Banks to Score Win in Softening of Risk-Retention Rule

WASHINGTON — Industry and housing advocates are on the verge of notching at least one solid victory in their quest to soften Dodd-Frank Act regulations.

In an era when bankers are more likely to lament the severity of post-crisis rules, six U.S. regulators are widely expected Wednesday to unveil far less stringent securitized loan standards — compared with their prior 2011 plan — for avoiding risk retention, including the lack of a down payment requirement. The agencies are expected to re-propose a risk-retention rule with softer criteria for "qualified residential mortgages," which, if fulfilled, frees securitizers from having to keep 5% of a loan's credit risk.

"The fact that these six regulators got back together and are going to re-propose is a reflection that the system [of notice and comment] actually works as the way it was intended to," said David Stevens, president and chief executive of the Mortgage Bankers Association and former head of the Federal Housing Administration.

Industry stakeholders and consumer groups believe the plan will not only scrap the 20% down payment requirement, which had drawn the most criticism of the 2011 proposal, but also will ensure the QRM criteria are in line with a different but similar Consumer Financial Protection Bureau underwriting standard for "qualified mortgages." The agencies have been urged to maintain consistency between the two labels.

"If the QRM rule is put in place so that it matches QM … we can be certain that we won't swing this pendulum even further and tighten credit more in a housing economy that is struggling to find its way back," Stevens said.

To be sure, the fact that the regulators are re-proposing the rule — rather than simply adopting changes in a final version — reflects just how complex the process has been to implement the Dodd-Frank provision. It also means stakeholders still have their work cut out for them before the agencies gather feedback on the new proposal and then issue a subsequent final rule.

The regulators are also expected to throw in another wrinkle, proposing to specify that mortgages with at least a 30% down payment are designated as QRM. (The new proposal is expected to include a 60-day comment period.)

"Because risk retention affects so many asset classes, so many moving parts, I think the regulators do need additional information on different aspects …," said Tom Deutsch, executive director for the American Securitization Forum. "I think that's both as a political matter, and an informational matter, and a legal matter."

The Federal Deposit Insurance Corp. board of directors is scheduled to discuss the second proposal at a meeting Wednesday morning. (Other agencies issuing the proposal include the Federal Reserve Board, Office of the Comptroller of the Currency, Securities and Exchange Commission, Federal Housing Finance Agency and the Department of Housing and Urban Development.)

The 2011 proposal had resulted in a rare alliance of industry and consumer groups — including a total of roughly 50 groups in the coalition — opposed to the original QRM criteria. Critics of the initial plan argued imposing a hefty down payment requirement of 20% would wind up keeping millions of creditworthy borrowers out of the housing market, block private capital from competing throughout the market and prolong the housing crisis.

They had also argued that any daylight between QRM and the QM criteria would lead to difficulties trying to comply with both. (The QM rule, finalized by the CFPB in January, included no down payment requirement.)

The expected changes are being seen as a coup by the coalition.

"We're claiming victory that this was the right decision done on behalf of the housing market and the American consumer," said Joe Ventrone, vice president of regulatory affairs and real estate services for the National Association of Realtors.

Barry Zigas, director of housing for the Consumer Federation of America, said adoption of QM already helps to solve many of the biggest risks that QRM was also designed to tackle by banning the kind of unstable products that were the largest contributor to mortgage defaults.

"It requires full documentation on the mortgage, full verification," Zigas said of the CFPB rule. "It only allows a limited number of products that highly constrain pre-payment opportunities and those are all the features that multiplied the risks in the pre-crisis portfolios."

President Obama touched on the issue during a broad housing speech on August 7 in Phoenix in which he urged regulators implementing Dodd-Frank to keep home purchases accessible to creditworthy borrowers.

"Let's make it a little bit easier for qualified buyers to buy the homes that they can afford," Obama said. The president said Shaun Donovan, secretary of HUD, has been "working with the finance industry to make sure we're simplifying overlapping regulations" and "cutting red tape for responsible families who want to get a mortgage but keep getting rejected by the banks."

Observers said it is possible regulators could opt to keep open the discussion about the down payment requirement by including questions for commenters to weigh in about an appropriate down payment level.

But industry representatives say they would oppose any plan with additional down payment requirements, particularly since the CFPB rule did not include such a requirement.

"The main thing is to see the preferred approach, which should be QM equals QRM, and to look at the alternative, as we understand it, an additional underwriting requirement of 30% down payment," said Ventrone.