QRM Restricts Credit and Adds Borrowing Costs, Senators Say

Over one-third of therncurrent members of the U.S. Senate have written a letter to federal regulatorsrnurging they adopt a less restrictive definition of a qualified residentialrnmortgage than has been formally proposed. rnThe bi-partisan group is led by Mary Landrieu (D-LA), Johnny Isaksonrn(R-GA), and Kay R. Hagan (D-NC). The letter, addressed to the heads of the Federal Deposit Insurance Corporation, Office of Comptroller of the Currency, Federal Reserve Bank, Federal Housing Finance Agency, Department of Housing and Urban Development, and the Securities and Exchange Commission, is signedrnby 23 Democrats, 13 Republicans, and both independent senators. It urges thernregulators to avoid restricting credit to middle class families who are saving to buyrna home. </p

The Dodd-Frank financial reformrnact requires the originator of a residential mortgage to retain at least a 5rnpercent interest in that mortgage when selling it into the secondary market, arnprovision commonly referred to as “skin in the game.”  Loans backed by FHA, VA, USDA, Fannie Mae and Freddie Mac will however be exempt from risk retention regs. For non-agency loans to meet the QRM definition and avoid being subject to risk retention regs, they must have down payments of 20% or more and a DTI of 28%/36% or less. </p

When Dodd-Frank was enacted, Landrieu, Isakson, and Hagan inserted an amendment which exempts suitably qualified mortgages (QRM), the definition of which was left up to regulators, from that 5 percent requirement.  The senators state that when theyrnincluded the QRM exemption amendment in the Dodd-Frank Wall Street Reform and ConsumerrnProtection Act that they were aiming to create a broad exemption from risk retentionrnfor historically safe mortgage products. The senators contend that they intended the exemption statute to require that the QRM definition be based on “underwriting and product features that historical loan performancerndata indicate result in a lower risk of default” and that they provided clearrnguidance on the types of factors that can be used including the documentationrnof income and assets, debt to income ratios and residual income standards, restrictionsrnon negative amortization, balloon payments, prepayment penalties and therninclusion of mortgage insurance and features that mitigate payment shock.  The three senators who proposed the amendmentrnsaid they intentionally did not include a rigid down paymentrnrequirement in the provision to ensure that creditworthy, qualified buyersrncould access mortgages with reasonable down payments.</p

The letter states that the proposed regulations go beyond what wasrnintended in the statute by imposing down payment standards which it termedrnunnecessarily tight.  “These restrictionsrnunduly narrow the QRM definition and would necessarily increase consumer costsrnand reduce access to affordable credit.” rnThe senators said that well underwritten loans did not cause thernmortgage crises and that the additional requirements proposed for QRM swing thernpendulum too far and reduce the availability of affordable mortgage capital forrnotherwise qualified buyers.  Many willrnhave to pay higher rates and fees and others may not be able to obtain a mortgagernat all, the letter says.  The senators alsorncriticized “overly narrow debt to income guidelines.”

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