The regulatory agencies charged with implementing the risk-retention provision of the Dodd-Frank Act (DFA) recently announced that the comment period for their initial proposal will be extended to Aug. 1. As reported in the press, the delay resulted from widespread opposition to the definition of qualified residential mortgages (QRMs) as outlined in the March proposal. More fundamentally, it reflects the difficult tradeoffs involved in attempting to implement the risk retention provisions outlined in the DFA without limiting the access of large numbers of borrowers to mortgage credit and further damaging the housing market.
As part of its risk-retention provisions, the DFA requires the regulators to define QRMs, i.e., the loans that are either fully or partially exempt from the 5% minimum requirement. The regulators subsequently proposed a fairly narrow definition that included front and back debt-to-income ratios of 28% and 36%, respectively, along with a maximum LTV (for purchase loans) of 80%. It does not allow mortgage insurance to be taken into consideration, while exempting loans securitized by the GSEs as long as Fannie Mae and Freddie Mac remain under the FHFA conservatorship.