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Regulators Close to Chucking 20% Downpayment Requirement

by Peter Thomas Ricci

The 20 percent downpayment in the Dodd-Frank bill proved quite controversial, but it’s looking like it will not become a reality.

A newly announced compromise between the SEC and federal regulators will likely result in the abandonment of the controversial 20 percent downpayment rule in the Dodd-Frank regulatory act, according to a report from the Wall Street Journal.

The rule, which stipulated that homebuyers needed to put down at least 20 percent in order to received a “qualified residential mortgage” – aka, a mortgage that met the government’s standards, lest banks retain 5 percent of the mortgage’s risk – had proven hugely controversial with housing advocates, who argued that the stringent requirement would limit consumer access to the mortgage market.

A Compromise Among Regulators

The battle over the 20 percent downpayment requirement pitted federal regulators, who were sympathetic to industry concerns, against the SEC, which wanted to keep the requirement in place and avoid another housing bubble. According to the Journal, here’s how the compromised regulation will work:

  • The new standard will be much more relaxed than when it was originally proposed in 2010; not only is the downpayment requirement gone, but a broad exemption is now in place for banks when it comes to retaining portions of credit risk on their books.
  • Now, U.S. policymakers will have to re-evaluate (and possibly readjust) the lending rules two years after they are adopted, and afterwards, they will have to evaluate them every five years – to keep up, ostensibly, with evolutions in the marketplace.
  • During those reevaluations, regulators will have to ensure that the new regulations are properly restraining the mortgage-backed securities market, the subset of the financial industry that proved so troublesome during the financial crisis.

A Long Road to Compromise

When the 20 percent downpayment requirement was announced in 2010, it received a coordinated backlash from housing trade groups, affordable housing non-profits and civil rights groups, who all argued that the requirement would stymie housing and limit homeownership options for lower-income consumers.

Last year, regulators proposed a revision to the rule that would chuck the downpayment requirement in favor of CFPB-written rules that would require banks to verify a borrower’s ability to repay a loan. On the strength of industry lobbying efforts, most government agencies supported the revision, though the SEC had been the one holdout.

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