Impact of CFPB carve-out varies by region, demographics

Community banks in states with even population distribution across counties will benefit more from the Consumer Financial Protection Bureau's carve-out for balloon mortgages made by small rural banks than will community banks in states like Minnesota where a greater portion of its population resides in metro areas. .The CFPB released its final ability-to-repay and qualified mortgage rule on Jan. 10. The final rule was more accommodating than many in the industry expected. Most mortgage lenders like the safe harbor the rule creates for prime mortgages. Community banks received special accommodations for balloon mortgages, which will be considered qualified mortgages so long as the loan is made by a "small rural bank" and has at least a five-year term, a fixed interest rate and has met certain basic underwriting criteria..A lender qualifies as a small rural bank if it has no more than $2 billion in assets and makes no more than 500 mortgage loans per year. It also must originate at least half its first-lien mortgages in counties defined by the CFPB as rural. "Unfortunately, while 50 of Minnesota's 87 counties are rural, the population just isn't there to make a large scale benefit," said Craig Foss, associate counsel for the Minnesota Bankers Association. "Only 16 percent of Minnesotans live in rural areas," Foss said. "In that regard it may not help bankers much.".In Iowa, on the other hand, population is less centralized in metropolitan centers and so the rule will cover more of the state. "We estimate that 71 of 99 counties will be considered rural," said Bob Hartwig, legal counsel for the Iowa Bankers Association. The state's 28 metro counties have approximately 62 percent of the population; the 71 "rural" counties have 38 percent of the population. "That's much broader than what was originally proposed," Hartwig said. .Despite the rule's disparate impact, it is apparent the CFPB attempted to maximize the coverage while upholding the intent of the Dodd-Frank Act. If the Bureau had adopted its originally proposed definition, only 2.3 percent of the population of the United States would have been covered; the current definition covers 9.7 percent..Hartwig said he has concerns about the limit on the number of mortgages made. "The section of the rule that limits multibank holding companies to 500 mortgage loans will be a bigger limitation than the $2 billion asset size threshold," Hartwig said. "It will be easy for some companies with multiple bank charters to hit the cap.".With the 800-page regulation going into effect on Jan. 10, 2014, the CFPB has proposed a second rule for a new category of qualified mortgages, which would offer community banks in metropolitan areas a similar carve-out. This category would be for non-balloon mortgages originated and held in portfolio by small creditors. The category would not be limited to rural lenders and would use the same size thresholds and other criteria as the rural balloon payment rules.