Agencies Propose Revised QRM Rule

Agencies Propose Revised QRM Rule

08/28/2013 BY: TORY BARRINGER

[UPDATED to include dissenting comments fromSEC commissioners Daniel Gallagher and Michael Piwowar.]

Six federal agencies have issued a notice revising their proposed qualified residential mortgage (QRM) rule that would require lenders to retain risk when selling mortgage-backed securities (MBS).

The FDICHUDFederal Housing Finance Agency (FHFA),Office of the Comptroller of the CurrencyFederal Reserve, and Securities and Exchange Commission (SEC) jointly released on Wednesday their proposed revision, which was created in consideration of the industry’s response to the original proposal issued in 2011.

That proposal required lenders to keep a stake in the loans they sold in which borrowers were spending more than 36 percent of their income on payments and in loans with down payments of less than 20 percent. At the time, critics argued it would create an even more restrictive lending environment.

Under the new proposal, the 36 percent income threshold has been raised to 43 percent, relaxing the exemption standards somewhat. The revised rule also eliminates the down payment requirement, opening up lending for low-income borrowers.

The agencies also made adjustments to bring the QRM proposal more in line with the “qualified mortgage” (QM) rule handed down by the Consumer Financial Protection Bureau (CFPB) earlier in the year. The alignment opens up the scope of QRM eligibility, which was originally “limited to closed-end, first-lien mortgages used to purchase or refinance a one-to-four family property, at least one unit of which is the principal dwelling of the borrower.”

“[T]he agencies seek to ensure that relevant definitions in the proposed rule and in the CFPB’s rules on and related to QM are harmonized to reduce compliance burden and complexity, and the potential for conflicting definitions and interpretations where the proposed rule and the QM standard intersect,” the 500-page document reads.

In addition to the new revisions, much of the original content has been kept, including a portion of the rule that would exempt commercial MBS (among other types of non-mortgage securities). The rule also still recognizes “the full guarantee on payments of principal and interest provided by Fannie Mae and Freddie Mac for their residential mortgage-backed securities as meeting the risk retention requirements” for as long as the enterprises are in conservatorship.

The agencies are also requesting comment on an alternative definition of QRM that would include alternative underwriting standards, including an option that would create a 30 percent down payment requirement for the QRM definition. Comments are to be sent by October 30, 2013.

Industry responses to the revised proposal were largely positive.

“The re-proposed rule is a reflection of how well the notice and comment process can work,” said David Stevens, president and CEO of the Mortgage Bankers Association (MBA). “Regulators proposed a rule and received a unanimous reaction from diverse groups within housing and real estate finance that the proposal would have unduly constrained the availability of mortgage credit for many borrowers. As a result the regulators recognized the implications for consumers and the broad mortgage markets, and decided to alter and then re-propose a much better rule.”

Stevens added that while the association is pleased with efforts to align the QM and QRM definitions, the potential 30 percent down payment requirement is “unnecessary” and worrying.

Other groups—like the National Association of Federal Credit Unions (NAFCU)—were less positive.

“While the second proposal is an improvement to the first, we believe it will still have a negative downstream effect on credit unions,” said Carrie Hunt, general counsel andSVP of government affairs for NAFCU. “As such, we will thoroughly study the proposal and work with the FHFAand the other agencies to provide relief for credit unions from the rule’s effect on their mortgage lending.”

Though the proposed rule doesn’t directly apply to credit unions, Hunt noted “as participants in the mortgage market—credit unions will feel the effect of any final rule impacting that market.”

Criticism also came from the government side. In a dissenting statement, SEC commissioner Daniel Gallagher said the lowering of standards could result in a repeat of the bad practices leading to the crash. He also noted that aligning QRM standards with the QM definition—which he called “deeply flawed”—abdicates the agencies’ responsibility to the CFPB.

“The re-proposed risk retention rules, if adopted, will ensure that the vast majority of mortgages in the United States are insured or owned by the government, will introduce another flawed government imprimatur of creditworthiness into the markets, and will disincentivize proper risk management and due diligence in the mortgage markets,” Gallagher said. “I cannot in good conscience support today’s re-proposal, and I respectfully but vigorously dissent.”

He was joined in his dissent by commissioner Michael Piwowar, who argued that the agencies did not conduct necessary economic analyses when revising the rule and said it does not adequately consider alternatives to risk retention requirements.

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