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So Much Controversy From Such a Small Acronym

By: Kari English

I am quickly learning nothing happens in Washington without spurring controversy — to varying degrees. So I guess it should be of no surprise that the regulators’ risk-retention proposed rule would be any different.

The proposal would require sponsors of asset-backed securities to retain at least 5 percent of the credit risk of the assets underlying the securities and would not permit sponsors to transfer or hedge that credit risk. That is not really the controversial part.

As required by the act, the proposal includes descriptions of loans that would not be subject to these requirements, including asset-backed securities that are collateralized exclusively by residential mortgages that qualify as “qualified residential mortgages.” This is the controversial part: The proposal defines QRMs, more or less, as being of high credit quality and where a borrower provides a 20 percent down payment on a home purchase.

In May, several senators sent a letter to the regulators stating that the QRM provision in the Dodd-Frank Act was intended to “create a broad exemption for historically safe mortgage products” and that the “proposed legislation goes beyond the intent and language of the statute by imposing unnecessarily tight down-payment restrictions.”

Shortly thereafter, more than 100 representatives signed and sent a letter to the regulators saying mortgage guarantee insurance should be one of the factors included in the QRM definition, as specified in the Dodd-Frank Act, but as the proposal stands, it is not.

Testifying in April on behalf of American Bankers Association before the Senate Banking Committee, Tommy Whittaker, president and CEO of The Farmers Bank in Portland, Tenn., said, “We have concerns that this will drive community banks from mortgage lending and shut many borrowers out of the credit market entirely.”

Similarly, in a recent conference call with media, the Independent Community Bankers of America said it has concerns regarding having a minimum down payment of 20 percent because such a high down-payment requirement will be particularly hard for qualified first-time and lower-income borrowers to meet.
Comments on the proposal were originally due by June 10. One can only assume the letters and comments mentioned above prompted the regulators to extend the comment period to Aug. 1. Now that the time for comments has ended, one can only wonder if the regulators will adjust this proposal as they did with interchange fees.

To learn more about the risk-retention proposal/QRM and how it could affect community banking, click the links below.

QRM Articles and Information

Reactions to the QRM Provision

Kari English is senior editor of BankNews.

Copyright © August 2011 BankNews Media