The Federal Reserve and five other regulators today introduced a revised qualified residential mortgage (QRM) rule that requires lenders to keep a stake in certain loans that do not meet QRM standards.
The proposed revisions to the QRM rule are designed to bring it in line with the provisions of the qualified mortgage (QM) rule developed by the Consumer Financial Protection Bureau (CFPB), going into effect in January, which requires that borrowers' total debt-to-income ratio be capped at 43% and that lenders conduct greater due diligence in determining a loan applicant's ability to repay by taking a deeper dive into their income and debt records.
The idea behind the revised QRM rule is to require lenders to keep a ‘skin in the game’ by forcing them to hold appropriate levels of capital in their reserves when they take the risk of securitizing loans that do not fall within QRM/QM standards. The rule, originally introduced in March 2011, is designed to satisfy the risk retention requirement contained in the Dodd-Frank Act.
The previous version of the QRM rule had included a provision calling for borrowers to make at least a 20% down payment in order for the loan to qualify as QRM. However, that provision was met with stiff opposition from industry stakeholders, who argued that it would lead to an overly restrictive lending environment and would prevent many otherwise-eligible borrowers from being able to obtain a mortgage. As a result, that provision has been eliminated in the revised rule.
The six regulators – including the Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Department of Housing and Urban Development, Federal Housing Finance Agency, and Secuities and Exchange Commission – have introduced two approaches to redefining the QRM rule. This indicates that regulators were not in full agreement on how far to go in terms of relaxing the previously proposed rules.
Each agency has requested comment from industry stakeholders on the proposed changes, with a deadline of Oct. 30.
The so-called ‘preferred’ approach would allow loans already classified as QM under CFPB standards to move forward with no down payment requirement. Thus these loans would be exempt from the QRM risk-retention requirements.
The alternative – and much less popular – approach would require lenders to retain a stake in the credit risk when mortgages to be securitized are originated without at least a 30% down payment.
The revised QRM rule would provide asset-backed securities sponsors with several options to satisfy the risk requirements. The original proposal generally measured compliance with the risk retention requirements based on the par value of securities issued in a transaction and included a so-called premium capture provision. However, under the revised rule, risk-retention would generally be based on fair value measurements, without a premium capture provision.
The proposed, softer QRM rules come just as the housing recovery is showing signs of weakening, due mainly to rising interest rates. Regulators are walking a tightrope in that they are compelled to rein-in the relaxed lending standards that helped fuel the economic crisis of 2008-2009, while at the same time, allowing enough flexibility in the rules so as to not overly restrict credit and dampen the recovery.
Overall, the ‘preferred’ approach seems to have broad industry support. Frank Keating, president and CEO of the American Bankers Association, applauded the proposed QRM rule.
‘Gratefully, the proposed rule aligns the QRM definition with the existing (CFPB) qualified mortgage rule,’ Keating said. ‘This will encourage lenders to continue offering carefully underwritten QM loans, including those with lower down payments. As a result, it will help the economy and ensure that the largest number of creditworthy borrowers are able to access safe, quality loan products at competitive prices.’
Keating added that the proposed rule ‘removes unnecessary risk-retention and capital requirements, which would reduce the availability of low-risk loans.’
Gary Thomas, president of the National Association of Realtors, said the proposed revised rules are ‘a victory for home buyers and the future of homeownership in this country.’
‘This version of the QRM rule will give creditworthy buyers access to safe and affordable loan products without overly burdensome down payment requirements,’ Thomas said. ‘The new standards, which align with those applied to qualified mortgages, are stringent enough to protect consumers from unscrupulous lending practices while also creating new opportunities for private capital to re-establish itself as part of a robust and competitive mortgage market.’
In particular, Thomas said he was grateful that the 20% down payment rule was eliminated, as it would have ‘denied millions of creditworthy Americans access to the lowest cost and safest mortgages.’
With regard to the alternative rule requiring a 30% down payment, Thomas said Realtors ‘will continue to oppose any regulation that requires unreasonably high down payments from consumers.’ He said such a provision would only benefit the wealthy and pointed out that it would take the average American more than 25 years to save up a 30% down payment for a modest home.
To download a copy of the proposed rule, click here.