Page 81

CRE Finance World, Winter 2012

New CREFC Mediation Proposal: A Response To SEC’s Proposed Breach Enforcement Regulation Resolution By Special Servicer Implementation The mediation process does not prevent a special servicer from Before the process of encouraging the industry to incorporate the taking action that is in the best interest of certificateholders. A proposed mediation provisions into MLPAs and PSAs, CREFC must special servicer may start or continue the liquidation, workout or accomplish several steps to ensure that the process is operational: other resolution of a loan at any time before or after the mediation, so long as the action is consistent with the applicable servicing (a) Chose and designate an official mediation agency. standard. In the event of a successful completion of a liquidation, (b) Develop and publish official mediation guidelines. workout or resolution, the mortgage loan seller will be liable for (c) Establish an advisory expert panel and appoint its members. the difference between the aggregate of all resolution proceeds, insurance and condemnation proceeds, minus REO revenues and (d)Establish a procedure for questions to be submitted in writing all other amounts previously received from the workout or resolution as hypotheticals certified to the expert panel for a written in respect of the loan and the purchase price to the extent the response without identifying the parties, the property, the loan repurchase claim is successful. or the CMBS trust. (e)Develop a standard CREFC mediation agreement for use with Confidentiality other agencies chosen by mediation parties. All communications, oral or written, made in the course or in con- (f)Establish more objective standards than the PSA/MLPA servicing nection with the mediation are confidential, privileged, inadmissible standards which may be problematic for special servicers. and non-discoverable for any purpose, including impeachment, in (g)Impose a strict confidentiality standard (with the usual legal any action involving the mediation parties. This includes all offers, compulsion exceptions) on the entire mediation process and promises, conduct and statements made by the parties, their agents, the certification of questions to the expert panel. employees, experts and attorneys, as well as the mediator and any of the agencies employees. However, any documents that would We believe that having an enforceable protocol that would help otherwise be admissible will remain discoverable and admissible, resolve breach repurchase disputes will provide investors with notwithstanding the mediation. a higher degree of predictability and stability and enable them to have more confidence in truly enforceable representations Legal Proceedings and warranties. Such predictability would go a long way toward Mediation does not preclude legal actions but parties cannot file bridging the current gap between CMBS originators/issuers and lawsuits before an initial attempt at mediation. An issue under investors. mediation cannot be the subject of a legal action until the mediation is terminated in accordance with the termination provision. Parties Yet, market participants may not yet fully appreciate or understand may agree to simultaneously continue the mediation process, even the potential enforcement consequences of a proposed SEC after a lawsuit is properly filed. Regulation that would mandate disclosure in individual originator/ issuer quarterly reports (going back three years) of loan put-back Termination requests (including details of whether the request has been Either party may terminate the mediation process after the earlier resolved and if not, why). The information must be considered by of either (a) the initial mediation session, plus a 10-day “cooling credit rating agencies in their ratings, and could be used by investors off” period following such mediation meeting, and (b) 90 days after in breach put-back litigation, although it is not yet clear how it the opposing party’s receipt of the initial written request for mediation. would be used by the SEC. The party wishing to terminate the mediation must do so by sending written notice to the opposing party. A publication of Winter issue 2012 sponsored by CRE Finance World Winter 2012 79


CRE Finance World, Winter 2012
To see the actual publication please follow the link above