Regulators Propose Relaxed 'Skin in the Game' Mortgage Rules

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Jae C. Hong/AP

By Margaret Chadbourn
and Emily Stephenson

WASHINGTON -- Six U.S. regulatory agencies released a reworked proposal on Wednesday that requires lenders maintain a stake in the loans they bundle and sell as securities, part of efforts to limit the type of underwriting practices which fueled the housing bubble.

But it also expanded the range of mortgages that would be exempt from the requirement. The new rules, the latest version of a 2011 proposal, were required under the 2010 Dodd-Frank law and would force most banks and bond issuers to retain a portion of the loans on their books.

Mortgages to borrowers who don't have to spend big chunks of their monthly income repaying the debt would be exempt from the "skin in the game" requirement.

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The regulators' new 500-plus page plan would exempt more loans than earlier proposals by eliminating a requirement that so-called "qualified residential mortgages," include a hefty down payment.

Housing industry and consumer groups have lobbied for more than two years against that requirement, which they said would harm the housing market recovery. Regulators said they received more than 10,000 comments on the 2011 proposal.

"Our goal as regulators is to provide clear rules that allow for robust markets that meet the needs of creditworthy borrowers in a safe and sound manner," said Paul Nash, a senior official at the at the Office of the Comptroller of the Currency.

"I believe the rule, as reproposed today, helps accomplish just that," he said.

The new rules are aimed at preventing banks from writing risky loans with impunity. In the years leading up to the 2007-2009 financial crisis, banks used shoddy underwriting standards under the assumption that they could sell loans to investors and avoid harm if the borrowers defaulted.

Dodd-Frank called for lenders and bond issuers to hold 5 percent of those loans on their books, giving them more incentive to make better loans.

Regulators originally said banks and bond issuers would have to keep "skin in the game," or hold part of securitized loans on their books, for all loans except mortgages that included a 20 percent down payment.


After backlash from housing and consumer groups, regulators decided to drop the down payment requirement.

Instead, they said Wednesday that mortgages that meet a minimum standard already adopted by the U.S. Consumer Financial Protection Bureau will be exempt from the risk retention rules. That standard includes loans that have no risky features such as interest-only payments or loan terms exceeding 30 years, and go to borrowers who don't have high debt loads.

Industry and consumer groups said matching the risk retention exemption to the consumer bureau's existing standard would simplify the rules and provide consistency for lenders.

"It is critical not to disrupt the marketplace for the funding and securitization of mortgages, and this proposal would go a long way toward that goal," said Richard Hunt, president of the Consumer Bankers Association.

Critics said regulators bowed to lobby groups. Daniel Gallagher, a member of the U.S. Securities and Exchange Commission (SEC), one of the agencies charged with crafting the rules, said dropping the down payment weakened the rules.

"Rulemakings are not referenda, and while independent regulatory agencies like the Commission must always be mindful of the points raised by commenters, ultimately, they must apply their experience and expertise regardless of the volume of negative comments," Gallagher said in a statement.

Regulators did ask for public input on whether or not to later add a 30 percent, down-payment requirement, in addition to the CFPB's standard. The agencies will seek public comment for a 60-day period before holding a final vote on the new rule.

Those involved in the rulemaking are the OCC, the SEC, the Federal Reserve, the Federal Deposit Insurance Corp., the Department of Housing and Urban Development and the Federal Housing Finance Agency.