Alternative Risk Retention for Commercial Real Estate
In response to input from the commercial real estate industry, the Dodd-Frank Wall Street Reform and Consumer Protection Act expressly contemplates flexibility and custom-tailoring for commercial mortgage-backed securities risk retention requirements. The contemplated regulations shall specify the permissible types, forms, and amounts of risk retention that would meet the requirements of the new rules. The proposed regulations may include:
(i) retention of a specified amount or percentage of the total credit risk of the asset;
(ii) retention of the first-loss position by a third-party purchaser that specifically negotiates for the purchase of such first-loss position, holds adequate financial resources to back losses, provides due diligence on all individual assets in the pool before the issuance of the asset-backed securities, and meets the same standards for risk retention as the federal banking agencies’ and Securities and Exchange Commission’s requirements;
(iii) a determination by the federal banking agencies and the SEC that the underwriting standards and controls for the asset are adequate; and
(iv) provision of adequate representations and warranties and related enforcement mechanisms.
Regulations under Dodd-Frank that incorporate items (ii) through (iv) would essentially be codification of existing practices with slight modifications, such as the requirement that first-loss position holders, under (ii) above, demonstrate certain financial wherewithal.