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Proposed lending rule looks for 'skin in the game'

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Lenders might one day ask more borrowers to put 20 percent down payment on home purchases.

But the money down might also be heftier for refinancing. As part of a proposed rule from federal regulators, a lender must put into reserve 5 percent of a refinanced loan if the borrower did not put at least 25 percent down. For cash-out refinancings, regulators have proposed 30 percent down if lenders want to avoid the 5 percent reserve.

The point of the reserve and down-payment proposal is to make sure the lender has “skin in the game” on its loans. Critics said the mortgage market collapsed because many lenders didn’t care if they made risky loans — they could just sell these to Wall Street investors, who’d then be out of money when borrowers defaulted.

In their proposal, regulators said default rates rose noticeably on home purchase loans as soon as the down payment fell under 20 percent. For refinancing, the rates jumped noticeably on loans with less than 25 percent down, they said. In cash-outs, defaults quickly rose when down payments fell under 30 percent, their report said.

The public has until Aug. 1 to comment on the proposal to the Federal Deposit Insurance Corp., the U.S. Department of Housing and Urban Development and four other financial regulatory agencies.

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