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June 2, 2011 – A bipartisan group of 39 senators is urging banking regulators to ease up in their proposed risk retention rule for mortgage underwriting, saying the proposed rule goes beyond the intent of the underlying law and is "unduly narrow."

The proposal was released in April and includes criteria for determining what would be defined as a "qualified residential mortgage" and thus exempt from a 5 percent risk retention requirement set by the Dodd-Frank Act.

The proposed rule doesn't directly apply to credit unions, but it has market implications that NAFCU is closely monitoring.

The 39 senators, led by Mary Landrieu, D-La., Kay Hagan, D-N.C., and Johnny Isakson, R-Ga., said the proposed rule could keep good borrowers out of the market.

Lawmakers "intended to create a broad exemption from risk retention for historically safe mortgage products when we included the [QRM] exemption" in the Dodd-Frank Act, they wrote in a letter last Thursday. The proposed criteria "unduly narrow the QRM definition and would necessarily increase consumer costs and reduce access to affordable credit," they said.

The proposed rule sets a number of parameters for loans meeting the QRM standard, including a minimum down payment of 20 percent. "Well underwritten loans, regardless of down payment, were not the cause of the mortgage crisis," they wrote. "The proposed regulation also establishes overly narrow debt-to-income guidelines that will preclude capable, creditworthy homebuyers from access to affordable housing finance."

The statute provides guidance on the types of factors regulators should consider in defining what is a QRM. Those factors, the senators said, include:

• 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.

The letter went to to the heads of the Department of Housing and Urban Development, Federal Reserve Board, FDIC, Securities and Exchange Commission, Office of the Comptroller of the Currency and the Federal Housing Finance Agency. The proposed rule is out for comment until June 10.