SEC Proposal Places Greater Burden on Servicers

A proposal by the Securities and Exchange Commission to overhaul registration and disclosure requirements for asset-backed securities calls for increased disclosures from servicers (as well as from originators, sponsors, trustees and other participants to securitized asset-backed transactions). Although the proposal recognizes the increasingly important role that servicers have come to play in commercial mortgage-backed securities transactions, the disclosures might well complicate things for servicers, in the current environment of multiple parties to a CMBS transaction, without providing any additional useful input to investors. The proposal has drawn comment from a number of industry associations that fear that the changes could have some unintended negative market effects.

In a Federal Register filing, the SEC says change is necessary considering that issuance of ABS has grown from $46.8 billion in 1990 to $416 billion in 2003 and heretofore there have been no specific disclosures geared to the requirements of this investment avenue. The capital markets regulatory agency notes, "Asset-backed securities and ABS issuers differ from corporate securities and operating companies. In offering these securities, there is generally no business or management to describe. Instead, information about the transaction structure and the quality of the asset pool and servicing is often what is most important to investors. Many of the commission's existing disclosure and reporting requirements, which are designed primarily for corporate issuers, do not elicit the information that is relevant for most asset-backed securities transactions."

The Mortgage Bankers Association, the Commercial Mortgage Securities Association, The Bond Market Association and the American Securitization Forum, which describes itself as a forum of TBMA, have all submitted their comments on the proposal.

One concern that the MBA has brought up is that a requirement for a so-called responsible party attestation relating to compliance with specific servicing criteria, which calls for a single party to sign this attestation along with the 10-K filing and the Sarbanes-Oxley certification, might stifle the market. The mortgage bankers' trade association also takes exception to the SEC's use of the term "credit enhancement" in the context of servicing advances. The MBA points out that "servicing advances perform a different function and have embedded refund characteristics that credit enhancements do not."

In the case of "unaffiliated servicers" to a transaction, the SEC proposal calls for a 10% threshold for triggering disclosure requirements. The Commercial Mortgage Securities Association points out in its comment letter to the SEC, "In the context of servicing, the typical CMBS investor's primary concern is with the entity to which the trust fund has ultimate recourse. In the typical CMBS subservicing relationship, it is the master servicer that reviews, synthesizes and processes information and to the extent required performs advancing functions. In certain cases, the master servicer is also liable for the activities of the subservicer. Accordingly, increased disclosure regarding subservicers should not be necessary except when the subservicer itself has a direct contractual obligation to the trust."

Deborah McKinnon, a vice president in the MBA's commercial/multifamily group, and Katie Schwarting, a director in the same MBA group, believe that servicers who are reporting on third-party compliance should merely act as conduits in obtaining the reports from third parties.

The MBA has also raised some concern about the possible impact of the proposal on the market for servicing rights. Alison Utermohlen, senior director, regulatory affairs, MBA, said that their concern is that to the extent that there is a tendency to provide more information rather than less, so as to be on the safe side of the disclosures, purchasers of servicing rights might build in an uncertainty effect into the price that they are willing to pay for servicing rights.

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