Commercial MBS Risk Retention


Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act required federal agencies to jointly prescribe rules for the retention of credit risk for asset-backed securities, including commercial mortgage-backed securities (CMBS). As directed by statute, the federal agencies - the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System (Federal Reserve), the Comptroller of the Currency (OCC), the Securities and Exchange Commission (SEC), the Department of Housing and Urban Development (HUD) and the Federal Housing Finance Agency (FHFA) - issued a Proposed Rule in April 2011, a re-proposal in 2013, and finalized the rule on December 24, 2014 (final rule). The final rule's risk retention requirements addressing CMBS take effect on December 24, 2016. MBA believes that additional changes and clarifications are necessary to the rule.


The final Risk Retention rule made important changes that were responsive to many of the issues and concerns raised by MBA. Importantly, the highly problematic Premium Capture Cash Reserve Account and subsequently proposed cash flow restrictions were withdrawn from the final rule. The final rule includes the following:
The final rule made important changes that were responsive to many of the issues and concerns raised by MBA. Importantly, the highly problematic Premium Capture Cash Reserve Account and subsequently proposed cash flow restrictions were withdrawn from the final rule. The final rule includes the following:

Flexible Approach to Risk Retention

Areas of greater flexibility permitted in the final rule for CMBS include the ability to divide the horizontal residual interest between up to two purchasers and the ability to reduce the amount of risk retention based upon the percentage of "qualified" commercial and multifamily loans comprising the CMBS. The final rule also specifies that only one sponsor for ABS with multiple sponsors can retain the vertical risk retention interest.

Risk Retention Hold Period and Hedging of Credit Risk

The final rule calls for a five-year hold period for retaining the horizontal risk retention interest, which is considerably shorter than the life of the securitization (as proposed in the original rule).

Financing of Risk Retention Interests

The final rule specifies that the sponsor can finance its risk retention position provided that the financing is subject to full recourse. Third-party horizontal residual interest purchasers are permitted to finance their purchase provided that they do not obtain financing from a party with any direct or indirect interest in the securitization transaction.

Operating Advisors

The final rule specifies that when the eligible horizontal residual interest has been reduced by principal payments, realized losses, and appraisal reduction amounts to a principal balance of 25 percent or less of its initial principal balance, the special servicer must consult with the Operating Advisor on any material decision in connection with its servicing of the securitized assets.

Vote to Replace the Special Servicer

The final rule provides the Operating Advisor with the authority to recommend that the special servicer be replaced. If a recommendation to replace the special servicer is made, the special servicer shall be replaced upon the affirmative vote of a majority of the outstanding principal balance of all ABS interests voting on the matter, with a minimum of a quorum of ABS interests voting on the matter. The transaction documents are to specify the quorum and may not specify a quorum of more than the holders of 20 percent of the outstanding principal balance of all ABS interests in the issuing entity, with the quorum including at least three ABS interest holders that are not affiliated with each other.

Disclosures Regarding Third-Party Purchasers

The final rule requires third-party purchasers to disclose the fair value of their eligible horizontal residual interest, as well as the purchase price.

GSE Multifamily

The final rule specifies that a sponsor satisfies its risk retention requirement if the sponsor fully guarantees the timely payment of principal and interest on all ABS interests, provided that Fannie Mae and Freddie Mac are operating under the conservatorship or receivership of the Federal Housing Finance Agency. In addition, any limited-life regulated entity succeeding Fannie Mae and Freddie Mac would be exempted from risk retention provided that it is operating with capital support from the United States.


Although the final rule was responsive to many of MBA's concerns and provided for additional risk retention flexibility, there are areas of the final rule where MBA seeks clarification and modification. In this regard, MBA has taken a two-pronged approach. For areas of the final rule that require clarification, we are engaging with the federal agencies that were charged with creating the final rule. For areas of the final rule that require modification in order to make them more workable, MBA is supporting legislative proposals that address our concerns.

For the areas of the final rule that require clarification in order to be effectively implemented, MBA created the 50+ member Risk Retention Implementation Working Group (Working Group). The Working Group has identified the issue areas that MBA should seek clarification on from the agencies. Some general areas include clarifications regarding the responsibilities that a second third-party risk retention purchaser must assume, and for CMBS with multiple sponsors, the obligations of the initial sponsors once the sponsor for risk retention purposes has been assigned. MBA is pursing clarification on these matters with an inter-agency working group that addresses risk retention issues.  

Specifically, areas of the risk retention final rule that require modification in order to be more workable within the existing CMBS market framework include: 

·      Single Asset Single Borrower CMBS - This category of CMBS should fall under the "qualified commercial real estate loan" classification and as such should be exempt from risk retention.

·      Horizontal Risk Retention Holders - While the final rule permits the horizontal residual interest to be held by up two purchasers provided that it is held on a pari passu basis, flexibility would be enhanced by also permitting a senior/subordinate structure for purchasers of the horizontal residual interest.  

·      Underwriting Standards for Zero Risk Retention - MBA remains concerned that the underwriting metrics for zero risk retention for commercial and multifamily loans specified in the final rule remain unduly restrictive. We recommend enhanced flexibility of underwriting parameters for a "qualified commercial real estate loan" for multi-property CMBS.

In February 2016, Representative French Hill (R-AR) introduced the Preserving Access to CRE Capital Act (H.R. 4620). H.R. 4620 remedies the major concerns listed above. Accordingly, MBA has lent its strong support for this legislation and other proposals, as they emerge, that would prevent CMBS market disruptions.   

April 2016

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