Home Equity Agreements and RTL Mortgage Loans: Emerging Trends in Residential Asset Classes European Commission Proposes Reforms to the EU Securitisation Framework Bankruptcy Consent Rights: Golden Shares and Golden Directors UCC Futureproofing Liquidity Solutions for Warehouse Providers Navigating a Non-QM World FALL 2025
STRUCTURED FINANCE SPECTRUM, FALL 2025 | 1 Editor’s Note Hard as it is to believe, we are approaching year-end. While inflation and economic uncertainty from earlier in the year remains, the industry continues to be resilient. Securitization issuance has been robust and investor demand has been heightened across different asset classes—consumer loans, timeshare loans, home equity loans, merchant cash advances, MSRs, trade receivables, and SBA 7(a) loans—with the Fed’s recent interest rate cut supplying a tailwind. The effects of the interest rate cut will undoubtedly give the market an additional boost, and it remains to be seen if a second cut will materialize before year-end. Similar to the beginning of 2025, we are confident in the market’s ability to adapt, and market participants continue to find creative ways to navigate challenges, mitigate risk, and seize opportunities. At Alston & Bird, we are committed to helping you stay ahead by keeping you abreast of market opportunities and developments. This edition of the Spectrum focuses on emerging trends in residential asset classes, structural bankruptcy protections (lender bankruptcy protection provisions recently becoming the topic du jour), the status and substance of the UCC Article 12 amendments and their effect on the market, proposed reforms to the EU’s securitization framework, and opportunities for warehouse lenders to limit the credit impact of non-QM mortgage loans. We hope you find the articles in this edition helpful as you continue to identify and capitalize on strategic investment opportunities, and the team and I look forward to seeing you at ABS East in Miami! Anna French Anna French Partner, Finance
STRUCTURED FINANCE SPECTRUM, FALL 2025 | 3 Home Equity Agreements and RTL Mortgage Loans: Emerging Trends in Residential Asset Classes New residential-based assets have emerged in recent years in response to the evolving demands of homeowners and investors in the current economy. Home equity agreements (HEAs) and residential transition loans (RTLs) have become increasingly popular products in the residential real estate industry. As a result, the securitization and warehouse markets for these asset classes continue to expand. HEAs Per the Federal Reserve, U.S. homeowners have almost $35 trillion in home equity. When homeowners look to access that equity, they can sell their home or seek common financing options like cash-out refinances, home equity lines of credit (HELOCs), or reverse mortgages. HEAs are marketed as an alternative. An HEA is a financial arrangement between a homeowner and an investor that allows the homeowner to receive a one-time cash payment in exchange for a share in the future appreciation (or depreciation) of the home’s value. The cash can be used for any purpose—most often for home improvements or debt consolidation. Notably, an HEA is not characterized by the investor as a loan—there is no debt issued, and there are no required monthly payments or interest charges. Instead, the investor is repaid when the property is sold or at the end of a defined term. HEA providers calculate the repayment amount using formulas that consider the home’s value, with the intent of providing for a repayment amount larger than the initial upfront payment. HEAs provide liquidity to homeowners who may have significant appreciation in their home values but credit restrictions or limited personal liquidity. They enable access to a portion of a home’s equity without a homeowner taking on new debt or monthly obligations, but they do come with risks. Specifically, since the repayment amount is based upon the home’s value at the time of the settlement, the total financing cost is uncertain at the time the parties enter into the agreement. If a homeowner wants to stay in their home at the end of the HEA term but their home has substantially appreciated, they may need to liquidate other assets or qualify for financing to repay the HEA if they owe a large settlement amount back to the investor. Homeowners who cannot pay the settlement amount risk having to sell their home or face foreclosure. In many cases, if a home appreciates significantly, the cost of the HEA to the homeowner could exceed the cost of more traditional financing. HEAs may also have complex terms that include fees and restrictions on selling or refinancing. The HEA market has grown in recent years. Accordingly, the securitization market has developed since the first unrated HEA securitization in 2021 and the first rated HEA securitizations in October 2023. As of October 2024, the four largest HEA originators—Hometap, Unlock, Unison, and Point—have securitized HEAs totaling over $2.5 billion. The HEA market remains relatively small (compared with products like HELOCs), but the industry predicts HEA origination will continue to grow in the next decade as homeowners look for ways to access their home’s equity while home prices continue to appreciate due to limited housing supply. As the market for HEAs expands, it faces an uncertain regulatory environment. There is ongoing debate among federal and state regulatory agencies and courts over the classification of HEAs as loans, which has significant consequences in determining whether they would be subject to the large set of laws and regulations governing traditional mortgage loans. Illustrating the uncertain legal framework for HEAs, the Massachusetts attorney general earlier this year sued Hometap, alleging the company’s product constitutes an illegal reverse mortgage that violates the state’s consumer protection laws for mortgages and foreclosure prevention. The Consumer Financial Protection Bureau and other federal regulatory agencies have not provided formal guidance on HEAs, requiring investors to navigate licensing, consumer protection, and disclosure laws that vary widely by state. RTLs RTLs (also known as fix-and-flip, or bridge, loans) are short-term loans designed for real estate investors and homeowners and are mainly used to finance property acquisition, renovation, or transition between homes. RTLs are usually secured by residential mortgaged properties and are designed to be repaid within 36 months. Unlike traditional mortgage loans that emphasize a mortgagor’s creditworthiness, income verification, and longer-term ability to repay, RTLs are underwritten primarily based on the underlying property’s value and the mortgagor’s exit strategy. RTLs often have an expedited approval and funding process that allows for access to those with credit restrictions. With rising home prices across the United States and ongoing shortages as demand continues to outpace supply, investors are increasingly looking for ways to improve existing homes. In There is ongoing debate among federal and state regulatory agencies and courts over the classification of HEAs as loans, which has significant consequences in determining whether they would be subject to the large set of laws and regulations governing traditional mortgage loans.
