Rural Area Definition and Special Provisions for Small Creditors (Regulation Z)

Updated 2026-05-17

Under the Truth in Lending Act (TILA) and Regulation Z (TILA) and its implementing Regulation Z (12 CFR Part 1026), the definition of a "rural area" is crucial for determining eligibility for certain special provisions and exemptions, particularly for Small Creditor Definition and Rural/Underserved Area Provisions (Regulation Z)s. These provisions aim to ensure access to credit in communities where traditional lending models may not be feasible.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) (CFPB), implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), has established and revised the definition of "rural area" and related exemptions.

Definition of Rural Area

The definition of a "rural area" under Regulation Z includes:

• A county or census block that the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) (CFPB) has designated as rural.

The CFPB publishes an annual list of rural and underserved areas. For 2025, mortgage loan originators (MLOs) must refer to the Revised List of Rural Areas for 2025 or the CFPB List of Rural and Underserved Areas (2025) to verify a property's eligibility.

Expired Rural Area Designation Process

Previously, the CFPB allowed individuals and entities to apply to have a specific census block or county designated as rural. However, this application process had a statutory sunset date of December 4, 2017, and is no longer active. Any designation made through this procedure was only effective before this date.

Special Provisions for Small Creditors in Rural or Underserved Areas

The definition of rural area, alongside Underserved Area, helps define the scope of eligibility for special provisions for small creditors, offering regulatory relief for:

1. Balloon-Payment Qualified Mortgages (QMs) (12 CFR § 1026.43(f))
2. Exemptions from Higher-Priced Mortgage Loan (HPML) Escrow Requirements (12 CFR § 1026.35(b)(2))

These provisions are designed to help small creditors serve rural and underserved markets where certain loan products or operational practices may be more common or necessary for financial viability.

1. Balloon-Payment Qualified Mortgages (QMs)

While Balloon Payments are generally prohibited for most QMs under 12 CFR 1026.43(e) as part of the Ability-to-Repay (ATR) Rule, 12 CFR § 1026.43(f) carves out an exception for specific types of creditors, primarily Small Creditor Definition and Rural/Underserved Area Provisions (Regulation Z)s operating in rural or underserved areas. This allows them to offer Balloon-Payment Qualified Mortgages (QMs).

This provision ensures that small creditors in these markets can continue to offer balloon-payment mortgages, which may be a necessary product, while still providing consumers with the protections of the ATR/QM rule.

Key Characteristics of Balloon-Payment QMs:

• Exemption from General Prohibition: These QMs are exempt from the general prohibition on balloon payments found in the General QM definition.
• Creditor Eligibility: Applies to Small Creditor Definition and Rural/Underserved Area Provisions (Regulation Z)s that meet specific criteria related to lending in rural or underserved areas.
• Portfolio Retention: To maintain their QM status and associated safe harbor protection, these loans must generally be held in the creditor's portfolio for at least three years. Exceptions exist for transfers to other qualified "Small Creditors."
• Safe Harbor Status: Even if these loans are considered Higher Priced Mortgage Loans, they may still retain safe harbor QM status, provided they meet the specific conditions of this subsection and are held in portfolio. This is a notable deviation from the general rule where HPML QMs only receive a Rebuttable Presumption (Qualified Mortgage).
• Loan Terms: The loan must have a term of at least five years and a fixed interest rate for at least the first five years.
• Ability to Repay (ATR): The creditor must have determined the consumer's ability to repay the loan in accordance with the requirements of the Ability-to-Repay (ATR) Rule.
• Other QM Criteria: The loan must meet all other criteria of a Qualified Mortgage, with the specific exception of the regular amortization requirement.

Eligibility for Small Creditors to Offer Balloon-Payment QMs:

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and the CFPB expanded eligibility for small creditors to offer balloon-payment QMs.

Previously, small creditors had to originate more than 50% of their first-lien covered loans in rural or underserved areas to qualify. The Interim Final Rule, effective March 31, 2016, removed this "predominantly" requirement.

Under the revised criteria, a small creditor may be eligible if it originated at least one Covered Transaction secured by a first lien on a property located in a rural or underserved area in the preceding calendar year. For applications received before April 1 of a given year, eligibility can be based on either of the two preceding calendar years.

Temporary Provision (Expired):

A temporary provision allowed any small creditor, regardless of where it operated, to originate balloon-payment QMs for applications received before April 1, 2016. This temporary provision has since expired.

2. Higher-Priced Mortgage Loan (HPML) Escrow Exemptions

Higher-Priced Mortgage Loans (HPMLs) are closed-end consumer credit transactions secured by a consumer's principal dwelling with an Annual Percentage Rate (APR) that exceeds the Average Prime Offer Rate (APOR) for a comparable transaction by a specified margin (1.5% for first-lien, 2.5% for first-lien jumbo, 3.5% for subordinate-lien). HPMLs are subject to additional consumer protection requirements, most notably the HPML Escrow Rule (12 CFR § 1026.35(b)), which generally mandates the establishment of escrow accounts for property taxes and insurance for a minimum of five years.

