Regulators recently issued a reproposal of the Dodd-Frank-mandated risk retention rule, which requires sponsors of securitization transactions to hold risk in those transactions.
The Dodd-Frank Act considered that most mortgage securitizations would be subject to risk retention, except for those “qualified residential mortgages” underwritten to high standards.
When regulators initially attempted to define QRM, they proposed down payments of 20 percent and a debt-to-income ratio of 36 percent. Comments on the proposal, however, raised concerns that the standard, though applicable only to a limited number of mortgages, would make it too costly for consumers to obtain loans.
Regulators revised the proposal to equate a QRM with the CFPB’s “qualified mortgage,” which does not include underwriting based on loan-to-value, down payment or credit history. The CFPB rule analyzes a borrower’s ability to repay, with a maximum debt-to-income ratio of 43 percent.
The new proposal also allows for an alternate definition of QRM that includes criteria not present in the CFPB’s QM rule, such as availability only if the LTV at closing did not exceed 70 percent, the borrower’s credit history must show ability to manage debt and QRM status would only be granted for first-lien loans secured by one-to-four family properties that are designated as the principal dwelling of the borrower.