The rule aims to prevent a repeat of the housing crisis when defective loans were being bundled into securities and sold to investors unaware of the risks. The FDIC is expected to adopt it later today.
“Finalizing this rule represents a major step forward to providing greater certainty to the housing finance market and paves the way for increased participation by the private sector,” Federal Housing Finance Agency Director Melvin Watt said this morning.
The final rule includes an exemption for Qualified Mortgages (QM
) similar to when the rule was proposed last year. It does not require steep down payment standards that were a part the initial draft and would have required borrowers to put up as much as 20% of the price of their home to qualify.
Frank Keating, president and CEO of American Bankers Association, said the final rule will “encourage lenders to continue offering carefully underwritten QM loans and avoid placing further hurdles before qualified borrowers."
Ultimately, the final rule was drafted closely to the related Consumer Financial Protection Bureau’s QM regulations
enacted in January to ensure borrowers have the ability repay their home loans
The agencies are three of six regulators required to adopt the so-called "risk retention" rule, which is mandated by the 2010 Dodd-Frank Wall Street reform law. At least two of the other agencies, the Federal Reserve and the Securities and Exchange Commission, are expected to formally adopt the rule on Wednesday.
Dodd-Frank, passed in 2010, has been unpopular in the mortgage industry, as it has brought about regulations many say are overly burdensome – including the “ability to repay” rule and various fee caps. Industry leaders say many of the new regulations place undue burden on originators and put mortgages out of reach for prospective borrowers who would have qualified under the old rules.
After pushback from housing and real estate groups, the regulators backed down and issued a new proposal last year. That approach included a broad exemption for issuers of mortgage-backed securities from having to retain a portion of the credit risk on their books.
The U.S. Federal Deposit Insurance Corp. (FDIC), Office of the Comptroller of the Currency and Federal Housing Finance Agency have approved a final rule today that requires banks to retain at least 5% of the risk on their books when they bundle loans, securitize them and sell them to investors.