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Senate passes reform bill including CRE Finance Council-supported language on retention
May 21, 2010

The U.S. Senate has passed sweeping financial reform legislation that includes provisions supported by the CRE Finance Council that improve the construct of asset-backed securities reforms and assist a market recovery for commercial real estate finance. By a vote of 59-39, the Senate approved the large-scale financial reforms believed to be needed by the Obama Administration in the wake of the global financial crisis. As passed, the Senate legislation includes specific language, offered by Sen. Mike Crapo (R-Idaho), that would structure risk "retention," commonly known as "skin in the game," to account for the unique nature of the commercial mortgage market. Specifically, the Senate-passed allows U.S. regulators to choose the most appropriate form of retention for commercial real estate finance, customizing the requirement and granting financial regulators the flexibility to structure the new mandate in several ways, including a "percent" retention, underwriting standards and controls, or through stronger "representations and warranties." Additionally, U.S. regulators are now allowed to consider allowing a "third-party investor," in addition to the "securitizer" or "originator" of loans, to satisfy a potential retention mandate as long as they perform due diligence, purchase a first-loss provision and retain this risk. "Today's language passed by the Senate provides important and tailored reforms that have been a top priority of the CRE Finance Council and its membership," said Patrick C. Sargent, president of the CRE Finance Council. "As we've advocated since last year, reforms must provide certainty and confidence in order to support private lending and investing that is critical to an overall recovery in commercial real estate." Also in the final Senate version is a provision that would alter the process of selecting rating agencies to perform initial ratings of structured finance products. The amendment would, among other items, require the Securities & Exchange Commission (SEC) to establish a self-regulatory organization, known as the Credit Rating Agencies Board, to determine who conducts the initial rating for any structured financial products. The outlook for this provision also remains unclear, as CRE Finance Council continues to examine its potential impact, as drafted. With the passage of the Senate-side legislation, prohibition on proprietary trading by banks and banking holding companies, known as the Volcker Rule, is still on the table and will be a significant issue for resolution during the Senate and House reconciliation process. While additional changes are possible in this area, there remain concerns that, depending on how it is structured, such a provision could impact the securitized credit markets, particularly the ability to hedge risk and warehouse/aggregate loans. The passed Senate Bill (S. 3217) now must be reconciled with the House legislation that was passed by lawmakers last December before the legislation moves to the White House for signature into law. The House bill also contains similar language on retention supported by the CRE Finance Council. For more information, visit
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