounts for certain higher-priced mortgage loans.

Additionally, the annual percentage rate ceiling for a first lien loan to be a non-higher priced mortgage loan that is eligible for the qualified mortgage safe harbor under the ATR rule is higher for small creditors than other creditors (i.e., less than 3.5 percentage points above a benchmark rate as opposed to less than 1.5 percentage points above the benchmark rate).

To increase the number of financial institutions eligible for these special provisions under Regulation Z, the final rule does the following:

  • Revises the definition of “small creditor” by increasing the loan origination limit for determining eligibility for small-creditor status from 500 originations of covered transactions secured by a first lien to 2,000 originations. Significantly, originated loans held in portfolio by the creditor and its affiliates are excluded from the 2,000 loan cap.
  • Includes the assets of the creditor’s affiliates that regularly extended covered transactions in the calculation of the $2 billion asset limit for small-creditor status. The CFPB took this step to prevent larger creditors from attempting to fit within the small creditor provisions through organizational changes.
  • Expands the definition of “rural area” to include either a county that meets the current definition of a rural county or a census block that is not in an urban area as defined by the U.S. Census Bureau. Additionally, the rule allows creditors to rely on a new automated tool provided on the CFPB website to determine whether properties are located in rural or underserved areas, or on the Census Bureau’s website to assess whether a particular property is located in an urban area (based on the Census Bureau’s definition).

However, the final 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. To address burdens based on this change, the rule adds a grace period in some circumstances, allowing a creditor that does not meet one or more of the requirements for a small creditor or a creditor that operates predominantly in rural or underserved areas in the preceding calendar year to still act as such a creditor with respect to applications for covered transactions received before April 1 of the current year.

With regard to the exemption from the requirement to establish an escrow account for a higher priced mortgage loan, the rule ensures that creditors who established escrow accounts solely to comply with the current rule will still be eligible for this exemption if they qualify under the rule as a small creditor operating predominantly in rural or underserved areas.

Finally, the rule extends the sunset date of the temporary provisions for small creditors to make balloon-payment qualified mortgage loans and high cost mortgage loans without regard to whether they operate predominantly in rural or underserved areas to transactions with applications received before April 1, 2016.

- Wendy Tran and Richard J. Andreano, Jr.


CFPB Highlights Mortgage Complaints in Third Monthly Complaint Report

The CFPB has issued its September 2015 complaint report, the third in its new series of monthly complaint reports. The new report spotlights mortgage complaints and complaints from consumers in the Denver, Colorado, metro area.

General findings include the following:

  • As of September 1, 2015 the CFPB has handled 702,900 complaints nationally, including 25,732 complaints in August 2015. For August 2015, debt collection was the most-complained-about financial product or service, representing about 29 percent of complaints submitted (approximately 7,582 of the 25,732 complaints handled in August). Credit reporting was the second most-complained-about consumer product (approximately 5,733 complaints). Overall, the CFPB received 972 fewer complaints in August 2015 than in July 2015.
  • Consumer loan complaints, which include pawn loans, title loans, and installment loans, showed the greatest percentage increase, increasing about 47 percent from the same time last year (June to August 2014 compared with June to August 2015). Payday loan complaints showed the greatest percentage decrease, decreasing 12 percent from the same time last year (June to August 2014 compared with June to August 2015). Complaints decreased from 526 complaints in 2014 to 463 complaints in 2015.
  • Nebraska and Nevada experienced the greatest complaint volume increases from the same time last year (June to August 2014 compared with June to August 2015). The volume of complaints from Nebraska increased by 54 percent and Nevada’s complaint volume increased by 45 percent. The next largest increase was North Carolina, where complaint volume increased by 36 percent compared to the same time period last year.

Findings regarding mortgage complaints include the following:

  • Since the CFPB began accepting consumer complaints in 2011, it has received more mortgage-related complaints than any other type of financial product. As of September 1, 2015, the CFPB has handled approximately 192,500 mortgage-related complaints.
  • 53 percent of mortgage complaints involved problems faced by consumers who were unable to make payments, such as issues about loan foreclosures and loan modifications.
  • 30 percent of mortgage complaints concerned problems making payments, such as problems arising when loans are transferred and payments not being applied according to the consumer’s instructions.

Findings regarding complaints from consumers in Denver include the following:

  • As of September 1, 2015, of the 11,500 complaints submitted by consumers in Colorado, 7,000 of them were from consumers in the Denver metro area.
  • Mortgages were the most-complained-about product, with mortgage-related complaints representing 27 percent of the complaints submitted by consumers in the Denver metro area.
  • Debt collection and credit reporting were, respectively, the second and third most-complained-about financial products in the Denver metro area.

