Flexible Risk Retention Provisions Stay in Senate Bill

WASHINGTON, DC-By a vote of 59 to 39, the Senate passed a measure that promises to reshape the regulatory environment for banks and Wall Street. The 1,500-plus bill now heads to the House-Senate Conference Committee to reconcile differences between the two chambers’ versions. House Financial Services Chairman Barney Frank, one of the lawmakers on the committee, has told reporters he expects to wrap up that part of the process in time for President Barack Obama to sign the final version by the Fourth of July holiday.

Exhaustively debated, the measure touches upon a wide range of issues from establishing a consumer protection agency within the Federal Reserve Bank to setting new requirements for credit rating agencies and higher capital requirements for larger banks. The bill also establishes a process for the government to wind down or dismantle failing financial institutions.

Almost all of these provisions were--and in some quarters, still are--deemed controversial and likely to weaken financial institutions. One in particular--a provision by Sen. Blanche Lincoln (D-AR), chairman of the Senate Agriculture Committee, to significantly restrict trading in derivatives--is very controversial and will need to be addressed in committee.

Other than the derivatives proposal, though, many of the measures included in the Senate bill most likely to directly affect commercial real estate are mimicked in the House version, which passed at the end of last year.

Chief among these is the so-called "skin the game" provision for securitization loans--a measure that the Commercial Real Estate Finance Council said it supports. That measure was introduced by Sen. Mike Crapo (R-ID). It allows US regulators to choose the most appropriate form of risk retention for commercial real estate finance, including a percent retention, underwriting standards and controls or stronger representations and warranties.

Also, US regulators may consider allowing a third-party investor, such as a B piece buyer, in addition to the loan originator, to satisfy a potential retention mandate as long as they perform due diligence, purchase a first-loss provision and retain this risk. The House bill includes similar language, granting regulators the flexibility to allow a third-party investor to satisfy the new retention requirements.

The final Senate version also includes a provision that would require the SEC to establish a self-regulatory organization--the Credit Rating Agencies Board--to determine who conducts the initial rating for any structured financial products. The Commercial Real Estate Finance Council is less certain about this provision’s value to the industry, saying its potential impact is still unclear.

That said, the legislation, as amended, will deliver enough certainty to bolster investor confidence in the emerging CMBS market, Brendan Reilly, SVP of government relations for the Commercial Real Estate Financial Council, tells GlobeSt.com. "We believe the bill offers important reforms that strengthen the market, but it also ensures that these reforms are customized by asset class to support private lending that is critical to commercial real estate." That confidence, though, he adds, is going to be tempered with the need to look at the totality of regulatory and accounting reforms that are being discussed. "It is vital that all of these reforms are coordinated and tailored by market," Reilly says.