The volume of change to the Truth-in-Lending Act and Regulation Z during the past year has been overwhelming. But in the midst of all the change Congress and the Consumer Financial Protection Bureau made an effort to lighten the load, a bit, for small creditors. So what breaks are available? And, who qualifies as a small creditor? Since the definition focuses, in part, on affiliates we are also concerned with who is an affiliate?
Breaks for Small Creditors
Escrow Exemption for Small Creditors: Section 2016.35(b) of regulation Z, which contains the escrow requirement for higher-priced mortgage loans, does not apply to a transaction, that among other conditions, is originated by a small creditor.
Ability-to-Repay Options for Small Creditors: Under Section 1026.43 of Regulation Z all creditors are required to verify the borrower’s ability to repay closed-end consumer extensions of credit secured by a dwelling. Section 1026.43 contains seven options for verifying the ability-to-repay. Three of those seven options are special options available only to small creditors – small creditor portfolio loans (Section 1026.43(e)(5)), temporary balloon qualified mortgages (Section 1026.43(e)(6)), and balloon payment mortgages (Section 1026.43(f)).
Definition – Small Creditor
The concept of small creditor is established in Section 1026.35(b)(2)(iii). A small creditor is determined by the volume of originations and the institution’s asset level.
- The volume test in Section 1026.35(b)(2)(iii)(B) is met if during the preceding calendar year, the creditor and its affiliates together originated 500 or fewer covered transactions, as defined by § 1026.43(b)(1), secured by a first lien.
- The asset test in Section 1026.35(b)(2)(iii)(C) is met if as of the end of the preceding calendar year, the creditor had total assets of less than $2,000,000,000. The asset threshold adjusts automatically each year, based on the year-to- year change in the average of the Consumer Price Index for Urban Wage Earners and Clerical Workers, not seasonally adjusted, for each 12-month period ending in November, with rounding to the nearest million dollars.
Definition – Affiliate
Section 1026.32(b)(5), which is part of Subpart E of Regulation Z, states, ” For purposes of this subpart, the following definitions apply:
(5) Affiliate means any company that controls, is controlled by, or is under common control with another company, as set forth in the Bank Holding Company Act of 1956 (12 U.S.C. 1841 et seq.).”
12 U.S.C. 1841 et seq. states,” Any company has control over a bank or over any company if—
(A) the company directly or indirectly or acting through one or more other persons owns, controls, or has power to vote 25 per centum or more of any class of voting securities of the bank or company;
(B) the company controls in any manner the election of a majority of the directors or trustees of the bank or company; or
(C) the Board determines, after notice and opportunity for hearing, that the company directly or indirectly exercises a controlling influence over the management or policies of the bank or company. ”
The escrow rules in Section 2016.35 and the ability-to-repay rules in Section 1026.43 are in Subpart E, so the definition of affiliate provided above is the appropriate definition for these rules.
Point of Confusion
Section 1024.15 of Regulation X (RESPA) uses the term “affiliated business arrangement,” which is defined in RESPA as follows:
(7) The term “affiliated business arrangement” means an arrangement in which
(A) a person who is in a position to refer business incident to or a part of a real estate settlement service involving a federally related mortgage loan, or an associate of such person, has either an affiliate relationship with or a direct or beneficial ownership interest of more than 1 percent in a provider of settlement services; and
(B) either of such persons directly or indirectly refers such business to that provider or affirmatively influences the selection of that provider.
While RESPA uses the term “affiliated business arrangement,” Regulation Z uses the term “affiliate.” A much higher level of ownership is needed for an “Affiliate” than for an “affiliated business arrangement.” So use of the term “affiliate” reduces the number of potential affiliates, thereby increasing the likelihood the transaction will be subject to the escrow exemption or the special ability-to-repay option.