WASHINGTON — The Consumer Financial Protection Bureau has managed to take one of the most controversial provisions of the Dodd-Frank Act — a rule that would effectively redefine the mortgage market — and craft it in a way to please both the banking industry and consumer groups.

The agency's revised final ability-to-repay rule released this week went a long way to easing many concerns from bankers that the version it initially offered in January would restrict access to credit, while also not giving so much ground that it alarmed consumer watchdogs.

"Not everything the industry asked for is bad," said Kathleen Day of the Center for Responsible Lending. "We really think they [CFPB] struck a good balance between a safeguard for consumers and not needlessly pointing at the banks."

For an agency that faces a series of challenges given its broad mission, the CFPB's mortgage rules were arguably its most difficult task. Under Dodd-Frank, the agency had to outline requirements to ensure lenders adequately assessed a borrower's ability to repay a loan as well as create an ultra-safe class of "qualified mortgages" that were protected from legal liability.

Its first stab in January initially won praise for its balanced approach, but many in the industry quickly soured on it, arguing the definition of QM was too narrow and that few lenders would be willing to make non-QM loans. Lawmakers, too, criticized the agency for going too far, urging it to reconsider its rule.

In its revisions, the CFPB moved significantly in the industry's direction, a decision likely to ease political pressure on the agency.

It amended its final rule to expand the legal protections for small creditors to lend beyond the rule's main requirements and offered them a longer timeframe to adjust to restrictions on balloon loans.

Small lenders can now count balloon loans as qualified mortgages for the first two years of the rule's enactment, based on the size of their assets and mortgage portfolio instead of the size of their community. After two years, they will have to meet the CFPB's definition of a "rural" or "underserved" community.

Smaller lenders can also charge a higher annual percentage yield and still receive the safe harbor legal protections for up to 350 basis points of the average benchmark. It was previously 150 basis points for all lenders.

Additionally, compensation paid by a brokerage or lender to a loan originator employee is no longer included in the rule's 3% cap on points and fees.

"What we were trying to do is strike a balance here," said Peter Carroll, assistant director for mortgage markets at the CFPB, in an interview. "Throughout the rulemaking we have tried to be very thoughtful and have conducted a great deal of outreach to stakeholders. We have taken the concerns raised about impacts on small creditors and access to credit very seriously."

While regulators often try to please both bankers and consumer groups, they usually fall short due to the gulf between the two sides. In this case, the CFPB appears to have struck a rare compromise that is acceptable to both sides.

"We appreciate the CFPB giving thoughtful consideration to our industry's concerns and to the impact the Ability-to-Repay rule could have on access to responsible credit," said Stew Larsen, executive vice president and mortgage banking division head at $62 billion-asset Bank of the West in San Francisco. "I feel they've done a nice job of balancing the various interests while both protecting consumers and fostering access to responsible credit."

To be sure, there are still some objections from banking and consumer advocates, particularly on the 3% cap on points and fees for a loan to be considered a qualified mortgage. But most of these appear relatively minor compared to the complaints made with the CFPB's initial rule.

"It was a huge challenge and probably the most important thing the bureau has done to date as far as its effect on consumer finance markets," said Ronald Rubin, a partner at Hunton & Williams and a former CFPB enforcement attorney. "There's no shame in not getting it perfect the first time so long as they're nimble in making appropriate adjustments. And they've been extremely nimble with this rule so far."

The agency will likely have to make further adjustments once the rules go into effect on Jan. 10. Lawmakers have pressed CFPB officials to make changes if they discover the rules adversely impact the mortgage markets.

"What if you're wrong" about the market, asked Rep. Michael Capuano, D-Mass., to CFPB officials during a House finance subcommittee hearing last week. What if "all of a sudden, most of America can no longer get a loan . . . do you have the ability to make a quick, even if temporary, adjustment to your rule to address something that maybe your estimates were wrong on?"

Though CFPB officials struggled to answer during the hearing, the agency said this week in the finalized rulemaking that it would perform an impact study on the balloon loan exemption before the two-year period ends. CFPB officials have also repeatedly said they would closely monitor the markets, giving hope to some bankers that the agency would continue to revise the rules after they are in effect.

"This [balloon loan exemption] is for a two-year period so we've got a window to address the bureau's concern, both around the product itself as well as our concerns about the rural definition," said Ron Haynie, vice president of mortgage finance policy at the Independent Community Bankers of America. "Our goal would be to get to the point where it shouldn't matter where the bank is located if they're doing loans and taking 100% of the credit risk, you should get the safe harbor for loans."

Rubin said going forward, it is critical for the agency to accurately assess how the market reacts once the rules are in place next year.

"I think they've done a great job with the QM rule but it's still in the third inning," he said. "How they respond to the effects of the rule going forward is really going to determine whether it's a success."

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