Financial regulators are revisiting one of the key Dodd-Frank regulations pertaining to mortgages, two years after industry and consumer groups warned that the original proposal would raise borrowing costs for homeowners.
On Wednesday, six federal agencies tasked with regulating banking and housing finance released a 499-page proposal for a rule mandated by the Dodd-Frank Act that requires banks to retain a portion of the risk created in securitizing mortgages. The provision was intended to ensure that lenders have some “skin in the game” to prevent them from loosening mortgage standards for loans packaged into securities, a phenomenon thought by many to have contributed to the 2008 financial crisis.
A key feature of the rule is the definition of a “qualified residential mortgage” — a loan that meets high underwriting standards that would be exempt from the risk-retention rule.
In the 2011 version of the rules, regulators called for a stringent definition for qualified residential mortgages that included a 20 percent down payment. After proposing the rule, agencies received comments from 10,500 people and groups, the “overwhelming majority” of whom opposed it, according to Wednesday’s new proposal.
Industry groups such as the National Association of Realtors and the American Bankers Association warned that the mortgage requirements could lead lenders to leave the market and put homeownership out of reach for many would-be borrowers. Affordable housing groups also expressed concerns that the QRM would price some people out of the market. The authors of the section of Dodd-Frank creating the QRM in the U.S. Senate also told regulators that they did not intend for it to include a minimum down payment.
The new version of the proposal would loosen the requirements for QRMs and would not require a down payment. It would bring the definition of the QRM into alignment with a definition of creditworthy mortgages issued by the Consumer Financial Protection Bureau, a separate regulatory agency created by the Dodd-Frank Act to guard against predatory lending.
The National Housing Conference, an affordable housing advocacy group, hailed the new proposed rule in a statement from its president, Chris Estes, saying that it would “allow more American families to become homeowners and ensures that housing markets can remain strong in the future.”
The Federal Reserve, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Securities and Exchange Commission, Department of Housing and Urban Development, and Federal Housing Finance Agency will now seek comments until Oct. 30 before moving to finalize the rule.