MBA Letter Addresses Risks to Proposed SEC Rule on Securitizations

The Mortgage Bankers Association, in a Mar. 27 letter to the Securities and Exchange Commission, said a proposed rule to curb certain material conflicts of interest in securitizations is flawed and would present risks to that market.

The proposed Rule 192 would implement Section 27B of the Securities Act, which prohibits certain material conflicts of interest in securitizations, subject to the exceptions set forth therein. Section 27B generally provides, with some exceptions, that a securitization participant (i.e., underwriter, placement agent, sponsor, etc.) of an asset-backed security cannot engage in any transaction that would result in a material conflict of interest with respect to any investor in such transaction. Section 27B further requires the Commission to implement rules for the purpose of implementing this prohibition.

In the letter, MBA Senior Vice President of Commercial /Multifamily Policy & Member Engagement Mike Flood and MBA Senior Vice President of Residential Policy & Member Engagement Pete Mills said securitization is a vital component of commercial and residential mortgage lending as it provides access to much needed capital and the ability to effectively manage risk, and the Proposed Rule, as written, is overly broad and could inadvertently stifle the securitization markets and access to capital.

“MBA appreciates the need for the Commission to curb transactions that represent a “bet” against a securitization and present material conflicts of interest between certain securitization participants and investors,” the letter said. “The Proposed Rule, however, is flawed in several respects and presents a significant risk to the efficiency of our securitization market and the crucial role it serves in providing liquidity to the overall financial system.”

Specifically, MBA offered the following recommendations:

–Servicers and special servicers should not be considered sponsors and it is recommended that the definition of “sponsor” be revised to reflect this concept. The letter further noted Servicers and Special Servicers engage in a variety of activities, including administration of mortgage loans and in the case of special servicers, negotiating modifications of the mortgage loans. “These activities do not constitute direction of the design of the asset-backed security and the Proposed Rule should be explicit in excluding them,” MBA said.

–B piece buyers in commercial mortgage-backed securities are investors and should not be considered sponsors. “While the Proposed Rule does state generally that it is not intended to apply to persons that direct in connection with acquiring a long position in the asset-backed security, this concept should be clearly stated in the Proposed Rule,” MBA said.

–Mortgage insurance-linked notes, which are reinsurance-based note structures with an insurable interest and significant risk retention, should not be viewed as a conflicted transaction as defined in the Proposed Rule. “The Commission should clarify that MILNs do not constitute conflicted transactions and further will not be viewed as a circumvention of the prohibitions in paragraph (a)(1) of the Proposed Rule,” MBA said.

–As written, the proposed rule will likely create detrimental limitations on Credit Risk Transfer transactions, which financial institutions use to effectively manage their credit risk. “The Commission should clarify that CRT transactions including MILN are not conflicted transactions allowing market participants to maintain their ability to manage their risk,” MBA said..

–The Proposed Rule does not define the term “synthetic asset-backed securities” and does not provide specific guidance regarding whether any particular products are synthetic ABS. “MILNs are not designed to create exposure to mortgage loans for securitization, but rather provide reinsurance via the capital markets on insurance policies written in the ordinary course of a U.S. regulated insurance business,” MBA said.