In a sudden departure from earlier actions, regulators today proposed two contradictory new approaches for defining Qualified Residential Mortgage (QRM).  Either approach would change the requirements for meeting the QRM standard, first proposed in 2011, for lenders who wish to sell on the secondary market.  Conforming to the standard is required if the lender wishes to be exempt from retaining a 5 percent or larger portion of the loan risk.  The QRM requirement is a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The first new approach outlined by the six agencies involved in the rulemaking, the Federal Deposit Insurance Corp., Federal Reserve and Office of the Comptroller of the Currency, Federal Housing Finance Agency, Department of Housing and Urban Development, and the Securities and Exchange Commission, would remove the 20 percent downpayment requirement for a loan already classified as a qualified mortgage (QA) by the Consumer Financial Protection Bureau (CFPB).  The downpayment provision has particularly rankled some members of Congress who claim they never envisioned such a restriction when they passed Dodd-Frank.

The second approach - called an alternative by the agencies - moves in the opposite directions, maintaining the requirement for lenders to hold some of the credit risk if a loan is sold with less than a 30 percent downpayment

The proposed revisions, which apply to other types of loans such as auto loans and commercial loans as well as residential mortgages will be open for public comment until October 30, 2013.

The action drew immediate and positive responses from David H.  Stevens, President and CEO of the Mortgage Bankers Association (MBA) and Gary Thomas, President of the National Association of Realtors® (NAR.)  Stevens called the rule a reflection of how well the comment process can work.  "Regulators proposed a rule and received a unanimous reaction from diverse groups within housing and real estate finance that the proposal would have unduly constrained the availability of mortgage credit for many borrowers. As a result the regulators recognized the implications for consumers and the broad mortgage markets, and decided to alter and then re-propose a much better rule."

As to the rule itself, he said MBA was extremely pleased that the proposal aligns the QM and QRM definitions for risk retention purposes. "The QM standard already clearly stipulates what is considered to be a safe and sound loan. Adding additional layers of regulation would have contracted credit for first time home buyers and borrowers without large down payments, and prevented private capital from entering the market."

He expressed concern, however that regulators are still considering adding a large downpayment or equity requirement to QRM.  "As we detailed in our original comments on the rule, such steep down payment requirements are unnecessary to accomplish the purposes of the QRM standard and would severely impair access to credit for all but the most well-heeled borrowers." 

Thomas called the proposed rule "A victory for homebuyers and the future of homeownership in this country."  He said the new QRM rule will give creditworthy buyers access to safe and affordable loan products without overly burdensome downpayment requirements.

"The new standards, which align with those applied to Qualified Mortgages, are stringent enough to protect consumers from unscrupulous lending practices while also creating new opportunities for private capital to reestablish itself as part of a robust and competitive mortgage market," he said.

However, Thomas called the alternative 30 percent requirement a "restrictive measure that dramatically favors the wealthy.  Research shows that it would take the average American more than 25 years to save enough money to buy a modest home with a 30 percent downpayment.'