In a letter to Treasury copied to the SEC, Senator Mike Crapo (R-ID) explained the intent behind the commercial mortgage-backed securities alternatives of the risk retention requirements of Section 941 of Dodd-Frank, which he authored. The Senator said that the legislative intent is for the regulations to offer alternative options with regard to commercial mortgage-backed securities as provided in Dodd-Frank and avoid the creation of a one-size-fits-all retention rule that could stifle a commercial real estate recovery before it can occur. He is concerned because, while the SEC and federal bank regulators must jointly adopt retention rules, there already have been several ad hoc rules from individual regulators that simply blanket a single retention framework broadly across all asset classes.
In order to support credit availability, Sen. Crapo urged the SEC and the other regulators to deliberately follow the statutory mandate to structure reforms for each unique asset class, including commercial real estate, home loans, automobile and student loans, and credit cards. Further, with a phased-in implementation, including two years for commercial mortgage-backed securities and consumer asset-backed securities after final rules, regulators should use the time to consider rules carefully and to better understand their impact on access to credit. Any review should also include an extensive examination of how the market is evolving and consideration of other developments such as the creation of market standards and other safeguards in the commercial real estate finance market that could assist regulators in their rulemaking.
With respect to commercial mortgage-backed securities, the provision in Section 941 mandates that there are several specific options for, as well as alternatives to, a percentage risk retention, including adequate underwriting standards, adequate representations and warranties and related enforcement mechanisms, and a percent of the total credit risk of the asset held by either the securitizer, originator or a third party investor. It follows, reasoned Sen. Crapo, that regulators should construct a joint rule effectuating these options in order to strengthen the commercial real estate market and support its recovery.
The Senator pointed to two reports mandated by Dodd-Frank that have reinforced the commercial mandate for risk retention. First, the Federal Reserve's October 2010 study cautioned that retention is not a panacea, and that if rules are not implemented carefully by asset class, credit availability could be disrupted at a time when it is desperately needed. The Federal Reserve report also suggested that regulators consider alternative ways other than retention to align interests. Second, the Financial Stability Oversight Council study on risk retention noted that there are several ways to accomplish retention for commercial mortgage-backed securities, including retention by a third-party investor, which the commercial provision recognizes as a viable option.