Bankers, Consumer Groups Form Rare Alliance to Urge Risk Retention Easing

WASHINGTON — Mortgage lenders and consumer advocates, two lobbies usually busy opposing each other, have joined forces to urge regulators to ease up on proposed risk-retention requirements that they say will result in a credit crunch.

The Mortgage Bankers Association is teaming up with groups including the National Community Reinvestment Coalition, the Consumer Federation of America, the Center for Responsible Lending and the National Housing Conference to say that regulators took a narrow approach when they outlined in March which loans would be exempt from the new requirements. They plan to hold a joint press conference Thursday and are expected to meet with regulators and lawmakers.

"We're doing briefings on the Hill and we're hoping to meet with regulators, arm in arm with consumer groups that are strongly concerned about impacts to homeownership access for moderate-income families across this country with the way rule is written," MBA Chief Executive David Stevens said in an interview.

At issue are provisions in the Dodd-Frank Act requiring lenders to keep 5% of mortgages they securitize. Yet the law also ordered regulators to create a new class of safe loan, known as a qualified residential mortgage, that would not have to comply.

But a wide array of Washington insiders, from senior Democratic and Republican lawmakers to banks to housing advocates, have said the proposed criteria for getting the QRM label are too tight. They say the restrictions, including a required 20% down payment and limits on a borrower's debt-to-income ratio, would unfairly subject borrowers with meager savings to higher mortgage costs. (The proposal included a comment period ending June 10, but the agencies are considering extending that to August.)

"We may have different reasons for being in this union, but I think we all have good reasons for being very concerned about what's been proposed," said John Taylor, the reinvestment coalition's president and chief executive.

"What has been proposed essentially creates a separate and unequal system of finance for people of color and for blue-collar, working-class people where regardless of your creditworthiness, of whether you're someone who has a great credit score and pays your bills on time and plays by all the rules, if you're not well-heeled enough to come up with 20% or if you're household debt to income ratios are high … you're going to go into a separate and unequal category of financing where you're going to have to pay more."

Ethan Handelman, vice president for policy and advocacy at the National Housing Conference, agreed. "The reason you're seeing these alignments is because all of the players in the space, including mortgage bankers and consumer advocates, recognize that an overly restrictive definition of QRM will exclude large numbers of responsible low- and moderate-income families from homeownership."

It is unclear whether the agencies will change much in the final rule. In proposing their definition for a QRM, regulators stated repeatedly that they did not intend for the exemption to be the norm in the mortgage market.

"The QRM is the exception, not the rule, and as such, I believe should be narrowly drawn," Federal Deposit Insurance Corp. Chairman Sheila Bair said at the agency's March 29 board meeting.

But since then, even lawmakers who supported the risk-retention provisions in Dodd-Frank have demanded a broader definition. Last week, nearly 40 senators from both parties told the regulators in a letter that the 20% down-payment requirement went too far. That followed a letter in April from House members, including one of the law's authors, Rep. Barney Frank, D-Mass. "There is evidence that a 20% requirement does not result in sufficiently lower risk to justify the significantly enhanced hurdle to buying a home that this represents," the House members wrote in the April 15 letter.

Laurence Platt, a partner at K&L Gates, said many policymakers who supported strong retention requirements during the legislative debate are realizing the QRM could curb credit availability.

"All of Washington is suffering from risk-retention remorse," he said. "When the law was first proposed, they wanted to put an end to what they called irresponsible lending, and they thought that risk retention and so-called skin in the game was a way to do that. Now that they actually have to try it on for size, I think they're realizing that you can still have responsible lending and make loans to borrowers without a lot of liquid assets."

Both Stevens and Taylor said they prefer a rule without hard limits for debt-to-income and loan-to-value ratios. In addition to no more than an 80% LTV, the proposal would limit front-end DTI ratios to 28% and back-end DTI ratios to 36%.

"DTI and LTV have very significant societal impacts. They draw boundaries along income and ethnicity that I'm very concerned about if the final rule goes forward as is," Stevens said. "At a time when the administration and regulators are actively trying to find ways to get private capital to reengage in the market, this is going to have the exact opposite effect."

Stevens, who recently joined the MBA after heading the Federal Housing Administration, said a narrow QRM definition could potentially put more risk on the FHA's books.

"DTI or LTV in the rule, whether loosened or as is, will ultimately draw boundaries that are not only going to have impacts on first-time homebuyers and people of color, but quite frankly will end up creating an environment where the government will end up being a much larger insurer of mortgages over the long term, simply because FHA will become sole-source provider for low-down payment financing," he said.

Lowering the down-payment requirement would be "helpful," Taylor said, but it would still force responsible borrowers with good credit histories into costlier loan options, he said. "If you have a credit score of 720 and you're a good borrower and … you only have 9% to put down, why should you have to pay more to get into the mortgage market?" he said.