STRUCTURED FINANCE SPECTRUM, FALL 2025 | 5 the past decade, home “flipping” and related home renovation projects have developed as its own industry in response to the demand for older homes that have undergone renovations. RTLs meet the needs of these endeavors since they provide for the acquisition and rehabilitation of existing properties, which can then be sold or leased to help satisfy demand. In light of the growth in RTL origination, the first large revolving RTL securitization was issued in 2018, with the asset class expanding significantly in the intervening years as it has matured with more uniform underwriting and servicing standards. The first rated securitization of RTLs was completed in early 2024. There are also risks associated with RTLs. Interest rates and fees can be substantially higher than for other mortgage products due to the short-term structure and risk profile. Additionally, borrowers must be confident in their ability to exit the loan, either through sale or refinancing, within the short duration. Lastly, federal consumer protection regulations such as the Ability to Repay/Qualified Mortgage Rule and the TILA-RESPA Integrated Disclosure Rule may not cover RTLs when the loans are made for business purposes. Conclusion The residential real estate market constantly adapts to evolving demand brought on by changes in the housing market and the economy generally. Both HEAs and RTLs have been spurred by housing shortages and changes in consumer credit, among other economic factors. As the industry continues to see noticeable development in these asset types, stakeholders will need to navigate the shifting legal and regulatory landscape. n On 17 June 2025, the European Commission (EC) published a long-awaited proposal to reform the European Union’s securitisation framework, marking the first legislative initiative under the savings and investments union strategy and closely aligned with the capital markets union objectives. These reforms are designed to address shortcomings identified since the framework’s introduction in 2019, which, while strengthening investor protection, transparency, and financial stability, has also imposed excessive regulatory and prudential burdens that have hindered market development. There is certainly room for the EU securitisation market to grow. In the United States, the securitisation market is $14 trillion, while it is only €1.6 trillion ($1.85 trillion) in the EU, still below the peak of €2 trillion in 2008, when the U.S. subprime crisis hit Europe. The ECs review aims to recalibrate the framework to strike a better balance between robust safeguards and the need to boost securitisation activity, thereby supporting economic growth, innovation, and job creation across the EU. Securitisation is seen as a key tool for Europe to free up bank capital for new lending, broadening the sharing of credit risk, and channeling more investment into the real economy. Freeing up capital for lending is becoming increasingly important in the EU given the EU’s stated desire to compete with the United States and China, finance commitments to military spending, and fund the green and nuclear economy. European Commission Proposes Reforms to the EU Securitisation Framework
STRUCTURED FINANCE SPECTRUM, FALL 2025 | 7 Key Proposed Changes to the Securitisation Regulation Article Commission Proposals Definitions (Article 2) New definitions of public and private securitisation: Public securitisations: Require a prospectus, are admitted to trading, or are marketed generally to investors with non-negotiable terms. Private securitisations: Do not require a prospectus, are not admitted to trading, and have terms negotiated bilaterally between the originator and a small group of investors. Due Diligence (Article 5) Streamline due diligence for EU-established, supervised sell-side parties. Remove detailed investor checks for EU-based, regulated issuers, focusing on proportionate, risk-based approaches. Allow an additional 15 days allow for secondary market due diligence documentation. Delegation of due diligence will not transfer legal responsibility. Waive due diligence for securitisations fully guaranteed by multilateral development banks or certain public-entity-backed first-loss tranches. Investors in non-EU issuers will still need to verify compliance with EU rules. Risk Retention (Article 6) Risk retention to be waived when a first-loss tranche, guaranteed or held by specific public entities, represents at least 15% of the nominal value of exposures. Transparency (Article 7) Reduce the reporting burden by at least 35% through fewer required fields in Article 7 reports. Clear distinction between mandatory and voluntary fields. Exclude loan-level data for highly granular, short-term exposures (e.g. credit cards or consumer loans). Lighter, supervisory-focused reporting for private securitisations. Securitisation Repository (Articles 10 & 17) Public securitisation data accessible to investors. Private securitisation data limited to supervisors to protect confidentiality. STS Requirements (Articles 20, 26b, 26c, 26e) Technical amendments to facilitate implementation of simple, transparent, standardised (STS) criteria. European Banking Authority to lead the sub-committee, providing secretariat and vicechairperson. National competent authorities to supervise STS criteria for bank-originated securitisations. Administrative sanctions for failure to meet due diligence requirements. The EU’s approach diverges from those in the UK and other jurisdictions, where requirements for third-country securitisations may be less stringent, potentially making the EU market less attractive for cross-border