On November 17, 2015, Ballard Spahr attorneys will conduct a webinar, “Coping with Consumer Complaints and CFPB Expectations,” from 12:00-1:00 p.m. ET. The registration form is available here.

- Barbara S. Mishkin


CFPB Publishes Annual CARD Act, HOEPA and QM Adjustments

The CFPB has published a final rule regarding various annual adjustments it is required to make under provisions of Regulation Z (TILA) that implement the CARD Act, HOEPA, and the ability to repay/qualified mortgage provisions of Dodd-Frank. The adjustments made by the final rule are effective January 1, 2016.

The CARD Act requires the CFPB to calculate annual adjustments of the minimum interest charge threshold that triggers disclosure of the minimum interest charge in credit card applications, solicitations and account opening disclosures, and the fee thresholds for the penalty fees safe harbor. The calculation did not result in a change to the current $1 minimum interest charge threshold. However, in the final rule, the CFPB did not change the current penalty fee safe harbor of $27 for a first late payment but decreased the safe harbor for a subsequent violation within the following six months by $1 to $37.

HOEPA requires the CFPB to annually adjust the total loan amount thresholds that determines whether a transaction is a high cost mortgage when the points and fees are either 5 percent or 8 percent of such amount. In the final rule, the CFPB decreased the current dollar thresholds from, respectively, $20,391 to $20,350 and $1,020 to $1,017.

Pursuant to its ability to repay/QM rule, the CFPB must annually adjust the points and fees limits that a loan must not exceed to satisfy the requirements for a QM. The CFPB must also annually adjust the related loan amount limits. In the final rule, the CFPB decreased these limits to the following:

  • For a loan amount greater than or equal to $101,749 (currently $101,953), points and fees may not exceed 3 percent of the total loan amount
  • For a loan amount greater than or equal to $61,050 (currently $61,172) but less than $101,749, points and fees may not exceed $3,052
  • For a loan amount greater than or equal to $20,350 (currently $20,391) but less than $61,050, points and fees may not exceed 5 percent of the total loan amount
  • For a loan amount greater than or equal to $12,719 (currently $12,744) but less than $20,350, points and fees may not exceed $1,017
  • For a loan amount less than $12,719 (currently $12,744), points and fees may not exceed 8 percent of the total loan amount

- Barbara S. Mishkin


ABA Consumer Financial Services Panel Highlights the Challenges of Serving Consumers in non-English Languages

I had the opportunity to speak on a panel at the American Bar Association’s Consumer Financial Services Committee meeting in Chicago (which was held as a part of the ABA Business Law Section Annual Meeting), covering the topic of how financial institutions can serve consumers with limited English proficiency (LEP). I was joined on the September 17 panel by representatives from the CFPB (Frank Vespa-Papaleo from the Office of Fair Lending), consumer advocacy groups, and financial institutions.

The topic produced a fascinating, but ultimately very unclear, discussion, and revealed the numerous quandaries that financial institutions face when trying to serve LEP consumers. Here are just a few of them:

  • In the past, there has been regulatory enforcement activity based on the idea that if a financial institution markets or originates a product in a non-English language, it must then service all aspects of that product in that language. This would suggest to financial institutions that they should carefully avoid marketing or originating products in any language other than English, but the CFPB and other regulators appear to want financial institutions to make credit more available to LEP communities by marketing and originating in non-English languages. Unless lenders are prepared to offer the entire servicing experience (including interactions with service providers) in a non-English language, however, complying with the CFPB’s goals in this area could create enforcement exposure.
  • There is also a strong tension between the regulatory desire to communicate in non-English languages and UDAAP issues. As readers of this blog know, it is difficult enough to ensure that communications to consumers in English are clear and understandable. If phone scripts, letters, disclosures, and other documents are translated into another language, they may not be as clear or understandable to non-English speakers, because some concepts (especially legal concepts, or words used in particular U.S. laws or regulations) may get “lost in translation.” But if financial institutions volunteer to translate such documents, they may face UDAAP liability if the translations are later alleged to be incomplete or unclear to non-English speakers. The CFPB is offering translations of some documents it creates (for example, the Home Buying Information Booklet, announced on September 21, 2015), but in the absence of “official” translations of other documents, financial institutions are left to guess if their translations will be viewed as adequate.
  • It is also impossible, as a practical matter, for financial institutions to transition all communications and all products into another language simultaneously. If institutions adopt a phased approach, converting certain products or certain “most critical” communications to a non-English language first, they are subject to attack based on claims of “steering” LEP consumers into certain products, or failing to translate a document that a regulator later decides should have been made available from the outset.

