New mortgage rules designed to promote responsible lending could be so restrictive as to make it difficult for many qualified borrowers to obtain a loan, according to several industry groups.

While generally supportive of the proposal, they say certain provisions, including one that would effectively require a 20 percent down payment for borrowers to obtain the best terms, could end up pricing many creditworthy borrowers out of the market.

The Federal Deposit Insurance Corporation (FDIC) today presented the long-awaited proposal for new lending rules designed to prevent a repeat of the abuses that gave rise to the runaway subprime mortgage market and subsequent crash. Chief among them is a requirement that lenders retain a 5 percent interest on most mortgages they originate, rather than simply selling them off to investors.

That requirement, known as "skin in the game" was mandated under last year's Dodd-Frank Wall Street Reform and Consumer Protection Act. The idea is that if lenders retain a stake in the loans they originate, rather than simply selling them off to investors, they've be more careful about who they lend to.

Can be waived for 20 percent down payment

However, the requirement is waived for mortgages that meet certain underwriting standards - which under the new rules include a minimum 20 percent down payment and maximum debt-to-income ratios of 28 percent for the mortgage alone, and 36 percent for all consumer debt payments as a percentage of monthly income. The lending associations say that's too strict.

"We do have concerns about the rigid and highly prescriptive nature of the proposed rule," said James Courson, president and CEO of the Mortgage Bankers Association, one of the groups to weigh in on the proposed rules. "We believe that such a narrow construct of the risk retention exemption would limit mortgage opportunities for qualified borrowers more than it would reduce the number of problem loans."

Courson said it would be better if the new rule allowed a borrower's entire credit profile to be considered. He suggested a lower down payment might be appropriate, for example, if a borrower had a low debt load and a well-established history of making timely payments.

Concerns over effect on small lenders

He said a too-strict application of the risk retention rule could also be harmful to independent mortgage banks and community lenders, for whom the 5 percent retention requirement would be a significant burden, but which have a history of good underwriting practices.

Similar concerns were voiced by the American Securitization Forum and the Securities Industry and Financial Markets Association, which also weighed in on the proposed regulation.

The new rule would implement provisions of last year's Dodd-Frank Wall Street Reform and Consumer Protection Act. The rule now undergoes a 60 day public comment period, after which final modifications may be made.

Published on March 30, 2011