01/21/2011

Council Pushes ‘Reps & Warranties' Standard

The CRE Finance Council is poised to release a proposed standard for a key portion of securitization documents — the “representations and warranties” that lenders provide about the adequacy and accuracy of collateral-loan data.

The proposal could end up being included in guidelines now being devised by federal regulators. But at a minimum, the trade group would encourage all commercial MBS lenders to adopt the standard. Under the proposal, deal documents would have to clearly specify any variation from the standard.

The initiative will be unveiled and discussed next week at the trade group's 12th annual January conference. Almost 1,200 industry professionals have signed up for the three-day confab, which kicks off Monday at the JW Marriott Hotel in Washington.

More than 50 council members have spent hundreds of hours hammering out the standard over the past six months or so. The task force, led by Brian Furlong of New York Life and Thomas Nealon of LNR Partners, was formed as part of the council's ongoing effort to help regulators implement new disclosure requirements, risk-retention standards and other securitization reforms mandated last July with the passing of the Dodd-Frank Act.

“What we're trying to put forth is a package that can provide a level of flexibility for risk alignment and disclosure,” said council president Lisa Pendergast, who co-heads CMBS trading and strategy at Jefferies & Co. “These are living, breathing documents that will change and grow with the market.”

Pendergast and a number of other council leaders met yesterday with the Federal Reserve, FDIC and SEC to discuss the trade group's recommendations for implementing parts of Dodd-Frank that pertain to CMBS. They included the reps-and-warranties model and two other standards the council has already adopted: a set of loan-underwriting principles for CMBS lenders and a new format for the so-called Annex-A collateral reports that come with CMBS offering materials. The trade group is encouraging regulators to incorporate the standards into their guidelines.

Meanwhile, the SEC announced yesterday it had adopted its rules for reps and warranties. It included the requirement, as suggested by Dodd-Frank, that rating agencies describe reps and warranties in presale reports. The SEC also wants agencies to note if and how reps and warranties in an offering they are rating differ from those in similar deals.

The council's reps-and-warranties model, which goes well beyond the SEC requirements, must still be voted on by the task force and approved by the trade group. But insiders are confident a final version close to its current form will be approved early this year. “It's been a major effort, with people from all areas of the industry working on it every day for the last few months,” said one CMBS investor involved in the process.

Reps and warranties are aimed at protecting bondholders against making investment decisions on the basis of faulty information provided by the issuer. They outline the conditions under which a lender would be required to buy back a CMBS loan at par value if discrepancies arise about the accuracy or completeness of information supplied about the loan. There are usually at least 40 stipulations, many of which are similar from deal to deal. But the absence of a standard has frustrated investors.

The council's proposed model is designed to provide a common starting point acceptable to CMBS borrowers, lenders and buyers, while still leaving the flexibility for customization. “With this being harmonized, it gives people something fixed to look at and focus their discussions on,” the investor said.

The model also has a few uncommon features that took a lot of debate to iron out. For example, disputes over breaches of reps and warranties must go to mediation before a lawsuit can be filed. Also, tenants at underlying properties have to sign estoppel certificates confirming information provided by lenders.

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