investment. The European supervisory authorities (ESAs) have highlighted the practical difficulties faced by market participants and have called for further interpretative guidance and a comprehensive review of the jurisdictional scope as part of the ongoing reform process. The EC is expected to consider these issues in future technical standards and guidance. Potential Risks and Unintended Consequences While the reforms aim to reduce regulatory burdens, there is a risk that new requirements—such as those for private securitisation reporting or third-party verifier supervision— could introduce fresh challenges or compliance costs if not carefully implemented. Market participants are advised to monitor the development of technical standards and guidance to ensure compliance and to anticipate any new operational requirements. Next Steps and Indicative Timeline The proposals must be adopted by the European Parliament and the Council of the EU, with key debates expected on balancing reduced due diligence with systemic risk safeguards, harmonising definitions, and adjusting capital/liquidity rules for insurers and banks. After the framework’s adoption, the ESAs will develop the necessary technical standards and guidelines. Issuers and investors will need to adapt to simplified reporting templates for private securitisations and new due diligence processes for EU-originated deals. Market Impact and Stakeholder Considerations The proposals have been broadly welcomed by market participants for addressing excessive regulatory burden, lack of clarity, and insufficient proportionality. However, ongoing concerns remain whether the reforms will truly reduce costs and complexity, especially for smaller institutions and cross-border transactions. The effectiveness of the reforms will depend on their implementation and whether they deliver meaningful cost and complexity reductions for issuers and investors. Stakeholders have called for further harmonisation of supervisory practices and the potential development of a panEuropean securitisation platform, particularly to support SME and green securitisations. Non-EU Transactions The jurisdictional scope of the EU securitisation framework remains a complex and evolving area, particularly for transactions involving non-EU parties. The framework applies to securitisations when any of the sell-side parties (originator, sponsor, or special purpose entity) or investors are located in the EU but also imposes obligations on EU investors investing in third-country securitisations. EU institutional investors are required to verify that thirdcountry originators, sponsors, or securitisation special purpose entities provide disclosure in line with Article 7 of the Securitisation Regulation, regardless of whether the securitisation is structured under non-EU law. This means EU investors must receive full Article 7 templated disclosure, which can be challenging because third-country sell-side parties may be unwilling or unable to provide this information. The lack of equivalence or a more principles-based approach has placed EU investors at a competitive disadvantage in third-country markets since they may be excluded from deals where non-EU originators do not comply with EU disclosure standards.
STRUCTURED FINANCE SPECTRUM, FALL 2025 | 9 Stage Estimated Date Parliament/Council negotiations Late 2025 – Mid-2026 Final adoption of reforms Late 2026 – Early 2027 ESA technical standards Mid-2027 – Early 2028 Full implementation Late 2027 – Early 2028 Timelines may shift depending on negotiations and legislative amendments. The EC aims to finalise reforms before the end of the current legislative term in 2027. n The foundation of structured finance is the use of bankruptcyremote special purpose entities to separate a company’s assets from its liabilities, permitting investors to invest in just specific assets while simultaneously allowing companies to borrow on more favorable terms and unlock additional value. The success of an asset-backed financing structure depends on the borrower in question remaining separate from the sponsor of the transaction and its related entities, especially if its related entities enter bankruptcy proceedings. The ability of a borrower to file bankruptcy and restrictions on its ability to do so remain an integral consideration and constitute a continuously evolving area of the law. Two primary means for regulating a borrower’s ability to file bankruptcy are “golden share” and “golden director” provisions. What Are Golden Share and Golden Director Provisions? Simply put, golden share and golden director provisions are blocking rights that prevent a company from filing for bankruptcy without certain consent. A golden share provision typically grants a lender a noncontrolling, frequently nominal, equity interest in the borrower that provides the holder of the nominal equity interest with a veto right for a prospective bankruptcy filing. In contrast, a golden director provision provides for the appointment of a director (usually an independent director) and requires the director’s consent to properly authorize the entity to file for bankruptcy. Bankruptcy Consent Rights: Golden Shares and Golden Directors
