The CFPB announced its ability-to-repay and qualified mortgage rule last week, and the rule’s definition of “rural” has raised some questions about the types of loans covered under the definition.
Under the authority granted by the Dodd-Frank Act, the CFPB proposed to allow some balloon-payment mortgages to qualify as QMs if they are originated and held in portfolio by small creditors that operate in rural or underserved markets. For a loan to qualify under the QM rule, it must have a fixed interest rate and a term of at least five years.
In order to qualify, creditors must have less than $2 billion in assets, originate 50 percent or more of first-lien mortgages in rural or underserved counties, and originate no more than 500 first-lien mortgages per year. Creditors are also required to hold the loans in portfolio for at least three years.
Additionally, the definition of “rural” has far-reaching implications for rules pertaining to escrow for higher-priced loans under the Home Ownership and Equity Protection Act.
Under the CFPB’s ability-to-repay rule, lenders are required to thoroughly examine the potential borrower’s expected income, employment status, mortgage obligations and other financial obligations before lending. The rule also allows creditors to refinance a borrower from a “risky mortgage” into a more stable loan without going through the entire underwriting process.