| WASHINGTON, July 24
WASHINGTON, July 24 U.S. 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
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
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
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
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
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
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.