Peter McKee, partner in Alston & Bird’s Finance Group, discusses the effects issuers of CMBS and other asset-backed securities face with the additional AB II requirements, specifically the CEO certification provisions.
You’ve been involved in the CMBS space for over 20 years – how do the new CEO certification requirements fit into the larger regulatory picture?
Broadly, the regulatory impetus has been to address the market conditions and behaviors that contributed to the recent financial crisis – lack of accountability, “skin in the game” and eroding underwriting standards, among other things. CMBS orthodoxy is that the residential side of the securitization market was the real problem, but regulators have largely resisted concessions to that view. The CEO certification puts a face on the party responsible for assuring adequate disclosure and structuring for public deals. It’s something the industry (and certainly the individual signatories) are taking very seriously.
From your perspective, what are the practical effects loan sellers will feel from the rule revisions?
Issuers have to scrutinize the loan sellers contributing to their shelf more intensely. Beyond the purely legal response of subcertifications and indemnifications, there is a relationship impact: are you comfortable with who you are dealing with and are you sure that they are doing things the right way. One example of this is formalized in originator review protocols and parallel loan reviews by the issuer—in effect, checking the loan seller’s homework.
Where do you think the market is heading with the enforcement of the new provisions? Any main impacts that will affect the issuer-loan seller dynamic in the CMBS space?
My expectation is that this will be self-enforcing, because there are tremendous incentives to do so. The level of asset diligence and disclosure in CMBS is already substantial and robust; so on one hand, adapting to this is just an incremental change. But on the other hand, this and other regulatory requirements impose costs and risks on industry participants, and that will have consequences: impacts on profitability, loan selection, loan underwriting and some industry shake-out are already in view.