WASHINGTON Regulators will soon unveil a new proposal that is seen as softening rules to prevent the type of shoddy underwriting practices that fueled the housing bubble, according to two sources familiar with the matter.
The rules, prompted by the 2007-09 financial crisis and first proposed in 2011, require lenders and bond issuers to keep a stake in mortgages that they securitize, with the exception of basic loans.
Six U.S. regulators, including the Federal Deposit Insurance Corp and the Federal Reserve, will soon float for public comment a new plan to exempt more loans from the skin-in-the-game rules, the sources said. The Wall Street Journal first reported on the expected proposal.
The change reflects regulators' nervousness about harming the housing recovery and comes after heavy lobbying from both lenders and consumer groups. Those groups said the earlier plan was too harsh and could restrict credit for first-time and lower-income borrowers.
Dozens of lawmakers also warned that the proposal went too far, while some reform advocates cautioned against weakening the rules seen as addressing a core driver of the financial crisis.
"On a point-by-point basis, every single mortgage-related rule out of the Dodd-Frank Act has been finalized in a far less burdensome manner than originally envisioned or proposed," said Isaac Boltansky, a policy analyst with Compass Point Research and Trading.
The risk-retention requirement stems from the 2010 Dodd-Frank Wall Street reform law. It is intended to reduce risk-taking by forcing lenders to hold a 5 percent stake in any loan bundled for investors in the secondary market.
Dodd-Frank charged the FDIC, the Fed, the Securities and Exchange Commission, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency and the Department of Housing and Urban Development with crafting the rules.
The initial proposal would have exempted so-called qualified residential mortgages, or QRMs, in which borrowers make 20 percent down payments.
Lenders and consumer groups alike said banks would be afraid to make loans that did not receive this exemption, meaning they might stop lending to people who would be good borrowers but do not have access to so much cash at one time.
"The QRM rule as it was originally proposed would have hampered private capital from coming back into the mortgage market and would have raised costs for the middle class and first time home buyers," said David Stevens, president and chief executive officer of the Mortgage Bankers Association.
The industry group called instead for writing the exemption to match a category of loans designated by the Consumer Financial Protection Bureau as "qualified mortgages."
Those loans are considered to be basic enough that they carry legal protections related to a different set of consumer rules. Qualified mortgages do not require a down payment.
"The key is to make sure that you're not up front excluding a lot of people who would otherwise be eligible and would be good borrowers," said John Taylor, chief executive of the National Community Reinvestment Coalition, a consumer and housing advocacy group, which had argued for dropping the down payment requirement.
The two sources familiar with regulators' thinking said officials are still debating the changes and warned that some agencies are hesitant to throw out the down payment requirement.
Discussions also have included the possibility of raising the down payment requirement so much that banks would have to make non-QRM loans or stop lending. The Wall Street Journal said one proposal involved requiring a 30 percent down payment.
The risk retention rule as initially proposed also included an additional exemption. Lenders could avoid holding a share in risky mortgages if they had government backing or sell the mortgages to Fannie Mae and Freddie Mac.
The rule-making process is expected to be finalized by the end of the year, according to the sources.
The Fed, FDIC and OCC declined to comment. HUD, the SEC and the FHFA did not immediately respond to requests for comment.
(Reporting By Margaret Chadbourn and Emily Stephenson; Editing by Karey Van Hall and Dan Grebler)