Rural & Underserved List and What It Applies To

Each year, the CFPB releases a list of rural and underserved counties.  The most recent list was just released by the CFPB and provides a few changes from prior years.  The 2018 CFPB list of rural and underserved areas can be found here.

While this list is definitely not the most exciting of lists, it does have an impact on community banks and credit unions in two main areas:

  • Higher Priced Mortgage Loans (HPMLs)

  • Qualified Mortgages

Higher Priced Mortgage Loans and Rural & Underserved

Rural and underserved counties impact HPMLs in two ways.  First, some creditors are exempt from the escrow requirements for HPMLs and one of the elements for the exemption is that the financial institution had to originate at least one closed-end first lien consumer purpose loan that is secured by a dwelling that is located in a rural and underserved area.

Specifically, Regulation Z provides the following exemption in 1026.35(b)(2)(iii):

(iii) Except as provided in paragraph (b)(2)(v) of this section, an escrow account need not be established for a transaction if, at the time of consummation:

(A) During the preceding calendar year, or, if the application for the transaction was received before April 1 of the current calendar year, during either of the two preceding calendar years, the creditor extended a covered transaction, as defined by § 1026.43(b)(1), secured by a first lien on a property that is located in an area that is either “rural” or “underserved,” as set forth in paragraph (b)(2)(iv) of this section;

(B) During the preceding calendar year, or, if the application for the transaction was received before April 1 of the current calendar year, during either of the two preceding calendar years, the creditor and its affiliates together extended no more than 2,000 covered transactions, as defined by § 1026.43(b)(1), secured by first liens, that were sold, assigned, or otherwise transferred to another person, or that were subject at the time of consummation to a commitment to be acquired by another person;

(C) As of the preceding December 31st, or, if the application for the transaction was received before April 1 of the current calendar year, as of either of the two preceding December 31sts, the creditor and its affiliates that regularly extended covered transactions, as defined by § 1026.43(b)(1), secured by first liens, together, had total assets of less than $2,000,000,000; this asset threshold shall adjust automatically each year, based on the year-to-year change in the average of the Consumer Price Index for Urban Wage Earners and Clerical Workers, not seasonally adjusted, for each 12-month period ending in November, with rounding to the nearest million dollars (see comment 35(b)(2)(iii)-1.iii for the applicable threshold); and

(D) Neither the creditor nor its affiliate maintains an escrow account of the type described in paragraph (b)(1) of this section for any extension of consumer credit secured by real property or a dwelling that the creditor or its affiliate currently services, other than:

(1) Escrow accounts established for first-lien higher-priced mortgage loans for which applications were received on or after April 1, 2010, and before May 1, 2016; or

(2) Escrow accounts established after consummation as an accommodation to distressed consumers to assist such consumers in avoiding default or foreclosure.

Secondly, HPMLs are affected by the rural and underserved list as the additional appraisal requirement does not apply if the property is located in a rural county.  Specifically, this exemption can be found in 1026.35(c)(4)(vii)(H) of Regulation Z:

(vii) Exemptions from the additional appraisal requirement. The additional appraisal required under paragraph (c)(4)(i) of this section shall not apply to extensions of credit that finance a consumer's acquisition of property:

(H) Located in a rural county, as defined in 12 CFR 1026.35(b)(2)(iv)(A).

 

Qualified Mortgages

 

In addition to the HPML requirements, the rural and underserved list has an impact on qualified mortgages.  Specifically, financial institutions that want to use the balloon payment qualified mortgage option must originate at least one closed-end consumer purpose loan secured by a first lien on a dwelling that is located in a rural or underserved area during the previous calendar year.  

While this requirement seems fairly simple… well, it is.  Prior to March 31, 2016, the rules used to required that at least 50% of loans were originated in a rural or underserved county in order to qualify for this QM, which meant that financial institutions had to track and log every loan to ensure they would continue to qualify for this option.  The CFPB, however, changed the rules to make it easier for financial institutions - who were losing the temporary small creditor balloon QM option - would more easily qualify for this qualified mortgage option. While the rule is now very simple, creditors must ensure that the one required origination is thoroughly documented to retain the QM status.

This requirement can be found in the commentary to 1026.43(f) which states the following:

“During the preceding calendar year or during either of the two preceding calendar years if the application for the transaction was received before April 1 of the current calendar year, the creditor extended a first-lien covered transaction, as defined in 1026.43(b)(1), on a property that is located in an area that is designated either “rural” or “underserved,” as defined in 1026.35(b)(2)(iv), to satisfy the requirement of 1026.35(b)(2)(iii)(A) (the rural or underserved test).”

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