Who wants to make this nicer? :(

existing.rb

def extension_path_for_nested_extension(path, apply_tmp)
  if File.exist?(path.gsub(/\.erb$/, ""))
    if %r{/(locales/.*\.yml)|((routes|#{gem_name})\.rb\.erb)$} === path
      # put new translations into a tmp directory
      path = path.split(File::SEPARATOR).insert(-2, "tmp").join(File::SEPARATOR) if apply_tmp
    elsif %r{/readme.md$} === path || %r{/#{plural_name}.rb$} === path
      path = nil
    end
  elsif %r{lib\/#{plural_name}.rb$} === path
    path = nil
  end

  path
end

final.rb

def extension_path_for_nested_extension(path, apply_tmp)
  return nil if !File.exist?(path.gsub(/\.erb$/, '')) &&
                %r{readme.md|(lib/)?#{plural_name}.rb$} === path

  if apply_tmp && %r{(locales/.*\.yml)|((config/routes|#{gem_name})\.rb\.erb)$} === path
    return path.split(File::SEPARATOR).insert(-2, "tmp").join(File::SEPARATOR)
  end

  path
end

@sgerrand thanks!