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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.
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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 Act.
© Copyright 2013 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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