Eased Mortgage-Risk Regulation to Be Proposed by U.S. Agencies

An eased version of a rule requiring lenders to keep a stake in risky mortgages that they securitize, a restriction designed to discourage the kind of lax underwriting that contributed subprime credit crisis, is set to be proposed by U.S. regulators tomorrow.

The 500-page draft regulation written by a panel of six agencies will replace a more stringent proposal for the Qualified Residential Mortgage rule. The first version, which was released in 2011, drew protests from housing industry participants and consumer groups who said it would be too restrictive of home lending.

The plan would require banks to retain a slice of mortgages when borrowers are spending more than 43 percent of their monthly income to repay their debt. The earlier proposal would have required banks to keep a stake in loans when borrowers were spending more than 36 percent of their income on all loan payments and in loans with down payments of less than 20 percent.

The regulation, mandated by the 2010 Dodd-Frank Act, will reshape who can lend and who can borrow because banks will probably make only those loans that conform to the new standards.

The proposal would align the qualified residential mortgage rule with similarly named guidance governing risky home lending: the qualified mortgage, or QM, rule. That regulation, issued by the Consumer Financial Protection Bureau in January, contains no down payment requirement. For loans in which borrowers are spending no more than 43 percent of their income on debt, the QM rule protects banks from being sued by investors or homeowners for faulty underwriting.

The agencies will seek public comment before each holds a vote on the final rule. The agencies involved in the rulemaking are the Federal Reserve, Federal Deposit Insurance Corp., Department of Housing and Urban Development, Federal Housing Finance Agency, Office of the Comptroller of the Currency, and Securities and Exchange Commission.

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