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No Surprise: Final QRM Rule Closely Follows QM

by devteam October 22nd, 2014 | Share

Financial regulators on Tuesday finally releasedrnthe final rule defining Qualified Residential Mortgages (QRM).  The definition is intended to determine whichrnloans are exempt from the risk retention requirements of the Dodd Frank WallrnStreet Reform and Consumer Protection Act. rn</p

As expected, the final QRM is alignedrnwith the definition of Qualified Mortgages (QM) which defines how lendersrndetermine if a borrower has the ability to repay the loan and sets out a safernharbor for lenders as they make that determination and underwrite the loan.</p

The regulatory agencies issuing the regulationrn(Treasury, Housing and Urban Development, the FDIC, Securities and ExchangernCommission, Federal Housing Finance Agency, and the Federal Reserve) observedrnin the preamble to the proposals presenting the rule the securitization marketsrnare an important part of the provision of credit to the nation’s households andrnbusinesses.  “When properly structured,rnsecuritization provides economic benefits that can lower the cost of credit.”</p

Prior to thernfinancial crisis regulators observe that the markets were not properlyrnstructured and investors were often at a disadvantage as they did not have thernsame level of information about their investments as lenders and securitizersrnwho, in turn, did not have to be concerned about risk once loans were sold onrnthe secondary market.</p

In passing DoddrnFrank, Congressrnattempted to address these problems by requiring that securitizers, retain an economic interestrninrnthe credit risk of the assetsrnthey securitize, thus giving them an incentive to monitor and ensure itsrnquality.    The regulatory agencies issued a proposal outliningrnhow this “retained risk” would work and which loans, qualifying as QRM, wouldrnbe exempt from the requirement. </p

The lengthy memorandum issued today, containingrnthe new rule and explaining the process of revision of the original QRM proposalrnthe regulators issued in 2011 notes that regulators received comments on thatrnproposal from over 10,000 persons and businesses.</p

The original proposal providedrna complete exemption from the risk retention requirements for asset-backed securities that are collateralizedrnsolely by QRMs andrnestablished the terms andrnconditions under which arnresidential mortgagernwould qualify asrna QRM.  The original proposal would generally have prohibitedrnQRMs from having productrnfeatures that werernobserved to contribute significantly to thernhigh levels of delinquenciesrnand foreclosures since 2007 and included underwriting standardsrnassociated with lower riskrnof default.rnThe original proposal also provided that sponsors<bwould not have tornhold risk retention for securitized commercial, commercial real estate,rnand automobile loans thatrnmet proposed underwriting standards. rnIt also specified that loans eligible for purchase by Fannie Mae orrnFreddie Mac would automatically meet the QRM definition. </p

It also provided several options from which sponsors could choose risk retention requirements, including retentionrnof either a 5rnpercent “vertical” interest inrneach class of ABS interests issued in thernsecuritization or a 5 percent “horizontal” first-loss interest in thernsecuritization, and other optionsrndesigned to reflect market practice in asset-backedrnsecuritization transactions.  </p

The rule issued today defines QRM as follows.  It is a “coveredrntransaction” that meets the generalrndefinition of a QM which provides that the loan must have:</p<ul class="unIndentedList"<liRegular periodic payments that are substantially equal;</li<liNornnegative amortization, interestrnonly or balloon features;</li<liA maximum loan term of 30 years;</li<liTotal pointsrnand fees that do not exceed 3 percent of therntotal loan amount, or the applicable amounts specified for small loansrnup to $100,000;</li<liPaymentsrnunderwritten using the maximumrninterest rate thatrnmayrnapply during the first five yearsrnafter the date on which the firstrnregular periodicrnpayment is due;</li<liConsideration and verificationrnof the consumer'srnincome and assets, includingrnemployment status if reliedrnupon, and current debt obligations, mortgage-related obligations,rnalimony and child support; and</li<liTotal DTI ratio that does not exceedrn43 percent</li</ul

The agencies believe that a QRM definition aligned withrnthe definition of QM meets thernstatutory goals andrndirective of the legislation to limitrncredit risk and promote sound underwriting. At thernsame time, the agenciesrnbelieve thisrndefinition will also meetrnthernimportant goals of<bpreserving access to affordable credit for various typesrnof borrowersrnand facilitating the returnrnof private capital to the mortgage market.rn The finalrndefinition of QRM does not incorporate either an LTV ratio requirement or standards related to arnborrower’s credit history, suchrnas previously proposed.</p

The ability-to-repay rule is particularly noteworthy for requiring loan originatorsrnto document income, debts, and other underwriting factors, whichrnshould in turnrnprovide investors a morerncomplete set of informationrnon whichrntornbase their investment decision.rn </p

In adopting their QRM definition thernregulators said they recognize that mortgage and securitization marketrnconditions and practices change over time and will therefore review the definitionrnno later than four years from the effective date and every five years thereafter.rn</p

Federal Housing Finance Agency Director MelvinrnL. Watt said in a statement following the release of the rule that, “Finalizingrnthis rule represents a major step forward to providing greater certainty to thernhousing finance market and paves the way for increased participation by thernprivate sector. </p

Aligning the Qualified ResidentialrnMortgage standard with the existing Qualified Mortgage definition also meansrnmore clarity for lenders and encourages safe and sound lending to creditworthyrnborrowers. Lenders have wanted and needed to know what the new rules of the roadrnare and this rule defines them.”</p

The National Association of Realtors®rnalso issued a statement through their president Steve Brown.  It said in part, “Realtors are confident thatrnthe new QRM rule will encourage sound and financially prudent mortgagernfinancing by lenders while also ensuring responsible homebuyers have access tornsafe and affordable credit. The synchronization with the QM rule will providernlenders with much needed clarity and consistency as they apply the newrnstandards to loan applications while also providing a framework to bring morerncompetition to the secondary mortgage market.</p

 “Importantly, the final rule reliesrnon sound and responsible underwriting rather than on an onerous downpaymentrnrequirement to qualify as a QRM loan. NAR strongly opposed earlier versions ofrnthe rule that included 20 and 30 percent downpayment requirements, which wouldrnhave denied millions of Americans access to the lowest cost and safestrnmortgages.”

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About the Author

devteam

Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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