CMBS 3.0? Dodd-Frank Credit Risk Retention Proposals Redefine Commercial Loan Securitization Rules
The public comment period has ended for the credit risk retention rules proposed by federal regulators under Section 941(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rules will affect the securitization of residential and commercial mortgages and other assets collateralizing asset-backed securities.
The proposed rules include:
• Sponsors are required to retain a 5% minimum risk retention. Proposed methods include vertical risk retention or horizontal risk retention.
• Retained risk must be retained and prohibit the sponsor from transferring, selling, hedging or financing the retained risk.
• B-piece buyers can acquire the first loss interests in the securitizations, but will require that they retain it, that they can't finance it and that they cannot have any role in controlling the servicing of defaulted loans in the pool. An exception allows B-piece buyers to retain control if there is a special operating advisor to oversee the servicing.
• The creation of a Premium Capture Reserve Account that is funded from the excess spread. The premium capture applies over and above the required five percent risk retention.
• An exemption to the Premium Capture Reserve Account for qualifying commercial real estate loans. However, the standards for qualifying CRE loans are so stringent that many commercial mortgage loans would fail to qualify for the exemption.
In this video, finance attorney Gregg Loubier discusses the proposed new rules and the impact they could have on the industry.
