Regulators overhaul risk-retention proposal

The QM rule lets lenders determine a borrower’s ability to repay, with a maximum debt to income ratio of 43 percent, and it prohibits some loan features, such as interest-only and balloon payments.

Banks are protected from being sued by investors or homeowners for faulty underwriting if they follow the QM rules. 

The first version of QRM drew heavy fire — nearly 11,000 comments — from a broad swath of housing industry and consumers groups that said the proposal would make it too expensive for many borrowers to get loans and would hamper the housing market's rebound. 

That ire was directed at the previous requirement that banks keep a stake in loans when the down payment was less than 20 percent and when borrowers hit a 36 percent debt-to-income ratio. 

The CFPB's qualified mortgage rule does not include underwriting based on credit history, loan-to-value ratio or down payment.  

So this latest plan, in response to the industry, broadens the requirement for banks to keep a slice of those who are spending more than 43 percent of their monthly income to repay their debt.

QM allows exceptions for rural lenders or small lenders, and allows loans that meet the underwriting standards of Fannie Mae and Freddie Mac to qualify for QM status, even with debt ratios above 43 percent, said Paul Nash, first deputy comptroller of the Office of the Comptroller of the Currency, at the FDIC's meeting on Wednesday morning.

"Balancing these considerations is important in the current environment where mortgage credit remains tight in there a few private mortgage securitizations factors that can constrain access to credit," regulators said.

The newly designed version more heavily weighs the proposed effects of the rule on credit pricing and credit availability.

"Staff sought to achieve meaningful risk retention levels that would balance incentives and sound underwriting and transparency with risk retention that does not reduce credit availability, minimize the operational costs of risk retention as much as possible and not disrupt the functioning of the securitization markets."

David Stevens, head of the Mortgage Bankers Association, said the CFPB rule set to go into effect in January, eliminates dangerous mortgage products that brought down the market. 

He said the proposed rule issued Wednesday reflects that regulators recognized the need to synch qualified residential mortgages and qualified mortgages instead of layering on additional rules that would hamper a housing recovery. 

A final rule could be ready by the end of the year. 

Although the QM rule is set to go into effect in January industry experts expect the QRM rule will be implemented after that. 

The rules were not expected to go into place at the same time under Dodd-Frank. 

The agencies involved in the rule-making besides the FDIC and Office of the Comptroller of the Currency are the Federal Reserve, Department of Housing and Urban Development, Federal Housing Finance Agency and the Securities and Exchange Commission.