Wells Fargo Backs Tighter Mortgage Rules

Wells Fargo has broken with other big banks by urging US regulators to require mortgage lenders to retain more of the loans they originate, rather than selling them to investors, a practice that helped to fuel the housing bubble.


The move by Wells , the fourth-biggest US bank by assets, represents a rare instance of division among financial groups as they try to soften new rules aimed at curtailing abusive lending practices.

Regulators are now deciding which mortgages will be exempt from a provision in the Dodd-Frank reform act which requires banks to retain 5 percent of the credit risk on home loans they originate.

That so-called 5 percent rule will not apply to mortgages that meet stringent underwriting guidelines. Officials are expected to provide guidance on exemptions by January.

“The point we are making, unlike others, is that risk retention is a good idea,” said John Gibbons, an executive vice president with Wells Fargo Home Mortgage.

“Rather than being something rare or unusual, it should be common in the mortgage industry to align interests of lenders, borrowers and investors.”

In a letter to regulators last month, Wells Fargo argued most mortgages should be retained . One possible exception would be loans in which borrowers have made downpayments of 30 percent or more.

Some lenders suggested such a rule would give big banks an advantage over small banks since they underwrite more “jumbo” loans in which borrowers tend to make larger down payments.

Other lenders have argued banks have already tightened standards sufficiently.

“We believe regulatory and industry changes over the past several years have increased the quality of loans ...?and these loans are much more conservatively underwritten than those made in the time period of 2002-2008,” said US Bank Home Mortgage, SunTrust Mortgage and Quicken Loans, which claim to represent 15 percent of all US mortgages being underwritten.

Ron Phipps, president of the National Association of Realtors, warned in a separate letter that broad risk retention would increase the cost of borrowing for consumers.

Bob Davis, an executive vice president with the American Bankers Association, told the Financial Times that wide-ranging risk retention “simply is not necessary for the plain-vanilla types of lending being done today”.

Mr Gibbons of Wells Fargo countered that “‘Oh, we’ve learned our lesson’ is what you always hear at this point in the credit cycle”.

He added: “If we want to discourage the type of ‘hit and run’ lending that got us into trouble in the future, we need to change the way the industry operates.”