OCT 11, 2012 11:15am ET

QRM Debate Among Many Regulators Drags On and On

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The qualified residential mortgage rule that determines which privately issued mortgages are subject to risk retention has been on the regulatory backburner for months and may even be repealed.

Federal regulators assigned to craft the measure still cannot agree on the universe of mortgages that should be subject to the 5% risk retention requirement. (The first QRM proposal issued for public comment was universally panned by members of Congress, and consumer and civil rights groups, as well as lenders.)

Meanwhile, it appears that the QRM rule has been overshadowed by its cousin—the qualified mortgage rule. Some regulatory experts have come to the conclusion that the QM rule (also mandated by the Dodd-Frank Act) is the more important of the two because it establishes an “ability to repay” standard.

Among other things, the QM rule will set the underwriting standards for acceptable lending practices as well as penalties for violations when mortgage bankers fail to consider the borrower’s ability to repay the loan. Lenders also face litigation risk for QM violations.

“There is talk of getting rid of the QRM rule,” one source told National Mortgage News. “It may be repealed if Congress ever gets around to passing a Dodd-Frank Act corrections bill.”

The author of the QM provision, Rep. Barney Frank, D-Mass., wanted to insure that anyone who securitizes risky loans has “skin in the game.” (A former Banking Committee chairman, Frank is retiring in January.)

As proposed back in April 2011, the QRM rule would require securitizers to retain 5% of the credit risk on loans that did not have a minimum downpayment of at least 20%.

The proposal sparked immediate opposition from Democrats and Republicans who complained it would cut off credit to first-time homebuyers and hurt the housing market. Even Frank said the 20% downpayment is too restrictive.

More recently, six consumer and housing groups warned that a minimum 10% downpayment would have an adverse impact on minorities and provide little benefit in terms of lowering defaults and foreclosures. Housing and Urban Development secretary Shaun Donovan wants a QRM rule that does not restrict access to the “safe” loans that are being originated today. Last week, the HUD secretary said the QRM rules should be drafted to require risk retention only on the type of irresponsible loans originated during housing boom.

“Less than 15% of the loans originated in 2006 would qualify under even the broader definitions that are being considered for QRM,” Donovan said. However, some regulators want a narrower definition. “We need to remember that the goal of this debate” is not to place further limits on today’s tight credit standards.

Six regulatory agencies, including HUD, are assigned to finalize the QRM rule. But earlier this year, they decided to suspend their rulemaking effort until the Consumer Financial Protection Bureau finalizes its QM rule, which defines the boundaries of the private mortgage market. The QRM rule is supposed to determine which types of private loans would trigger risk retention.

The American Bankers Association wants regulators to rethink the QRM rule entirely or drop it. The trade group believes the rule needs to be substantially modified so it doesn’t place additional constraints on today’s conservative underwriting standards.

“At the end of the day, if the regulators can’t decide on major modifications to the QRM rule or not to issue a rule at all, then it is unlikely they will get anything right,” said ABA senior vice president Bob Davis. (Congress exempted Fannie Mae, Freddie Mac and Federal Housing Administration loans from DFA risk retention requirements.)

In addition to the QM and QRM rules, regulators are also charged with issuing new servicing and mortgage disclosure rules, as well as loan officer compensation guidelines.

Most of the weight has fallen on the CFPB, which has missed its own self-imposed deadlines for issuing the QM rule. Now the bureau is expected to issue a final rule after the November elections.

Under the DFA legislation, the QM provisions go into effect Jan. 21 whether there is a rule or not. Considering the litigation risk, failure to issue a QM rule would have chilling effect on mortgage lenders. “The significant delays in putting out rules is partly because of the complexity of each rule and the impact other DFA mortgage rules will have on lenders and borrowers,” said Kevin Petrasic, a partner at the Paul Hastings law firm in Washington.

He noted the QRM rule is particularly challenging because it could disadvantage first-time homebuyers and less-creditworthy borrowers.

When mortgage rates eventually rise, the QRM definitions will become more restrictive, Petrasic warned. “First-time homebuyers and marginal borrowers are going to have a more difficult time getting mortgages,” he said.

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