STRUCTURED FINANCE SPECTRUM, FALL 2025 | 11 Courts’Treatment of Golden Share and Golden Director Provisions Courts have been reluctant to enforce contractual waivers of a debtor’s ability to file bankruptcy, grappling with the public policy favoring a debtor’s access to bankruptcy when determining the validity of golden shares. To that end, historically, courts have refused to enforce unanimous consent provisions, relying on long-standing precedent that parties cannot contract around the rights conferred by the Bankruptcy Code. Over time, however, some other courts have been more tolerant of golden shares so long as the golden shareholder is exercising rights as a bona fide equity holder. Notably, the Fifth Circuit, in the case In re Franchise Services of North America, held in 2018 that “[t]here is no prohibition in federal bankruptcy law against granting a preferred shareholder the right to prevent a voluntary bankruptcy petition just because the shareholder also happens to be an unsecured creditor.” In Franchise Services, the Fifth Circuit also considered whether, under applicable Delaware corporate law, a minority shareholder with a bankruptcy veto right owes a fiduciary duty to the company and other shareholders in the exercise of that right. The Fifth Circuit held that a minority corporate shareholder does not owe these fiduciary duties and could exercise those rights in accordance with its own interests. However, it’s important to note that the analysis of whether fiduciary duties are owed will vary, depending on the state of incorporation and the type of corporate entity at issue. Courts have more frequently enforced golden director provisions, and the case law has been more uniform. Specifically, courts uphold golden director bankruptcy consent rights when the director’s independence is not tainted with undue bias or favoritism toward the appointing lender and when the director maintains fiduciary duties to the debtor. Recent Case Law Developments Following the Fifth Circuit opinion in Franchise Services, there seems to have been increasing enforcement of golden share provisions when there is a bona fide equity holder that has made a substantial equity investment in the debtor. But some recent case law has questioned the enforceability of golden share provisions even for bona fide equity holders. In In re Pace Industries, the Delaware bankruptcy court, ruling in 2020 as a matter of first impression, found that a minority shareholder, who was not a lender or creditor to the debtor and had negotiated for a bankruptcy consent right, could not exercise its consent right both as a matter of bankruptcy policy and under applicable Delaware corporate law. (“I see no reason to conclude that a minority shareholder has any more right to block a bankruptcy [or] the constitutional right to file a bankruptcy by a corporation than a creditor does.”) In deciding the issue under its broad equitable powers and in accordance with public policy, the court found that the investors violated their fiduciary duty in blocking the bankruptcy and denied the motion to dismiss. Pace runs in direct contrast to the Fifth Circuit opinion in Franchise Services, holding that a golden share held by a minority shareholder did not create a fiduciary duty under Delaware corporate law. Another Delaware bankruptcy court decision continued the logic from Pace in In re PWM Property Management. However, Pace and PWM Property Management have yet to be adopted in other districts. While these opinions are both from Delaware bankruptcy courts, they indicate that courts in other jurisdictions may scrutinize golden shares more closely. For golden director provisions, a Northern District of Illinois bankruptcy court recently upheld a golden director’s bankruptcy consent rights when the golden director was an independent manager under the operating agreement and Golden share and golden director provisions are blocking rights that prevent a company from filing for bankruptcy without certain consent. retained fiduciary duties to the company and its creditors. In In re 301 W N. Ave., the debtor entered a secured loan agreement requiring the debtor to appoint an independent director whose consent was required to approve a bankruptcy filing. The debtor defaulted on the secured loan and filed for bankruptcy without the independent director’s consent. The secured lender moved to dismiss. The court granted the motion to dismiss after concluding that: (1) the bankruptcy filing was not authorized under the operating agreement; and (2) the bankruptcy consent rights did not impermissibly restrict the debtor’s ability to file for bankruptcy as a matter of public policy. The court explained that the independent director’s bankruptcy consent rights were permissible under Delaware state law, which provides that a limited liability company can act only through authorization provided by its operating agreement. Moreover, the court held that the bankruptcy consent rights were not impermissible when an operating agreement preserved the independent director’s fiduciary duties and otherwise complied with nonbankruptcy law. The court held that the independent director’s bankruptcy consent rights were not in violation of public policy when the operating agreement required the independent director to consider the interests of the debtor and other stakeholders. Conclusion Golden shares and golden director provisions continue to be used in the structuring and maintenance of special purpose entities and are an important tool in ensuring that lenders receive the benefit of their bargain and corporate structures are respected. However, in light of the uncertainty surrounding the enforceability of golden shares, lenders may find appointing a golden director a more appealing alternative. In any event, bankruptcy consent rights should be carefully drafted to ensure maximum protection and maintain the integrity of the applicable structure. n Courts uphold golden director bankruptcy consent rights when the director’s independence is not tainted with undue bias or favoritism toward the appointing lender and when the director maintains fiduciary duties to the debtor.
