• SEC, Five Other Regulators Propose Relaxed Standards for Exempt Mortgages
  • September 9, 2013 | Authors: Luke B. Falgoust; J. Marshall Page
  • Law Firm: Jones Walker LLP - New Orleans Office
  • On August 28, 2013, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Department of Housing and Urban Development, the Office of the Comptroller of the Currency, the Federal Housing Finance Agency, and the Federal Reserve Board proposed a new Qualified Residential Mortgage ("QRM") that would relax the process for lenders to issue home loans that may be 100 percent securitized in the secondary mortgage market. The revised proposed rule would require lenders to hold a portion of mortgage credit risk on their books when the borrower has a monthly debt-to-income ratio of 43 percent or greater. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires lenders to keep 5 percent of the credit risk as "skin in the game" for riskier mortgages that do not meet the QRM standards.

    An earlier proposal of March 2011 would have required a QRM to include a 20 percent down payment from the borrower and a maximum debt-to-income ratio of 36 percent. Consumer advocates, industry groups, and lawmakers criticized the proposal, stating it would limit access to mortgage credit for many potential borrowers. Many of the more than 10,000 commenters said that the original QRM definition was too narrow and would increase borrowing costs or reduce access to credit for borrowers who have higher levels of monthly debt or cannot afford a 20 percent down payment. The new proposal comes in response to the negative feedback.

    The new proposal would align the definition of a QRM with the definition of a qualified mortgage ("QM") under the Consumer Financial Protection Bureau's ("CFPB") ability-to-repay rule. Effective January 10, 2014, the CFPB rule sets underwriting standards for lenders to ensure that borrowers are issued mortgages they can afford. The CFPB rule requires an analysis of the borrower's ability to repay and a maximum debt-to-income ratio of 43 percent. The QM definition also prohibits certain types of loans and loan features, such as interest-only loans, balloon payments, or negatively amortizing loans. Under the new proposal, a home loan already classified as a QM by the CFPB standards would also count as a QRM, allowing the mortgage to enter the secondary market without any risk retention on the part of the lender, even if it does not have a down payment.

    In addition to the main proposal, the regulators have included an alternative proposal that would require a 30 percent down payment for all QRM loans. A final rule could be completed by the end of 2013. The proposed rule will be open for public comment until October 31, 2013.