Yesterday, the Federal Reserve and five other federal regulators introduced a revised qualified residential mortgage rule (QRM). This is the rule that requires lenders to keep a stake in loans they securitize if they do not meet the QRM standard.
This rule was required by the Dodd–Frank Wall Street Reform and Consumer Protection Act, and the provision is in response to concerns that lenders were making poor loans and selling them to the secondary market without concern whether the borrower could make the loan payments. Our industry may recall the initial proposal from the federal regulators in 2011 that would have required a 20% down payment on any loan that lenders proposed to sell in the secondary market. This proposal was considered draconian and was uniformly opposed by the banking and real estate industries.
Fortunately, this new proposal has dropped that requirement and now proposes to mirror the Qualified Mortgage (QM) definition rule. This QM rule specifies the requirements for a mortgage loan that merits a “safe harbor” from lawsuits based on the ability to repay. This will bring the QRM proposal in line with the provisions of the QM rule. The QM rule was developed by the Consumer Financial Protection Bureau (CFPB) and goes into effect in January. It requires that borrowers’ total debt-to-income ratio be capped at 43% and that lenders conduct greater due diligence in determining a loan applicant’s ability to repay by taking a deeper review into their income and debt records.
As reported in trade publications, the newly proposed QRM approach seems to have broad industry support. Frank Keating, president and CEO of the American Bankers Association, applauded the proposed QRM rule. “Gratefully, the proposed rule aligns the QRM definition with the existing (CFPB) qualified mortgage rule,” Keating said. “This will encourage lenders to continue offering carefully underwritten QM loans, including those with lower down payments. As a result, it will help the economy and ensure that the largest number of creditworthy borrowers are able to access safe, quality loan products at competitive prices.” Gary Thomas, president of the National Association of Realtors, said the proposed revised rules are “a victory for home buyers and the future of homeownership in this country.”
This proposed QRM rule is not the final rule, however. It is open for comment until October 30, 2013, and regulators have also sought comment on a “QRM plus” that would require a 30% down payment. Reaction to this proposal was negative from the real estate industry. The National Association of Realtors said that it “will continue to oppose any regulation that requires unreasonably high down payments from consumers.” He said such a provision would only benefit the wealthy and pointed out that it would take the average American more than 25 years to save up a 30% down payment for a modest home.