Qualified residential mortgage credit retention rule: Racial disparate impact

The Dodd–Frank Wall Street Reform and Consumer Protection Act (Pubic. Law 111-203, H.R. 4173) is a federal statute in the United States that was signed into law by President Barack Obama on July 21, 2010.  The Act is a product of the financial regulatory reform under President Obama’s administration.  Of concern is provision XIV-Mortgage Reform and Anti-Predatory Lending Act.  This provision proposes new credit risk-retention rules.  The new regulations would require mortgage originators to retain capital reserves equal to 5% of all but the safest mortgages.  The mortgages that are exempt from the risk retention guidelines are termed “qualified residential mortgages” or QRMs.  In order to qualify as a QRM, there must be a down payment of at least 20% to purchase a new home and 25% equity in the property to refinance.  The proposed regulations will have a disparate impact on African Americans and Hispanics.  With homeownership being the lion’s share of household wealth, the stringent down payment and equity requirements will have adverse consequences on closing the racial wealth gap.  The purpose this research is to examine by race the impact of the proposed QRM down payment and home equity requirements.  In so doing, by race both the total number of years needed to save for down payment and home equity positions of homeowners with mortgages are analyzed.  The data analysis includes data for median income by state, median home price by state, property data from county land sale records, property appraisals based on DataQuick’s automated valuation model, and borrowers race estimation based on Compliance Tech’s RaceEstimation™. Statistical test are conducted to illustrate disparities of the proposed rule for down payment and refinancing with respect to race.