CFPB Urged to be More Flexible in Defining 'Rural' Markets

State banking regulators are asking the Consumer Financial Protection Bureau to be flexible in its definition of a "rural" market when determining when a community bank is eligible to make a balloon loan.

Under its proposed lending guidelines, the CFPB has essentially banned balloon mortgages, but it gave an exemption to community banks in rural or underserved markets. Many loans in those markets do not meet the criteria for being sold on the secondary market and therefore are held in banks' portfolios.

But community bankers are concerned that the CFPB's definition of rural is so narrow that it would force many small banks to stop making balloon loans. In a letter to CFPB Director Richard Cordray, the Conference of State Bank Supervisors urged the CFPB to establish a policy whereby it rules whether a market is rural on a case-by-case basis.

In creating its standard, the CFPB is using an existing designation set by the U.S. Department of Agriculture to determine if an area is considered rural. The Conference of State Bank Supervisors, which represents state banking regulators, said this strict definition could wind up limiting consumers' access to home loans in areas that are essentially rural are not considered so by the USDA.

"These…rural requirements will have a significant effect on the responsible mortgage products offered in many states," John Ryan, the chief executive of the Conference of State Bank Supervisors, wrote in a March 26 letter.

The trade group cited Nye County, Nev., as an example of rural area that is not viewed as such because of its proximity to Las Vegas. Nye County is the nation's third-largest county by size, but it has a population of less than 44,000, or an average of 2.42 people per square mile.

"Practically speaking, there is no single good manner to define 'rural' in a country with 3,794,000 square miles and more than 300 million people," Ryan wrote. "As a result, the rural designation will not be applied to areas inherently rural because states and county sizes vary significantly."