WASHINGTON — With regulators struggling to decide which loans to excuse from risk-retention, Federal Deposit Insurance Corp. Chairman Sheila Bair said Thursday the best option would have been to shelve the exemption altogether.

Under provisions in the Dodd-Frank Act requiring securitizers to hold 5% credit risk, several agencies — including the FDIC — must define a "qualified residential mortgage", a new class of safe mortgage not subject to retention.

But banks and consumer advocates say the current proposal for QRM standards, which they warn could become a new basis for conforming loans, would benefit just the wealthy. The agencies proposed requiring a 20% down payment and certain debt-to-income restrictions to be exempted.

Bair said a cleaner solution would be to apply risk retention to everyone.

"If we could get rid of the QRM, … I would," Bair said in remarks to the Council on Foreign Relations.

"There is only so much regulation can accomplish. Financial incentives can be so much more powerful. So requiring that institutions who are securitizing loans take a meaningful 5% slice of that can do a lot to tame underwriting standards in a way that regulators don't have to get into micromanaging what the standards are."

With less than a month left in her term, Bair acknowledged the "pushback" regulators have received over the QRM, and said those concerned about higher costs for non-QRM loans have a point, although the FDIC estimates a cost differential much lower than other projections.

"That was the original proposal in Dodd-Frank: just 5% risk retention. … At the last minute, some in the industry got the QRM exception into the bill that basically tells the regulators to define what is the gold standard of mortgages," she said. "We did that and now there's this huge pushback on it with the thinking being this is going to become the new normal, not just a small exception."

"People are right to the extent that it is going to create two-tiered pricing for securitized loans. With risk retention loans, some will probably be incrementally higher — we think it is like 10 to 15 basis points. … If we could just get rid of [QRM], it would be fine with me, just making sure that the [retention] is 5%. I would love that. … I'm talking freely about this because I won't be part of the decision-making."