As regulators try to collaborate on new securitization rules, a fissure has emerged in bankers' own thinking on the subject.

A united industry had lobbied Congress to exempt extra-safe loans from retention requirements in the Dodd-Frank Act. But an idea from Wells Fargo & Co. to limit that to loans with more money down has inflamed concerns that just a few large banks could enjoy the exemption.

"All other things being equal, a narrow definition will result in further consolidation in the mortgage marketplace to the benefit of large players and to the detriment of smaller lenders and consumers," said Karen Thomas, the senior executive vice president of government relations and public policy at the Independent Community Bankers of America.

Regulators have until spring to write rules enforcing a Dodd-Frank provision requiring lenders to retain at least 5% of loans they sell. The agencies also must establish the criteria for a "qualified residential mortgage," which could avoid the retention requirement and which Dodd-Frank left undefined.

Sources say the agencies are already divided over how restrictive the rule should be; a proposal initially expected in December is now targeted for a January release. But controversy over the Wells proposal poses an additional complication, observers said. In a Nov. 16 letter to regulators, the lender proposed that they use a narrow category for the exemption — such as just mortgages with a 70% loan-to-value ratio — saying an overly broad exemption would have unintended consequences.

"A definition of QRM that encompasses a large portion of the mortgage market … will produce a tendency to avoid lending to creditworthy borrowers falling outside that definition," wrote John P. Gibbons, an executive vice president at Wells Fargo Home Mortgage.

The proposal dominates industry buzz over the rulemaking, and Wells has remained a somewhat lone wolf. The biggest banks, which are more capable of making jumbo loans with whopping down payments, are presumed to stand to benefit from Wells' idea. But they have stayed mum on the topic. Meanwhile, some large banks and nonbank lenders, as well as trade groups like the American Bankers Association and National Association of Realtors, have distanced themselves from the idea.

"We believe there should be broad latitude to establish qualified mortgage exemptions and that it should be fairly liberal, and we are not in favor of excessive down payment requirements or any other term or condition," said Bob Davis, an executive vice president at the ABA.

Since Gibbons' proposal, others have released letters that, though not naming Wells, appeared to be rebuttals. (A Wells spokeswoman declined to comment.)

A joint letter Nov. 19 from three lenders argued that setting a narrow QRM definition would push most lending to Federal Housing Administration mortgages, which are also exempt from the risk-retention requirement.

"To the extent that the criteria are ratcheted up too tightly in the QRM, it will cause borrowers to fail to meet the QRM criteria, and they will be forced to move in large numbers to seek FHA loans," wrote Daniel Arrigoni, the president and CEO of U.S. Bancorp's U.S. Bank Home Mortgage; Sterling Edmunds Jr., the CEO of SunTrust Banks Inc.'s SunTrust Mortgage Inc., and William Emerson, the CEO of Quicken Loans Inc. "That will move a substantial amount of risk from the private sector to the government."

Ron Phipps, NAR's president, said in a Dec. 1 letter that a tightly defined QRM would result in reduced access to credit. "We fear that extensive additional requirements for QRMs would swing the pendulum too far and reduce the availability of affordable mortgage capital for otherwise qualified consumers," he wrote. "Many borrowers would simply be forced to pay much higher rates and fees for safe loans that nevertheless did not meet too narrow QRM criteria."

Stephen O'Connor, the vice president of government affairs at the Mortgage Bankers Association, said in an interview that a higher down payment requirement is not necessary if a loan has other positive features.

"If you have traditional products that are well documented and well underwritten, they should be exempt from risk retention because those are the very products you are trying to encourage for the marketplace," he said. "We think you can allow for a smaller down payment if there is some kind of credit enhancement, the most obvious being mortgage insurance. We don't think requiring a large down payment is appropriate."

Tom Deutsch, the executive director of the American Securitization Forum, also called for a more flexible QRM definition.

"The tighter the box around a QRM, the less loans available to those outside of that box, and the price of that credit will definitely be much higher," he said.

Wells' proposal has complicated an already uncertain regulatory environment for securitizers. Institutions have already been dealing with a recent regulation from the Federal Deposit Insurance Corp. that requires 5% risk retention — in addition to other measures — for securitized loans not subject to FDIC seizure in a bank failure. The agency has pledged that it will ease its rule to abide by the QRM definition, providing some hope for institutions.

But observers said the Wells proposal could make the retention requirements more restrictive than first expected for most of the industry.

"If you have a high down payment requirement, … then a couple of the large banks could portfolio those mortgages until the risk retention expires," said Jaret Seiberg, financial services policy analyst for MF Global's Washington Research Group. "We still believe we are going to end up with low down payment criteria if you have other credit enhancements to meet the qualified mortgage test. But there is a big push for this to be a lot more draconian of a test, and that's why there is so much [more] risk here than the market expected."

Julia Gordon, a senior policy counsel at the Center for Responsible Lending, said the Wells idea makes the rulemaking more complex.

"One hopes the rulemaking is not made based on industry lobbying, but realistically speaking, the regulators do take into account what the large banks say," she said.

Gordon said the exemption for qualified mortgages should not defeat the purpose of risk retention.

"What matters is [that] the concept of 'skin in the game' does not get watered down," she said.

Other observers said that, regardless of the outcome of the QRM test, the FHA is sure to be a winner since the loans it insures are already exempt in the law.

"As a result of that, this FHA will be the principal place for people with low credit scores where they can get credit," said Jeff Naimon, a partner in BuckleySandler LLP.