The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) became law on July 21, 2010. Section 941 of the Dodd-Frank Act required financial institutions that securitize mortgages loans to retain at least 5 percent of the credit risk.
The Dodd-Frank Act required lenders that securitized mortgage loans to retain 5% of the credit risk unless the mortgage was a Qualified Residential Mortgage (QRM) or was otherwise exempt. Six federal regulators originally issued a proposed rule that narrowly defined a QRM to require a 20% down payment, stringent debt-to-income ratios, and rigid credit standards. Late 2013, the rule was re-proposed to match the definition of a “QRM” with the definition of “QM.”
In addition to the main proposal, regulators introduced an unfavorable alternative that would require buyers to put 30 percent down to qualify for a QRM loan, a restrictive measure that dramatically favors the wealthy. NAR advocated for adoption of the preferred standard which was in line with the congressional intent of a QRM exemption that included a wide variety of traditionally safe, well documented and properly underwritten products.
The Final QRM Rule
After nearly three years of deliberations, regulators finalized the QRM rule in October of 2014. The final rule includes a broad definition of QRM and aligns it with the Qualified Mortgage standard implemented earlier in 2014.
Under the QRM rule, as under the QM rule, loans are generally considered qualified if the borrower's debt-to-income ratio is 43 percent, among other things. There is no onerous down payment requirement, which regulators had talked about including and which NAR and coalition partners strongly opposed. The final rule also comes without the risk-retention requirement for qualified residential mortgages.
The final rule becomes effective one year after publication in the Federal Register for residential mortgage-backed securitizations.