QRM and the Community Bank

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from the Compliance Alliance, September 11, 2013

After much debate, the long-awaited Qualified Residential Mortgage, or “QRM” rule, was finally proposed by six federal agencies (FRB, HUD, FDIC, FHFA, OCC and the SEC) on Aug. 28, 2013. The QRM rule sets the standard for credit risk retention requirements for securitization of asset-backed securities, more specifically, residential mortgage-backed securities.

People sometimes use the terms “qualified mortgage” (QM) and “qualified residential mortgage” (QRM) interchangeably but they are not the same thing. Both of these terms originated from the same piece of legislation, and while their names are similar, these are actually two different variations of the same set of rules.

The QM rule issued back in January sets the safe harbor provision for the ability to repay rule, and the QRM contains the requirements for mortgage loans to be exempt from the risk retention requirements. However, the agencies have synchronized the definition of QRM and QM.

Generally, the sponsor of an asset-backed security has to retain a 5 percent capitalization requirement. This requirement has several exemptions, one of them being an asset-backed security, which is secured by residential mortgages that qualify as a “qualified residential mortgage.”

Under the Dodd-Frank act, the definition of QRM had to be at least as broad as the definition for QM as issued by the CFPB. There was a lot of speculation that the agencies would add additional hurdles to the QRM definition. Of particular concern was an additional LTV standard to satisfy the requirements. Luckily, the agencies left out this requirement and simply defined a “qualified residential mortgage” to mean “qualified mortgage” as defined in Reg Z. Thus, under the new ruling, any mortgage-backed security having QM loans will be exempt from the risk retention requirements.

For many community banks, the ruling will only have a derivative impact because most small community banks do not hold non GSE issued mortgage-backed securities in the bank’s investment portfolio. It will, however, have an impact on those banks that sell to the secondary market or investors who require portfolios to satisfy the QRM standard. Smaller banks selling to the secondary market will no longer have to worry about LTV requirements imposed by investors.

The ruling will have a direct impact on those banks holding mortgage-backed securities in their investment portfolios. Many small banks hold such investments on their books, particularly for CRA purposes. The new proposal is a bit of a relief, particularly for banks that purchase CRA-targeted mortgage-backed securities from FNMA. Since loans eligible for purchase from GSEs, including FNMA, are automatically considered a “Qualified Mortgage” under Reg Z, all mortgage-backed securities purchased from FNMA or other GSEs will likely fall under the QRM exemption.

The ruling is still in the proposal stage, but it is expected to be finalized without any significant changes. Comments on the proposed ruling must be received by Oct. 30, 2013. The agencies are particularly interested in whether or not they should add additional underwriting standards to the QRM. This, of course, would not be in the best interest of the mortgage industry and would significantly impact lending at the community bank level. Bankers are encouraged to voice their opinions with their primary regulator.

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