Wednesday, June 01, 2011

Senators Posit that Proposed Dodd-Frank Risk Retention Regulations Go Beyond Legislative Intent

The proposed risk retention regulations go beyond the intent and language of Dodd-Frank by imposing unnecessarily tight down payment restrictions that unduly narrow the qualified residential mortgage definition, said the Senators who wrote the qualified residential exemption into Section 941 of Dodd-Frank. In a letter to the SEC and the federal banking agencies, the Senators said that the current proposals would necessarily increase consumer costs and reduce access to affordable credit. Well underwritten loans, regardless of down payment, were not the cause of the mortgage crisis, they noted. The Senators urged the SEC and the banking regulators to follow the legislative intent as they modify the proposed risk retention regulations. The letter was signed by Senators Johnny Isakson (R-GA), Mary Landrieu (D-LA), Kay Hagan (D-NC), and Jeanne Shaheen (D-NH).

The Senators said that they intended to create a broad exemption from risk retention for historically safe mortgage products when they included the qualified residential mortgage exemption in the Dodd-Frank Act. The statute requires the qualified residential mortgage definition to be based on underwriting and product features that historical loan performance data indicate result in a lower risk of default.

The statute goes on to provide clear guidance on the types of factors that can be used, including, documentation of income and assets, debt-to-income ratios and residual income standards, product features that mitigate payment shock, restrictions or prohibitions on non-traditional features like negative amortization, balloon payments, and prepayment penalties, and mortgage insurance on low down payment loans.

Noting that well underwritten loans, regardless of down payment, were not the cause of the mortgage crisis, the Senators said that imposing unnecessarily tight down payment restrictions goes beyond the legislative intent of the provision. In addition, the proposed regulation also establishes overly narrow debt to income guidelines that will preclude capable, creditworthy homebuyers from access to affordable housing finance.

In the letter, the Senators emphasized that the extensive additional requirements for qualified residential mortgages in the proposed regulations swing the pendulum too far and reduce the availability of affordable mortgage capital for otherwise qualified consumers. Many borrowers would simply be forced to pay much higher rates and fees for safe loans that nevertheless did not meet the exceedingly narrow qualified residential mortgage criteria. In many cases, some creditworthy borrowers may not be able to get a mortgage at all. Congress included the qualified residential mortgage provision to exempt safe, well-underwritten mortgages that have stood the test of time from the risk retention requirement.

In a letter sent to the SEC and the banking regulators earlier this year, the Senators said that, while there was discussion on whether the qualified residential mortgage should have a minimum down payment in negotiations during the drafting of the provision, they intentionally omitted such a requirement. According to the Senators, the purpose of the qualified residential mortgage exemption is to support a housing recovery by creating a robust underwriting framework that will attract private capital to support responsible lending and borrowing. In developing the QRM framework, the Senators recognized the importance of establishing a framework that would allow creditworthy first-time homebuyers to have access to the benefits of loans meeting the QRM standard.

In the earlier letter, they also recognized that homeowners in the hardest hit housing markets have lost extraordinary amounts of equity and that a high down payment is out of reach for many of them. A qualified residential mortgage with a high down payment requirement would force them to postpone buying or refinancing a home for years, or to take on mortgages at much higher interest rates. Consequently, the QRM framework set forth in Dodd-Frank specifically contemplates the inclusion of low-down payment loans, provided they have mortgage insurance or other forms of credit enhancement, to the extent such insurance or credit enhancement reduces the risk of default.

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