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Financial Regulators Finalize QRM Rule

QRM Qualified Residential Mortgage RuleFederal regulators announced on Tuesday they have finalized a rule establishing a risk retention framework for mortgage lenders securitizing and selling loans.

The so-called qualified residential mortgage (QRM) rule, which was put up for consideration by FDIC's board of directors Tuesday morning, would require banks to retain at least 5 percent of a loan's risk when packing mortgages to sell to investors in the secondary market. The rule comes as a response to last decade's housing bubble, when lenders let their standards slip and passed on the risk to investors, resulting in an economic crash as those mortgages defaulted.

The QRM rule is one of the bigger provisions mandated by the 2010 Dodd-Frank Act, with co-author Barney Frank remarking in the past that risk retention is "the single most important part of the bill."

Regulatory leaders agreed, assuring lawmakers last month that they were close to completing the rulemaking.

The road to finalizing a QRM rule has been a bumpy one. Regulators—including FDIC, HUD, the Federal Reserve, the Securities and Exchange Commission, the Office of the Comptroller of the Currency (OCC), and the Federal Housing Finance Agency (FHFA)—first proposed a draft in 2011.

The group released a second proposal in 2013, removing some of the more contentious provisions—in particular, a requirement that banks must retain risk on mortgages with down payments lower than 20 percent—in response to industry concerns.

The finalized rule is more closely aligned with the Consumer Financial Protection Bureau's (CFPB) qualified mortgage (QM) rule implemented early this year. Both rules exclude from qualification mortgages with debt-to-income ratios exceeding 43 percent, and both prohibit loans with riskier features like balloon payments or terms longer than 30 years.

In separate statements released Tuesday, regulators expressed optimism that the finalized rule will give the housing finance sector greater certainty, opening the door for more activity from private investors.

"Aligning the Qualified Residential Mortgage standard with the existing Qualified Mortgage definition also means more clarity for lenders and encourages safe and sound lending to creditworthy borrowers," FHFA Director Mel Watt said. "Lenders have wanted and needed to know what the new rules of the road are and this rule defines them."

Comptroller of the Currency Thomas J. Curry said securitizations can provide an incentive for lax underwriting if the weak credits can be transferred from originators to investors with no further responsibility for the loans.

"The rule we are approving today will require lenders to retain some of the risk for the loans that go into securitized pools except for home mortgages that meet the standards necessary under the qualified residential mortgage, or QRM, exception," Curry said. "Under this rule, QRM is equivalent to QM – that is, the Qualified Mortgage rule approved by the Consumer Financial Protection Bureau."

Industry groups were also optimistic about Tuesday's announcement, praising policymakers' efforts to avoid confusion by lining up QM and QRM together.

"This rule was required by Dodd-Frank to ensure that loans sold into the secondary market are properly underwritten, a goal which the QM rule also helps to ensure.  It is appropriate and good policy to align the two," said Frank Keating, president and CEO of the American Bankers Association. "This will encourage lenders to continue offering carefully underwritten QM loans, and avoid placing further hurdles before qualified borrowers, allowing them to achieve the American dream of homeownership."

About Author: Tory Barringer

Tory Barringer began his journalism career in early 2011, working as a writer for the University of Texas at Arlington's student newspaper before joining the DS News team in 2012. In addition to contributing to DSNews.com, he is also the online editor for DS News' sister publication, MReport, which focuses on mortgage banking news.
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