The banking industry's positive reaction to the Consumer Financial Protection Bureau’s (CFPB) "qualified mortgage" rule, which governs mortgage underwriting, is prompting cautious optimism that a related securitization rule may also turn out better than expected.
The CFPB earlier this month used a broader definition for QM than previously feared, affording more loans legal protection under the CFPB's ability-to-repay standards. The bureau established a clear safe harbor for prime loans meeting QM criteria.
That positive development has intensified attention on an ongoing, related effort by other regulators to define so-called "Qualified Residential Mortgages", or loans exempt from pending securitization restrictions. With the QRM definition seen as being somewhat dependent on QM, industry observers hope the still-pending securitization rule will similarly expand the pool of loans exempt from credit risk retention.
"The fact that QM is much broader and more sound and good for lending would lead me to think, or at least hope, that it is taken into consideration when [regulators are] looking at QRM," said David Coleman, managing director at KPMG Advisory.
Under the Dodd-Frank Act, lenders must hold 5% of the credit risk for mortgages they securitize. But the law left it to six financial regulators — not including the CFPB — to define QRM, a new category of ultra-safe loan that can skirt the requirement. (The reform law also mandated QM.)
To limit the burden lenders could face if the two definitions are in conflict, regulators had been waiting to finalize the QRM rule until after the CFPB finished QM. With the bureau's rule in place, the risk-retention rule is expected to be completed later this year.
"Now we are going to get it in higher gear and get this in place. My hope would be by the second half of this year, we would have the rules in place," Comptroller of the Currency Thomas Curry, whose agency is among those writing QRM, said in a recent interview with ASR’s sister publication, American Banker.
The industry is still critical of the regulators' 2011 proposal for QRM, which was seen as having an overly narrow exemption. Bankers and housing advocates were particularly opposed to a 20% down payment requirement for loans avoiding risk retention.
But analysts say the QM rule could now affect the outcome for QRM, including the down payment standard.
The belief is "if the government is blessing a certain quality of underwriting for QM, then why do you need to add an extra layer with QRM," said Jaret Seiberg, a policy analyst at Guggenheim Partners. "There's a legitimate policy debate starting to brew about whether a down payment requirement should be taken out of mix."