History of the 2022 UCC Amendments So Far In 2019, the Uniform Law Commission and The American Law Institute appointed a joint committee to consider the need for changes to the Uniform Commercial Code (UCC) to accommodate certain emerging technologies, including artificial intelligence and distributed ledger or “blockchain” technology. The joint committee’s meetings culminated, in July 2022, with the approval of the Uniform Commercial Code Amendments (2022) that the Uniform Law Commission recommended for adoption and enactment in all U.S. states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. In June 2023, Hawaii became the first jurisdiction to enact the amendments, followed by Indiana, North Dakota, Colorado, Delaware, Nevada, and New Hampshire, which all enacted in 2023. Though not yet universally adopted, 32 jurisdictions have revised their laws to incorporate the amendments’ changes as of August 2025, while six more have begun the legislative process. While several key jurisdictions, including California and Delaware, have enacted the amendments, other important jurisdictions, such as New York, have not. The centerpiece of the amendments is the addition of a new Article 12 that governs the transfer of property rights in certain intangible digital assets, including AI and blockchain, and important changes to Article 9 of the UCC relating to the perfection of security interests in these new types of assets. The amendments broadly define these new intangible digital assets as “controllable electronic records” (CERs). Generally speaking, the amendments’ changes demonstrate that the drafters envision a further migration toward electronic collateral in secured transactions, as evidenced by the broadening of types of collateral susceptible to the concept of “control,” which the drafters expressly state is intended to serve as the functional equivalent of possession for perfection purposes. Current Legal Regime While legislative momentum for universal adoption of the amendments is gathering, the market has yet to undergo a sea change, and many institutions and law firms are still relying on pre-2022 methods for perfection and transfer of electronic collateral. The current regime treats electronic collateral in one or more of the following categories: (1) payment intangibles under Article 9 of the UCC; (2) transferable records under the Uniform Electronic Transactions Act (UETA) or the Electronic Signatures in Global and National Commerce Act (ESIGN); or (3) electronic chattel paper under Article 9 of the UCC. States began adopting UETA in 1999, and as of today, 47 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands have adopted UETA. New York passed its own legislation: the Electronic Signatures and Records Act. In 2000, Congress passed the ESIGN Act to ensure the validity of electronic contracts and the defensibility of electronic signatures at the federal level. ESIGN contains provisions covering the same two broad purposes as UETA. One material difference between UETA and ESIGN’s transferable record provisions is that ESIGN’s provisions are narrower and only apply to electronic instruments that relate to loan secured by real property. The practical result of this is that the market does not rely on UETA or ESIGN for electronic instruments that relate to loans secured by personal property or for unsecured loans. Payment intangibles A “general intangible” is defined in Article 9 of the UCC as any personal property, including things in action, that is not otherwise classified elsewhere under Article 9. General intangibles do not include any tangible property, and the following classes of intangible property are excluded: accounts receivable, chattel paper, deposit accounts, and investment property. “Payment intangible” is a subset of general intangibles under which the principal obligation is the payment of money. Electronic collateral that does not qualify as electronic chattel paper or transferable records are generally classified as payment intangibles, although payment obligations for transferable records are also payment intangibles. A security interest in a payment intangible is perfected by filing a financing statement, pursuant to Section 9-312 of the UCC. Priority among secured parties is determined by the first-tofile-or-perfect rule set forth in Article 9. Transferable records Because Article 3 of the UCC governs only writings, the drafters of UETA and ESIGN extended certain concepts of negotiable instruments to electronic equivalents known as “transferable records.” A transferable record is an electronic record that would qualify as a negotiable instrument if it were in writing, provided that the parties expressly agree to treat it that way. Control under UETA and ESIGN, rather than possession, determines enforcement rights for a transferable record, and control may be established by maintaining a single authoritative copy of the record in a compliant electronic vaulting system. The concept of a holder under Article 3 is replaced with the concept of a party having control for transferable records. The concept of a holder in due course of a negotiable instrument is therefore also applicable for transferable records. It is worth noting that control under UETA and ESIGN does not confer perfection under Article 9. Because transferable records are not an Article 9 class of collateral, they would default to being classified as payment intangibles and are therefore perfected solely by filing a financing statement. STRUCTURED FINANCE SPECTRUM, FALL 2025 | 13 UCC Futureproofing Electronic collateral that does not qualify as electronic chattel paper or transferable records are generally classified as payment intangibles, although payment obligations for transferable records are also payment intangibles.
