	Introduction

Prior to the recent financial crisis, mortgage underwriting standards were relaxed to the point where many borrowers could only repay their loans if the favorable financial conditions that existed at the time of origination remained intact. In other words, borrowers were able to obtain mortgage loans that relied upon interest rates not rising or the value of the underlying collateral (house prices) not declining. When market conditions changed, however, many mortgage loans became delinquent and went into default. The mortgage defaults often translated into large losses for both the borrowers and the financial industry. Rulemaking is now taking place to implement "ability to repay" and risk-retention standards as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act; P.L. 111-203 ). Although some borrowers may qualify for loans when underwriting criteria are relaxed, which typically may occur at times when housing and macroeconomic conditions are more favorable for repayment, lenders may be reluctant to originate those that fail to comply with qualification standards that would reduce their exposures to legal risks. This report examines the developments associated with the implementation of mortgage lending reforms. The report begins with a summary of proposed ability to repay and risk-retention standards. Next, the report describes risky underwriting and financing practices that occurred prior to the mortgage crisis, followed by a discussion of how access to mortgage credit might be affected. Ability to Repay Standards and Qualified Mortgages

Title XIV of the Dodd-Frank Act is entitled the Mortgage Reform and Anti-Predatory Lending Act; Section 1411 is entitled "Ability to Repay" and says,
In accordance with regulations prescribed by the (Federal Reserve) Board, no creditor may make a residential mortgage loan unless the creditor makes a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance (including mortgage guarantee insurance), and assessments. The CFPB has re-opened the comment period to seek further comments on the litigation risks that could potentially arise from the new requirements. The comments, however, should be narrowly focused and based upon analysis that uses mortgage data from the portfolios of Fannie Mae and Freddie Mac, which are discussed in more detail below. The closing date for comments will be July 9, 2012. The proposed rule provides four methods in which a lender would be able to comply with the ability-to-repay standards. This section requires securitizers to retain "not less than 5 percent of the credit risk for any asset that is not a qualified residential mortgage…" The Dodd-Frank Act authorizes the Federal Reserve and other financial regulatory agencies to implement requirements to ensure that relevant parties involved in a securitization transaction retain "skin-in-the-game" or a requirement to ensure the sharing of potential losses. The proposed QM rules may discourage lenders from excessively relaxing lending standards even during economic boom periods, thus making loan repayment more resilient to sudden shifts in short-term economic and financial conditions. Disadvantaged or weaker borrowers, therefore, would face additional difficulties obtaining mortgage credit.
Prior to the recent financial crisis, mortgage underwriting standards were relaxed to the point where many borrowers could only repay their loans if favorable financial conditions that existed at the time of origination remained intact. In other words, borrowers obtained mortgage loans that relied upon interest rates not rising or the value of the underlying collateral (house prices) not declining. When market conditions changed, however, many mortgage loans became delinquent and went into default. The mortgage defaults often translated into large losses for both the borrowers and the financial industry.
After enactment of The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act; P.L. 111-203), the Federal Reserve Board announced a proposed qualified mortgage (QM) rule that would establish "ability to repay" standards for mortgage lending. The Federal Reserve, along with other federal regulatory agencies, also jointly released a proposed risk retention or qualified residential mortgage (QRM) rule to require parties involved in a transaction in which mortgage originations are sold to retain "skin-in-the-game" or a minimum percentage of the credit risk of financial products, which would result in the sharing of any eventual losses. Adoption of ability to repay and risk-retention standards may discourage lenders from excessively relaxing lending standards even during economic boom periods, thus making loan repayment more resilient to sudden shifts in short-term economic and financial conditions.
The ability to repay and risk-retention standards, while designed to curtail the pre-crisis proliferation of risky lending practices, are likely to simultaneously reduce access to mortgage credit. Although ability-to-repay standards would encourage consistent underwriting at all times, some borrowers that benefit from lender flexibility during more favorable macroeconomic conditions are likely to face increased difficulty obtaining mortgage loans. Lenders may be reluctant to originate loans that are not in compliance with the ability-to-repay standards if this exposes them to increased legal risks. Likewise, risk-retention standards that translate into more stringent qualification requirements for borrowers are likely to increase barriers to homeownership for both creditworthy and disadvantaged borrowers.
The 112th Congress is overseeing the rulemaking stemming from the Dodd-Frank Act. This report examines the developments associated with the implementation of mortgage lending reforms. After summarizing the proposed ability to repay and risk-retention standards, a description of risky underwriting practices that occurred prior to the mortgage crisis is presented, followed by a discussion of possible effects on mortgage credit accessibility.
The Consumer Financial Protection Bureau (CFPB), which will prescribe final regulations on QM rule, has re-opened the comment period to seek further comments on the litigation risks that could potentially arise from the new requirements. The comments, however, should be narrowly focused and based upon analysis that uses mortgage data provided by the regulator of Fannie Mae and Freddie Mac. The closing date for comments will be July 9, 2012.