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In the wake of the financial crisis, mortgage-related
reforms enacted as part of the Dodd-Frank Act or established under the Basel
capital process have created four different classes of residential mortgage
loans that are entitled to some kind of favorable treatment. These classes are
(i) "qualified mortgages" for Truth in Lending Act purposes; (ii) "qualified
residential mortgages" for the purpose of the risk retention requirements in
securitizations; (iii) "Category 1" mortgages for the purpose of assigning risk
weights under Basel capital requirements; and (iv) mortgages underlying
residential mortgage-backed securities that may qualify as "Level 2B assets"
for the purpose of the "liquidity coverage ratio" (LCR). Given these different
purposes, the criteria for specialized treatment vary. The result is a
patchwork of requirements that substantially increase the complexity of the
mortgage origination process and the secondary market.
In an effort to simplify these four sets of requirements
so that lenders and secondary market participants can make informed decisions,
the attached tables compare the four different approaches to favored mortgage
loans on a side-by-side basis, including the types of loans and their terms
that are eligible for preferred treatment and the underwriting requirements.
Any given loan could qualify for special treatment under one approach but not
under others. Indeed, with the exception of the rules for qualified residential
mortgages, which must take into account the rules for qualified mortgages, there
has been no effort to reconcile the different regimes, which are as follows:
Attached are two tables: Table I summarizes the loan
features and payment terms that distinguish mortgage loans that are eligible for favored
treatment from those that are not. Table II sets forth the underwriting
criteria-"ability to repay" for QMs-that a creditor must use to qualify its
loans for favorable treatment.
click on the Attachment: link at the top of the post to view or download the
For more legal analysis on the Dodd-Frank
Wall Street Reform and Consumer Protection Act, visit Morrison
& Foerster LLP's online resources that track rulemaking pursuant to the
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Morrison & Foerster LLP. Because
of the generality of this update, the information provided herein may not be
applicable in all situations and should not be acted upon without specific
legal advice based on particular situations.
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