As was to be expected, the Mortgage Bankers Association has filed a letter with federal regulators urging them to adopt the ‘preferred’ approach to defining how lenders address risk retention in the proposed qualified residential mortgage (QRM) rule.
Last month, federal regulators introduced revisions to the proposed QRM rule, which defines how banks implement risk retention for securitized mortgage loans.
Within the revised rule, however, regulators offered two separate and strikingly different approaches to addressing risk retention – and solicited feedback from industry stakeholders as to which approach they prefer.
The so-called ‘preferred’ approach, as outlined in the revised proposal, is designed to bring the QRM rule – which was originally introduced by the Federal Reserve in 2011 and is part of the Dodd-Frank Act – in line with the qualified mortgage (QM) rule established by the Consumer Financial Protection Bureau (CFPB) in January.
Using this approach, loans that are already classified as ‘QM’ under CFPB standards would be able to move forward with no down payment requirement. In other words, QM loans would be exempt from the QRM risk-retention requirements. (This is also known as the ‘QRM=QM’ approach.)
The previous version of the proposed QRM rule stipulated that loans could only qualify as QRM if the borrower made a 20% down payment. However, that provision met with stiff opposition from industry stakeholders, who argued that it would lead to an overly restrictive lending environment.
As a result, regulators eliminated that provision. However, as a result of feedback from certain investor groups, regulators ended up proposing two separate alternatives in the second revision – the ‘preferred’ approach (‘QRM=QM’) and an ‘alternative’ approach that 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.
This alternative approach came as a surprise to some industry players, many of whom wondered why regulators would propose a rule with a 30% down payment requirement when they had already agreed to eliminate the 20% down payment requirement.
In its letter to regulators, the MBA expressed ‘deep concerns’ over the alternative proposal that would require a 30% minimum down payment, asserting that such a proposal ‘was inconsistent with legislative intent and could exclude large numbers of minority borrowers from sustainable mortgage lending.’
In addition the MBA asserted that the alternate method ‘would limit the availability of QRM coverage to a small fraction of mortgage borrowers while largely excluding first-time buyers, minority borrowers and the underserved from the most competitive and affordable mortgage financing terms that are anticipated for QRM loans.’
‘The QM definition is central to the CFPB's ability to repay rule and incorporates product restrictions, documentation and underwriting requirements, such as debt-to-income and agency standards, which are designed to ensure a borrower's ability to repay,’ wrote David Stevens, president and CEO of the MBA. ‘The CFPB accomplishes this objective without including hard-wired down payment and credit history standards that would exclude a large segment of the population, particularly first-time, minority and other potentially underserved homebuyers. Considering the similar purposes of QM and QRM, MBA does not believe that there are any valid reasons for the Agencies to establish separate compliance standards.’
In its letter, the MBA argues that the alternate approach is ‘unnecessary because the investor market can easily ascertain and price transparent credit attributes like loan-to-value ratio.’ In addition, it is opposed to this approach because it ‘will raise costs to borrowers… consumers who do not qualify for QRM will pay higher prices for ever-scarcer private label credit.’
What's more, because the alternate approach would result in a more restrictive QRM rule, it would have the effect of increasing the federal government's involvement in the mortgage market ‘when the government's footprint and risk should be reduced.’
On the other hand, the MBA supports the ‘preferred’ approach because it aligns the CFPB's QM definition, which ‘sets forth a rigorous standard for sustainable mortgage lending which result in borrowers' ability to repay and significantly lowers delinquencies and defaults.’
In addition, the MBA prefers this approach because ‘aligning the QRM and QM definitions will allow a greater number of borrowers to benefit from lower mortgage costs resulting from greater access to the private investor market, as well as safer and more sustainable loans.’
What's more, the preferred approach will ‘streamline the regulatory burden on an industry where the costs of regulation have become a great concern.’
The agencies in charge of developing the revised QRM rule – including the Office of the Comptroller of the Currency; the Board of Governors of the Federal Reserve; the Federal Deposit Insurance Corp.; the Securities and Exchange Commission; the Federal Housing Finance Agency; and HUD – are expected to adopt a final rule by the end of this year.
To view a copy of the MBA's letter to regulators, click here.