CRE Finance Council 2013
Government Relations Priorities
CRE Finance Council has been extremely active the past several years on both the legislative and regulatory fronts. Subsequent to the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, our industry is now adjusting to more than two dozen mandated rules, reports, and studies that directly affect commercial real estate finance. In addition, the market faces new domestic and international accounting standards, changes to risk-based capital requirements, the SEC’s Regulation AB, and myriad other rules that will shape the future of CRE finance for years to come.
For these reasons, CREFC is committed to further strengthening our advocacy efforts in Washington on behalf of our members and working to improve the statutory and regulatory regimes governing our market.
CREFC's top priority is the pursuit of policies that promote private lending and investing, while ensuring that reforms are customized by asset class and coordinated among policymakers to promote a commercial real estate recovery. To this end, CREFC is actively involved in the following initiatives:
CMBS Risk Retention Rules
In July 2011, CREFC responded to the Federal regulators’ joint proposed credit risk retention rules. While we remain uncertain if or when another re-proposal may emerge prior to finalization, we continue to advocate for proposals that ensure market liquidity and access to credit. Five key elements of the proposal that was last-issued have generated significant scrutiny:
- Premium Capture Cash Reserve Account (PCCRA): If a CMBS sponsor structures a securitization to monetize excess spread on the underlying loans (for example, through the sale of I/O tranches or premium bonds), the sponsor would have to put the excess spread in an “escrow” account that would sit in the first-loss position, ahead of the newly imposed 5% retention. That money could not be collected until maturity.
- B-Piece Option: If the B-piece buyer is also the special servicer and retains the 5% risk, they must include an “operating advisor” (OA) within the structure.
- Qualified Loan Exemption: There are more than 30 underwriting requirements that must be met in order to qualify for the exemption. Currently, less than 1% of CMBS loans would qualify for the exemption.
- Non-Conduit Loans: The rules do not address how to handle risk retention for either single-borrower loans or short-term floating-rate deals, which are a significant portion of CMBS.
- Crapo Amendment: For CMBS, the regulators have the ability, per Dodd-Frank, to allow for adequate representations and warranties, underwriting and other enforcement mechanisms to satisfy the retention requirement in lieu of the 5% escrow. CREFC created “best practices” specifically to help regulators with this process. To date, the regulators have largely ignored this portion of Dodd-Frank.
Regulators are expected to either release final rules or a re-proposal for comment in the first half of 2013.
Regulation AB Reforms
CREFC responded in July 2011 to the SEC’s re-proposal of portions of its Regulation AB reforms. Regulation AB sets forth the disclosure and compliance requirements for shelf eligibility for asset-backed securities. Specifically, CREFC provided input in four key areas:
- Certification either by the CEO or an executive officer in charge of the securitization regarding both the disclosures within the prospectus and the design of the securitization;
- The appointment of a “credit risk manager” to review the underlying assets upon triggering a repurchase request;
- Inclusion in ongoing reports of any investor requests to be communicated with other investors; and
- Repurchase request dispute resolution procedures.
The SEC is expected to release final rules that thoughtfully align with the risk-retention rules, which we do not expect this rule to be finalized until 4Q, 2013 at the earliest.
Further Regulatory Reforms
CREFC expects many other regulatory actions to be finalized in 2013, with focus in the following areas:
- Volcker Rule: Final rule release is quite late and timing is still very much uncertain.
- Conflicts-of-Interest Rule: The SEC’s proposed rule is principles based, and works to mitigate material conflicts of interest between ABS issuers and investors.
- SEC’s ABS Exemptions: The SEC is studying whether it should modify its exemptions for REITs and ABS issuers under the Investment Company Act, which distinguishes both from investment companies. Both the REIT study and ABS proposed rule are expected to be redefined in 2012.
- Basel III Capital Standards: Basel III calls for increased capital ratios for the world’s largest banks. However, the standards also contain higher capital levels for securitization, including the application of a high risk weight for certain lower-rated and unrated tranches, and risk haircuts for securitization exposures when calculating capital related to market risk. The questions include how U.S. regulators interpret the Basel III standards and how they will be implemented.
The 2012 elections will impact GSE reform as much as any issue before Congress. Debate on this issue, similar to other areas, will occur largely through the prism of the single-family market. Given the differences in multifamily housing, the solution for reform could (and should) easily be considered as a separate item.
While there is no replacement for securitization, CREFC supports covered bonds as an additive financing tool. Congressman Scott Garrett (R-NJ) used the power of his Subcommittee Chairmanship to pass H.R. 940, a bipartisan covered-bond bill that CREFC has supported, through the full House Financial Services Committee. Both Chairman Garrett and CREFC are hopeful the bill will pass the full House in 2013.
While Senate action is uncertain, Senators Corker, Crapo, Hagan and Schumer previously introduced a bi-partisan covered bonds bill (S. 1835), similar to Chairman Garrett’s, which CREFC endorsed.
For additional information on CRE Finance Council’s advocacy efforts, please contact:
Vice President, Government Relations