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CRE Finance World, Winter 2012

The Washington Minute: 2012 Will See Finality to Many “Dodd-Frank” Rules Vice President, LegislativeMike Flood & Regulatory Policy CRE Finance Council W and Republicans is to dig in, blame theother side for of activity in the near term:Moving forward into what should prove to be an interesting(and challenging) year, we have identified five issues whichbear monitoring, and which will undoubtedly see some degreeith the presidential and congressional elections just 11months away, conventional wisdom is that partisan dividewill bring the legislative process to a grinding halt. Itcertainly appears that the game plan for both Democrats the lack of activity, and then wait for the voters to judge who’s to CMBS Risk “Retention” Rules blame on Election Day. In July 2011, CREFC responded to the Federal regulators’ joint proposed credit risk retention rules. Although there is little on the horizon to indicate a change to this plan, an interesting historical fact is that election years have proven Specifically, there are five key elements of the proposal that to be periods that produce some of the most significant legislation. have generated significant scrutiny and discussion within the One only need look to the passage of theFamily and Medical CREFC community: Leave Act (1992), welfare reform (1996), the McCain-Feingold campaign finance law (2002), and — most recently — the $700 billion •Premium Capture Cash Reserve Account (PCCRA): If a CMBS TARP bank bailout bill (2008) to see that pre-election periods sponsor structures a securitization to monetize excess spread often produce serious activity in our nation’s capital. Is there some on the underlying loans (for example, through the sale of I/O event or catalyst that will lead to a major policy compromise? While tranches or premium bonds), the sponsor would have to put the it doesn’t appear so, there is precedent. excess spread in an “escrow” account that would sit in the first- loss position, ahead of the newly imposed 5% retention. That Few elected officials from either party want to preside over a period money could not be collected until the life of the ABS is complete. of gridlock — but as in any Washington risk/reward proposition, there are political benefits to this. As such, 2012 could prove •B-Piece Option: If the B-piece buyer is also the special servicer, to be one of those “Catch 22” years, when potential legislative they must include an “operating advisor” (OA) within the structure. victories could give campaign ammunition to one side, while a lack The most contentious piece of the structure is the OA’s ability of action could provide the other side with fodder for speeches to replace the special servicer unless a majority of each voting and campaign ads. Further work on deficit reduction, meaningful tranche objects. Another point of contention is the requirement attempts at bringing spending under control, and even the debate that the B-piece buyer must retain the 5% for the life of the asset. over bringing in additional revenue through increased fees and tax increases will continue to be debated. •Qualified Loan Exemption: There are more than 30 underwriting requirements that must be met in order to qualify for the exemp- No matter the outcome, decisions made (or not made) in Washington tion. Unfortunately, the proposed standards are so strict that little will have a significant impact on the psyche and confidence of the more than 1% of CMBS loans ever securitized would have qualified business community and consumers. This in turn, will affect the for the exemption. broader capital markets and the rate of our economic recovery. •Non-Conduit Loans: The rules do not address how to handle risk The commercial real estate finance industry remains uneasy about retention for either single-loan or short-term floating-rate deals, 2012, mainly due to the Euro-zone crisis, U.S. debt levels and which are a significant portion of CMBS. regulatory uncertainty — and by regulatory uncertainty, I do not mean the timing or pace of finalizing regulations. Instead, I’m referring •Crapo Amendment: For CMBS, the regulators have the ability, per to uncertainty about the types of final regulations that will end up “Dodd-Frank,” to allow for adequate representations and warranties, being put into place- a subtle but important nuance that can be underwriting and other enforcement mechanisms to count as lost here in Washington. “skin-in-the-game” and act as retention in lieu of a 5% requirement. The CREFC created “best practices” specifically to help regulators We do expect 2012 to provide a great deal of certainty when it with this process. To date, the regulators have largely ignored this comes to the regulatory playing field for commercial real estate portion of “Dodd-Frank.” finance. Specifically, we should see final rules for risk-retention, regulation AB, and credit rating agency reform. At the same time, Regulators are expected to either release final rules or re-propose the presidential and congressional elections will determine the rules for comment in the first quarter of 2012. As such, CREFC direction the country takes, and will greatly influence both the has taken the following actions on behalf of its membership: GSE reform debate and continuing “Dodd-Frank” oversight. CRE Finance World Winter 2012 66


CRE Finance World, Winter 2012
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