I believe that the historical enforcement activity in this area, coupled with the CFPB’s very aggressive focus on fair lending issues, is inhibiting progress in making financial products available to LEP consumers. To relieve the paralysis that the current regulatory environment is creating, the CFPB should establish a road map that gives financial institutions guidance about how to serve LEP consumers without taking the UDAAP and fair lending risks discussed above (in addition to many others). The CFPB’s guidance could promote progress in this area by establishing guidelines for what documents should be translated first; by prescribing an acceptable transition period in which not all portions of a consumer’s experience would have to be in a non-English language; and by pledging that the CFPB will not pursue enforcement actions for UDAAP or fair lending issues based on partially-transitioned products or translations using a particular method. The status quo, however, in which the CFPB expects financial institutions to try to make difficult and risky judgment calls in the face of seemingly contradictory regulatory commandments, is not only unfair to financial institutions, but unfair to LEP consumers, whose access to financial services is being diminished because of the fear of regulatory enforcement.

- Christopher J. Willis


Welcome to Matthew R. Smith

We are pleased to welcome Matthew R. Smith, a consumer financial services and mortgage banking attorney, as the newest member of our Mortgage Banking Group.

Matt is an associate in the firm’s Washington, D.C., office and advises mortgage banking industry clients on a range of federal mortgage banking and servicing-related statutes and regulations.

Before joining Ballard Spahr, Matt was a compliance analyst at Mortgage Builder Software, an Altisource Business Unit, where he developed, implemented, and monitored regulatory compliance initiatives.

He holds a J.D. from the Georgetown University Law Center and a B.A. from the University of Michigan.

- John D. Socknat


Montana Temporarily Reduces Licensing Renewal Fees

Montana has adopted a temporary rule to reduce certain licensing renewal fees by 50 percent for the period of January 1, 2016 through December 31, 2016. The Department of Administration believes that adopting the Uniform State Testing has increased the number of mortgage loan originator applicants, and thus, creating surplus revenue. The reduced fee applies to the following licenses--Mortgage Broker Entity, Mortgage Broker Branch, Mortgage Lender Entity, Mortgage Lender Branch, Mortgage Loan Originator, Mortgage Servicer, and Mortgage Servicer Branch.

The provisions are effective on September 25, 2015 and will expire on March 17, 2016.

Colorado Amends Definitions and Disclosure Requirements to Reflect TRID and MLO Compensation Rule

Colorado has amended the definitions and disclosure requirements for mortgage loan originators and mortgage companies licensed under Mortgage Loan Originator Licensing and Mortgage Company Registration Act.

 The amendment adds a definition for “TILA-RESPA Integrated Disclosure Rule,” referring to the CFPB’s integrated mortgage disclosure final rule set forth in Regulation X of the Real Estate Settlement Procedures Act, effective October 3, 2015. A definition for “MLO Compensation Rule,” referring to the CFPB loan originator compensation rule set forth in Regulation Z of the Truth in Lending Act, effective January 10, 2014, has also been added. In addition, the amendment replaces the prior disclosure requirements with the disclosure requirements as set forth in the TILA-RESPA Integrated Disclosure Rule and MLO Compensation Rule.

The provisions are effective on October 3, 2015.

- Wendy Tran


Did you know?

Montana Temporarily Reduces Licensing Renewal Fees

by Wendy Tran

Montana has adopted a temporary rule to reduce certain licensing renewal fees by 50 percent for the period of January 1, 2016 through December 31, 2016. The Department of Administration believes that adopting the Uniform State Testing has increased the number of mortgage loan originator applicants, and thus, creating surplus revenue. The reduced fee applies to the following licenses--Mortgage Broker Entity, Mortgage Broker Branch, Mortgage Lender Entity, Mortgage Lender Branch, Mortgage Loan Originator, Mortgage Servicer, and Mortgage Servicer Branch.

The provisions are effective on September 25, 2015 and will expire on March 17, 2016.

Colorado Amends Definitions and Disclosure Requirements to Reflect TRID and MLO Compensation Rule

Colorado has amended the definitions and disclosure requirements for mortgage loan originators and mortgage companies licensed under Mortgage Loan Originator Licensing and Mortgage Company Registration Act.

The amendment adds a definition for “TILA-RESPA Integrated Disclosure Rule,” referring to the CFPB’s integrated mortgage disclosure final rule set forth in Regulation X of the Real Estate Settlement Procedures Act, effective October 3, 2015. A definition for “MLO Compensation Rule,” referring to the CFPB loan originator compensation rule set forth in Regulation Z of the Truth in Lending Act, effective January 10, 2014, has also been added. In addition, the amendment replaces the prior disclosure requirements with the disclosure requirements as set forth in the TILA-RESPA Integrated Disclosure Rule and MLO Compensation Rule.

The provisions are effective on October 3, 2015.
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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