Electronic chattel paper Under Article 9 of the UCC, “chattel paper” refers to, among other things, a record or records that evidence both a monetary obligation, which refers to obligations secured by the goods or owed under a lease of the goods, and either a security interest in specific goods or a lease of specific goods. Chattel paper may be tangible, if evidenced by information inscribed on a tangible medium, or electronic, if evidenced by information stored in an electronic medium. An installment loan for the purchase of goods (such as an automobile), which is secured by a security interest in such specific goods, is an example of chattel paper. A lease of the same automobile (instead of an installment loan) would also constitute chattel paper. Perfection may be achieved in electronic chattel paper by either filing a financing statement or by obtaining control in accordance with Section 9-105 of the UCC. A secured party that obtains control similarly enjoys priority over a secured party that only files. Control over electronic chattel paper requires compliance with the standards set forth in Section 9-105 of the UCC, including maintaining a single authoritative copy of the record. Systems operated by established vendors are generally recognized in the market as satisfying these control requirements. 2022 Amendments As noted above, the new Article 12 introduces the concept of CERs. It also introduces the related concepts of “controllable accounts” and “controllable payment intangibles.” Accounts and payment intangibles that are tethered to a CER are controllable accounts and controllable payment intangibles, respectively. The result is that the amendments will allow certain electronic records that evidence accounts or payment intangibles to be perfected by control, in addition to filing. The ability to perfect by control will provide secured parties with priority advantages similar to those historically available for possession of tangible negotiable instruments. As a result, market practices relating to the control of electronic contracts will continue to evolve. In addition, the amendments will enable persons that obtain control of controllable accounts and controllable payment intangibles to take their interest in the controllable electronic record free of property claims to the record, including security interests and claims of ownership. Thus, a holder in due course concept that in the past was only available to tangible negotiable instruments or transferable records is now available to persons who take control of controllable accounts and controllable payment intangibles, effectively creating a concept of electronic negotiable instruments. MERS Futureproofing Despite the slow process for adopting the amendments, some market players are proactively taking steps to future-proof their protocols and procedures in anticipation of the amendments’ universal passage. One notable example is the MERS eRegistry system, an outgrowth of the MERS system that was launched in 1997 as a solution for streamlining the mortgage process. MERS is a national electronic database that tracks changes in mortgage servicing rights and beneficial ownership interest in loans secured by residential real estate. At transaction close, the parties agree to name MERS as mortgagee in the county land records for the lender and servicer. This reduces issues related to breaks in chain of title since MERS remains the mortgagee no matter how many times servicing is traded. The eRegistry similarly tracks ownership, custodial relationships, and secured party interests in electronic mortgage notes and, via proprietary technology, provides operational and legal control for UETA and ESIGN compliance. At closing, an electronic mortgage note is generated, electronically signed, tamper-sealed, and stored in an eVault, upon which a copy of the electronic mortgage note is sent to the relevant transaction parties. While this construct satisfies the current requirements for control under UETA/ESIGN, it also may allow an electronic mortgage note to be perfected by control as a controllable account or controllable payment intangible under the new Article 12 and the revised Article 9 pursuant to the amendments. To meet the test for control under the amendments, an electronic record must first qualify as a CER, meaning such record must be (1) stored in an electronic medium that (2) can be subjected to control under Section 12-105. To establish control, Section 12-105 requires that the holder of the CER have (1) power to avail itself of substantially all the benefit from the CER; (2) exclusivity of that power; and (3) the ability to identify that it has that power. Here, the informational and electronic characteristics of a MERS electronic mortgage note are not in question (the definition of “record” under Section 9-102(a)(70) is unchanged by the amendments), and the electronic mortgage note’s identifying information and tamper-seal insertion into the eVault may very well satisfy a plain-text reading of the requirements of Section 12-105. The same analysis applies to electronic home equity lines of credit (eHELOCs), which are also tracked by the eRegistry, and though legal control may be possible under the amendments, it cannot be established for eHELOCs under the current regime. DART Registries that use blockchain technology, such as Figure Technology Solutions’ Digital Asset Registration Technologies (DART) platform, are the ultimate future play since the current legal regime does not recognize the systems employed in blockchain registries as giving anything more than operational security. Launched in spring 2024, DART is a combined lien and electronic mortgage note registry service for mortgage processing that uses the Provenance blockchain and digital wallets to automatically update loan ownership and registration information in real time. Like the MERS eRegistry, DART stores the equivalent of a MERS electronic mortgage note off-chain in an object store and registers notes in a blockchain-based digital token that is then delivered to a transaction party’s digital wallet. Later transfers of the token between digital wallets are recorded on the Provenance blockchain—which DART continuously monitors—allowing for contemporaneous updates to the registry. TriBar Report Similar to the loan origination market, opinion practice has remained largely unaffected by the amendments since most parties are still perfecting under the pre-2022 legal regime. Still, preparations are being made. In spring 2024, the TriBar Opinion Committee published the “TriBar Report on Opinions Under 2022 Amendments to the Uniform Commercial Code Regarding Emerging Technologies” in The Business Lawyer. Intended as a resource for practitioners, the TriBar report summarizes the provisions of the amendments likely to be addressed by legal opinion letters and provides sample opinion and assumption language. Among other things, the TriBar report addresses the current choice-of-law issues that many practitioners may encounter when opining on perfection by control of a security interest STRUCTURED FINANCE SPECTRUM, FALL 2025 | 15 Despite the slow process for adopting the amendments, some market players are proactively taking steps to future-proof their protocols and procedures in anticipation of the amendments’ universal passage. One notable example is the MERS eRegistry system. As the TriBar report demonstrates, opinion practice will need to keep pace with technological updates in the marketplace designed to implement the amendments.