However, the CFPB provides exemptions from this escrow requirement for certain creditors, primarily those operating in rural or underserved areas and meeting specific size and activity thresholds. These exemptions offer regulatory relief, allowing qualifying creditors to avoid the administrative burden of managing escrow accounts for these specific types of loans. They aim to reduce the burden for small creditors and insured institutions serving communities where managing escrow accounts can be more complex, less cost-effective, or less common, thereby enabling them to continue offering HPMLs in these areas.

Both main exemptions require the creditor to have extended at least one covered transaction secured by a first lien on a property in a rural or underserved area in the preceding calendar year (or the year prior to that for applications received before April 1 of the current year). The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and the CFPB expanded eligibility for small creditors to utilize the escrow requirement exemption for HPMLs by removing the "predominantly" requirement for originating loans in rural or underserved areas.

1. Small Creditor Exemption (12 CFR § 1026.35(b)(2)(iii))

A small creditor and its affiliates may be exempt from the HPML escrow requirement if they meet the following criteria:

• Small Creditor Status: The creditor must meet the CFPB's definition of a "small creditor." For calendar year 2026, a creditor (including its affiliates) with total assets less than $2,785,000,000 as of December 31, 2025, may qualify, provided other criteria are met. This asset threshold adjusts annually based on the Consumer Price Index for Urban Wage Earners and Clerical Workers.
• Loan Volume: The creditor and its affiliates together extended no more than 2,000 first-lien covered transactions that were sold, assigned, or otherwise transferred to another person, or were subject to a commitment to be acquired by another person, during the preceding calendar year. Loans kept in portfolio are not counted towards this limit.
  • Grace Period: If the loan volume limit was exceeded in the immediately preceding calendar year, the creditor can still qualify for applications received before April 1 of the current year if the limit was not exceeded in the calendar year before the immediately preceding calendar year.
• Asset Size: As of December 31 of the preceding calendar year, the creditor and its affiliates that regularly extended first-lien covered transactions together had total assets of less than $2.23 billion (adjusted annually for inflation).
  • Grace Period: Similar to loan volume, a grace period applies if the asset-size limit was exceeded in the immediately preceding calendar year.
• No Existing Escrow Accounts: The creditor (or its predecessor or affiliates) must not have established escrow accounts for most of its first-lien mortgage loans during the preceding calendar year, with two exceptions:
  1. Escrows established after consummation as an accommodation to distressed consumers to assist in avoiding default or foreclosure.
  2. Escrows established when the creditor was previously required by regulation to do so (e.g., for applications received between April 1, 2010, and May 1, 2016).
• Loan Retention: The creditor must hold the loan in its portfolio for at least three years, with certain exceptions.
• Loan Location: The loan must be secured by property located in a rural or underserved area, as defined by the CFPB, at the time the loan is made.
• No Forward Commitment for Sale: The HPML is not originated under a forward commitment for sale to a non-exempt institution, unless the loan is otherwise exempt (e.g., a reverse mortgage) or the acquirer is also eligible for an exemption.
• Creditor Choice: The exemption applies unless the creditor chooses to establish an escrow account for an application received on or after May 1, 2016.

2. Insured Institution Exemption (12 CFR § 1026.35(b)(2)(vi))

This exemption, introduced by the Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA), applies to insured depository institutions or insured credit unions and their affiliates if they meet the following criteria:

• Asset Size: The insured institution has assets of $10 billion or less (adjusted annually for inflation) as of the preceding December 31st. The asset size of affiliates is not included in this calculation.
  • Grace Period: Similar to the small creditor exemption, a grace period applies if the asset-size limit was exceeded in the immediately preceding calendar year.
• Loan Volume: The insured institution and its affiliates originated 1,000 or fewer first-lien covered transactions on a principal dwelling during the preceding calendar year. All first-lien loans originated by the institution and its affiliates count towards this threshold, regardless of whether they are held in portfolio.
  • Grace Period: Similar to the small creditor exemption, a grace period applies if the loan volume limit was exceeded in the immediately preceding calendar year.
• No Escrow Maintenance: The insured institution and its affiliates generally do not maintain escrows for HPMLs, with the same two exceptions as the small creditor exemption (accommodation to distressed consumers or previously required by regulation).
• No Forward Commitment for Sale: The HPML is not originated under a forward commitment for sale to a non-exempt institution, unless the loan is otherwise exempt or the acquirer is also eligible for an exemption.

Other HPML Requirements (General)

While the escrow exemption is a key relief for small creditors in rural areas, HPMLs generally remain subject to other consumer protection requirements:

• Appraisals: Regulation Z includes specific rules for HPML appraisals [12 CFR § 1026.35(c)], often requiring a second, independent appraisal for certain transactions.
• Prepayment Penalties: Prepayment penalties are generally prohibited for HPMLs, with some exceptions [12 CFR § 1026.35(d)].
• Ability-to-Repay (ATR) and Qualified Mortgage (QM) Status: HPMLs that meet QM criteria receive a rebuttable presumption of compliance with the ATR rule [12 CFR § 1026.43(e)(2)], meaning a consumer can challenge the lender's ATR determination. This differs from non-HPML QMs, which receive a stronger "safe harbor" presumption.

It is important for Mortgage Loan Originator (MLO)s (MLOs) to distinguish HPMLs from High-Cost Mortgages (HOEPA loans). While both categories involve loans with higher costs and trigger additional consumer protections, they have different thresholds and specific regulatory requirements.