Score one for community banks in their battle with the Consumer Financial Protection Bureau over their ability to make balloon loans.

The CFPB on Wednesday made several changes to mortgage rules that require lenders to determine a borrower's ability to repay a loan. Most notably, small banks and credit unions that have $2 billion of assets and that make fewer than 500 loans now have two years to continue originating balloon loans to all customers, a major change from a prior proposal that would have banned such loans except in rural or underserved markets.

The shift comes in response to complaints from community bankers and lawmakers who argued that the rule, as first proposed, would have forced some banks to stop originating balloon loans entirely.

"These are huge improvements to the rule for which our institution and many others will now qualify," says Chad McClung, president of the $84 million-asset Colfax Banking Co. in Louisiana.

"One of the most glaring concerns of the rule is the overly restrictive definition of what is a rural community," argued Rep. Shelley Moore Capito, R-W.Va., during a House financial subcommittee hearing on the CFPB's mortgage rules May 21. "Having an accurate rural definition is essential for community banks and credit unions that currently offer balloon loans to their customers."

The much-awaited amendments to the CFPB's ability-to-pay rule are part of the agency's attempt to reduce risk in mortgage lending without limiting access to credit. Banks that verify a borrower's ability to repay a loan receive the agency's "qualified mortgage" stamp of approval, giving them a safe harbor from litigation.

In addition to changes on balloon loans, the CFPB expanded its exemption some nonprofits and community lenders from the ability-to-repay provision entirely. The exemption applies to lenders that make fewer than 200 home loans per year and serve only low- and moderate-income consumers. The original threshold was at 100 loans per year or less.

Under its revised rule, the CFPB also said that compensation paid by a mortgage lender or broker to a loan originator employee does not count toward a 3% cap on points and fees. That cap had been a point of contention for many lenders and was a requirement of the Dodd-Frank Act.

The CFPB did not change a final rule in which loan officer compensation paid by a creditor to a mortgage broker must be included in points and fees, in addition to any origination charges paid by a consumer to a creditor.

"I'm extremely pleased with these changes," says Julia Gordon, director of housing finance and policy at Center for American Progress. "What was most important to us was to make sure payments to a broker from a creditor were counted for because those are payments that lent themselves to abuse. The CFPB made the right decision to make sure nefarious incentives can't sneak back into the system."

The ability-to-repay rule has a hard requirement that borrowers must have a debt-to-income ratio of 43% or less in order to qualify for a qualified, or safe, mortgage. But the final rule expands the safe harbor for smaller creditors in higher-priced mortgages.

Consumer advocates said it was necessary for nonprofits and community-based lenders to get an exemption because many borrowers that receive loan modifications have debt-to-income ratio higher than 43%, which would essentially disqualify them from meeting the underwriting criteria for a qualified mortgage.

The National Association of Federal Credit Unions "appreciates the CFPB making these revisions, and we will see if they go far enough to ease the requirements so that credit unions will feel confident in continuing to offer qualified mortgages to their members," said NAFCU's President and Chief Executive Fred R. Becker Jr., in an emailed statement. "We will continue to review these revisions and continue to push for additional changes, especially in regards to debt-to-income ratio and points and fees."

The finalized amendments take effect Jan. 10. The agency separately delayed the deadline for another provision in a rule issued in January that prohibits creditors from financing certain insurance premiums on specific mortgage loans. The effective date for that provision was moved from June 1 to Jan. 10 next year.

With only six months left to implement the changing rules, industry advocates are requesting for more time.

Bob Davis, an executive vice president at the American Bankers Association, will continue to push Congress and regulators to extend the effective date of the rules by another year "to allow regulators to make more adjustments and to allow time for lenders to come into compliance."

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