in a CER, controllable account, or controllable payment intangible—a current pain point in CER opinion practice. The issues may arise in cases when the amendments are in effect either in the CER’s jurisdiction or the debtor’s location, but not both. For example, forum courts in jurisdictions where the pre-2022 UCC is still in effect will classify a CER as a “general intangible.” However, if the debtor is located in a jurisdiction where the amendments are in effect, such as Delaware, then the forum court would apply Delaware law and classify the record as a CER and treat it accordingly. Conversely, a forum court sitting in a jurisdiction where the amendments are in effect will treat the record as a CER, but if the amendments are not in effect in the CER’s jurisdiction, the amendments will not apply to the CER (for example, with control) since the forum court will apply the law of the CER’s jurisdiction. Furthermore, as the TriBar report notes, opinions on security interest given over personal property under Article 9 typically do not address choice-of-law issues—or only address these issues in a limited way. As the TriBar report demonstrates, opinion practice will need to keep pace with technological updates in the marketplace designed to implement the amendments. However, as the TriBar Report notes, because of the novelty of many of the terms and concepts used in the amendments (information relevant to a particular opinion may be highly technical and not within the competence of a lawyer to evaluate), opinion preparers are likely to expressly assume many of these concepts and information. These assumptions are set out in tables in the TriBar Report, Tipping Point The market may soon see a tipping point because the enactment of the amendments in New York is imminent. New York State Assembly bill number A03307-A was first introduced on January 27, 2025. On June 11, 2025, the bill was passed by the Assembly, sent to the Senate, passed by the Senate, and returned to the Assembly for delivery to the governor—the final step in New York’s legislative process. Under New York law, the governor has 10 days to sign or veto any bill sent while the legislature is in session, and the bill will automatically become law if the governor fails to act. Slightly complicating matters is the fact that New York’s legislative session ended on June 12, 2025, the day after the bill passed. If a bill is delivered to the governor while the legislature is not in session, the governor has 30 days to act instead of 10. Importantly, failure to act during the 30-day period will have the same effect as a veto, an outcome known as a “pocket veto.” As written, the bill will take effect 180 days after it is enacted. As of this writing, the governor has not signed the bill, making it somewhat unlikely that the amendments will take effect in New York before 2026. Once in effect, however, practitioners and market participants should be prepared to reevaluate their approach to commercial transactions governed by New York law to accommodate the changes brought by the amendments and the evolving technological realities of the marketplace. n NEED IMAGE STRUCTURED FINANCE SPECTRUM, FALL 2025 | 17 The market may soon see a tipping point because the enactment of the amendments in New York is imminent. Now, more than ever, the market for residential mortgage finance has become increasingly fragmented. Over the course of the past few years, the market has seen an influx of new players, breakups of power houses and the transfiguration of bank lending to private credit lending. All this change has led to opportunity for warehouse lenders, both new and old, looking to solidify their status in the market. In addition, there are new opportunities found lying about the current market. The market, however, is not without its own challenges. Warehouse lenders are faced with myriad issues, including fluctuations in origination volume and the uncertain future of interest rates. This has led many lenders to look for opportunities in places that may not be the traditional source of business. Further complicating the current market situation is the fact that volume for traditional agency loans is low. The origination of non-QM mortgage loans is becoming more commonplace in the U.S. retail mortgage market for a variety of reasons. This means warehouse lenders that traditionally enjoyed the high-volume agency business need to keep up with the market trend of financing non-QM loans. While many warehouse lenders have gotten comfortable with the non-QM product type over the years, others struggle to justify the credit and risk profile for these particular mortgage loans. This has led to some warehouse lenders being skittish about offering concentration limits and warehouse facilities to non-QM originators. To meet the increased demand, some warehouse lenders are seeking ways to limit the credit impact of non-QM mortgage loans and offer to finance these loans on their platform. There are three distinct ways warehouse lenders can limit the credit impact of non-QM mortgage loans while allowing their counterparties the ability to finance, continue financing, or even offer more line size for non-QM loans as well as various other product types that may seem like a riskier business proposition. While there is no magic bullet, each of these three methods offers flexibility for a lender’s needs. The one drawback, however, is that to successfully implement these methods, the warehouse lender will need at least one business partner willing to provide some help in implementing the strategy. Liquidity Solutions for Warehouse Providers Navigating a Non-QM World
