Regulation AB Reform
In addition to the rating agency rules that go into effect on June 2, the SEC has asked for public comment on extensive changes to SEC securitization rules, known as Regulation AB.
I am actively participating in developing both the MBA/MISMO and the CREFC responses to the proposed changes. This process provides a forum to promote the adoption of XML standards, which I am also actively participating in. Below is my summary of where we are with our current disclosure levels, what the industry goal should be, and a recommendation for a solution.
During the CMBS offering process, issuers share basically everything with rating agencies and bond investors including full loan level, lease-by-lease underwritings. While this disclosure has historically been extensive and complete, there has been no standard format (despite the fact that everyone shares the same types and level of data). The offering disclosure can be characterized as complete but not standardized.
For ongoing investor reporting (surveillance), there is a standard reporting package (CMSA IRP 5 ), but it is in the wrong format (CSV and Excel instead of XML), and it does not contain sufficient data to do full loan level underwriting. This data can be characterized as standardized but incomplete.
There has been a three-year effort to upgrade IRP 5 to XML (the result being the Draft IRP 6 XML schema), and there has been extensive debate regarding adding information to allow loan level underwriting during the surveillance of the bonds. However, adoption of XML has been stopped by a handful of parties for various reasons, and, despite requests from investors, there has been no consensus on disclosing all tenants (currently only the top three tenants are disclosed).
The main intent of the SEC regulations is to demand transparency in the securitization process. Transparency is defined as providing enough data to allow investors and rating agencies to accurately value the underlying collateral and produce open, credible bond models so all parties can see how the securities were priced.
The goal of CREFC and MBA should be to satisfy this demand by agreeing on one standardized data set that would meet the needs of investors, rating agencies and bond models. If we do that, we can satisfy both the letter and the spirit of the financial reform rules.
The SEC is making it clear they want XML. The CMSA IRP committee worked with MISMO to devise the proposed IRP 6 XML schema, which can serve as the foundation of disclosure standards for both new issuance and surveillance.
If some additions are made to IRP 6 (MISMO rent roll and operating statements, full information regarding original and modified note amortization terms, and bond waterfall data), we will be transparent. Done.
The responses from both CREFC and MBA will be submitted in the next 45–60 days. I will try to get the above goals and solutions incorporated, and I’ll post updates as the comment letters start to take shape.
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Jim Flaherty is CEO of CMBS.com and the creator of the Backshop loan origination system. He is a trained credit professional with experience installing enterprise underwriting systems for commercial real estate lenders, rating agencies and investors.
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