WASHINGTON – Financial regulators agreed to postpone for two months final rules that would require financial institutions that package loans and sell them on the secondary market to hold some of the risk on their books – that is, retain some “skin in the game.”
Regulators are getting lots of complaints from both lenders and borrowers that the proposal will cut off credit to lower-income people who may not have as much of their own skin in the game. That’s because the proposal would require credit unions and banks to retain at least 5% of mortgages they sell on the secondary market unless the mortgage meet strict qualifications as qualified residential mortgages, such as a 20% down payment.
The rule, part of last year’s Wall Street reform bill, is aimed at ensuring lenders who sell loans on the secondary market retain some type of financial incentive to make good loans. Critics said the originator of the loan or the firm creating the security had little stake in whether the loan performed because it was being sold to investors, contributing to the financial crisis.
“Having been in the mortgage lending industries for almost 30 years, I believe these new proposed regulations will not only prohibit creditworthy citizens from obtaining financing to purchase a home even more difficult than it is today,” Wanda Sisna, an executive with Indiana’s Midwest America FCU, told the Federal Reserve in a recent comment letter on the proposal.
In another credit union comment, Wesley Walton, vice president of finance at Oregon’s CBC FCU, said the skin in the game proposal will “put low and moderate income borrowers inherently out of the running” for qualified residential mortgages.
The Center for Responsible Lending, a consumer lobby funded by Self-Help CU, said it supports the skin in the game concept, but asserted a rule that is too stringent will cut off credit to many lower-income home buyers. “If the regulators impose a 20% – or even a 10% – minimum down payment requirement as part of the new QRM framework, hundreds of thousands of creditworthy households will be excluded from home ownership because of the dramatic increase in the wealth required to purchase a home,” said the credit union-backed consumer group in its comment to the Fed.
The rule will have a profound effect on credit unions, even though NCUA is not writing its own version. The Office of the Comptroller of the Currency, Federal Reserve, the FDIC, Securities and Exchange Commission, Federal Housing Finance Agency and Department of Housing and Urban Development are coordinating on a joint rule, meaning anyone who plays in the secondary mortgage market will have to comply with the rule.