STRUCTURED FINANCE SPECTRUM, FALL 2025 | 19 Participations: The Tried-and-True Method Participations in asset-based financing—specifically, in the mortgage finance world—have been around for quite some time. A participation agreement offers an easy and time-tested path to achieve the warehouse lender’s goal of financing more non-QM products. The process goes something like this: The warehouse lender will sell a participation interest in a portion or all of the related financing agreement. This interest can be specific or general. For example, a lender can sell an interest in specific mortgage loans or a subset of mortgage loans. Conversely, if so desired, the lender can sell a portion or all of its interest in an entire repurchase agreement. The participation represents the beneficial economic interest in whatever is being sold (i.e., the mortgage loan or the agreement itself). The participation agreement is typically structured in such a way that the participant can receive cash flows from the underlying loans or warehouse agreements as they pay down. The other benefit to a participation agreement is that it is a sale. This means that, although the participant is providing back-leverage to the warehouse lender, it will not be considered a financing from the participant’s view. This can be extremely useful to those investors looking to enter the realm of mortgage finance but don’t have the ability to do so. That makes this method attractive to insurance companies and other mortgage aggregators looking to enter the world of mortgage finance. A key negotiating point is striking a balance between the warehouse lender’s rights vis-à-vis its counterparty and the participant’s sacred rights. This dichotomy represents a bulk of the negotiated terms of the agreement. Another factor to consider is how the participant will get paid in the priority scheme based on its bargain. In other words, if the music stops and the warehouse lender exercises its rights against the repo counterparty, items like margin and demands on a guarantor become sticking points for participants. This last point is an often-overlooked factor but nonetheless an important one. Overall, a participation offers an easy and certain benefit for all parties involved in the transaction. However, even though the structure is basic, it may not offer enough of an economic benefit for the potential business partner. Overall, a participation offers an easy and certain benefit for all parties involved in the transaction. Repledge: Risk and Reward The second method to achieve the back-leverage goal of financing non-QM loans is through a repledge arrangement. Here, the warehouse lender enters into an agreement that repledges individual mortgage loans to a back-leverage provider. In our example, the warehouse lender would repledge non-QM loans directly to another financing provider in exchange for liquidity. This arrangement is much more complex than a participation and a bit more cumbersome because the back-leverage provider has a security interest in the underlying collateral and is therefore more closely tied to the warehouse lender and the underlying mortgage loans. For example, the warehouse lender’s third parties will be dealing directly with the repledgee (the back-leverage provider) from time to time. In essence, the warehouse lender becomes a conduit for the back-leverage provider in many ways. The back-leverage provider has many avenues for control and becomes more in-grained in the day-to-day management of the underlying facility. This method is best reserved for a situation where one backleverage provider is taking an interest in many different facilities or an entire platform. We see this type of facility working well with private credit outfits looking for a constant stream of liquidity. While cumbersome, it can provide large amounts of liquidity for warehouse lenders that otherwise do not have the funds to operate a cash-intensive business. Of course, this arrangement itself is a financing, so warehouse lenders can expect negotiation with a repledgee at all documentation levels. The repledgee will most likely want a certain level of control over major decisions for each underlying facility. This may hinder the operations of the warehouse lender a bit. The benefit for the potential repledgee is that this arrangement can avail itself of the bankruptcy safe harbors given that the mortgage loans themselves are repledged. This allows the repledgee to mirror the underlying deal (i.e., master repurchase agreement) for capital and underwriting purposes. It also allows the potential repledge to access a voluminous amount of product. While a bit cumbersome, this method allows for more liquidity and a more seamless integration of the product. By allowing the repledgee more direct access, the theory is that funding of loans can happen quickly, which is a major advantage for the warehouse lender. Additionally, this arrangement is highly bespoke, so the parties can tailor the transaction to their needs. The Committed Takeout The third and final method for solving the non-QM problem is the committed forward takeout. In this scenario, a takeout investor is identified to buy loans directly or indirectly from the underlying originators. The investor will typically commit to purchasing mortgage loans on a forward basis, and the warehouse lender agrees to give the committed takeout investor a look at the collateral. This gives the investor time to diligence the loans while a commitment is inked. It is important to note that this arrangement requires a bit of structuring. There are a few ways to get the loans into the hands of the takeout investor. However, the easiest way is to have a mortgage loan purchase and sale agreement between, for example, the warehouse lender and its counterparty. On the date the trade settles, the takeout investor receives all required releases from the warehouse lender in addition to an assignment and assumption of the mortgage loan purchase agreement from the warehouse lender. This ensures that the takeout investor inherits the representations and warranties from the underlying originators. The purchase price for the loans will be applied to pay down the warehouse line. In essence, the warehouse lender is acting as a middleman in arranging a sale of the loans to an aggregator or other investor. This arrangement works great for middle-market warehouse lenders that have a large quantity of small to midsize warehouse agreements because it allows the takeout investor access to a large pool offered by smaller originators. Additionally, this is structured as a sale, so there are the same financing concerns that are present in a repledge transactions are not present here. We have seen these arrangements in all shapes and sizes. There is no one-size-fits-all solution to this problem. Economic factors will ultimately dictate how and what form each venture should take. The key is that in each one of these arrangements, a warehouse lender can obtain a substantial benefit from looking for business partners—specifically, when trying to solve for the problem of lack of available financing opportunities for its potential clients. n While a bit cumbersome, this method allows for more liquidity and a more seamless integration of the product.
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