By now, most everyone has heard the news that the new proposed definition of the “qualified residential mortgage” has been aligned to match the definition of a “qualified mortgage” which was released earlier this year. This would be an important victory for lenders since the original definition included substantial downpayment requirements and loan to value limitations that could have significantly impeded the origination of residential home loans.
Though many are declaring victory with the proposed rule announced this week, the Federal Reserve has also released an alternative definition−referred to as the QM-plus definition−which would include a requirement of a 70% loan-to-value ratio.
While it is clear the Federal Reserve appears to favor a QRM rule that aligns with the QM definition, lenders should not relax assuming that the fight is over. Rather, it appears that although an important legislative victory is within reach, the matter is not finally settled. Lenders should press forward to ensure that the aligned definition set forth in the Fed’s main proposal is not lost or compromised in the process of finalizing the QRM/risk retention rule.
By way of background, the importance of the QRM definition is that it excludes any loans meeting the QRM definition from credit risk retention requirements. Hence, loans that do not meet the QRM definition would be subject to a 5% credit risk retention requirement, but loans meeting the definition would have no such requirement.
To avoid confusion, the QM definition, which under the QRM proposal would be identical to the QRM definition, creates a safe harbor shielding a lender from claims that a loan did not meet the ability to repay standard required of all residential loan originations. Thus, a loan now meeting an identical QM/QRM definition would both shield the lender from liability from “ability to repay claims” and exempt the loan from the 5% credit risk retention requirements.