Regulation AB, a new regulation adopted by the Securities and Exchange Commission (SEC) and effective November 24, may have an adverse effect on small CMBS lenders. Regulation AB requires a senior CMBS executive employed by the lead lender in the securitization to assume personal liability for each securitization by certifying that all deal information supplied to investors is accurate. The measure, intended to force issuers to more closely scrutinize collateral and raise their credit standards, carries no criminal liability, but could leave signers vulnerable to civil lawsuits by investors or to SEC charges of civil violations of securities law.
The rub is smaller CMBS lenders that contribute a relatively small proportion of loans to a securitization may not have to provide the certification, as the certification is made by the chief executive of the securitization’s depositor, which is typically the lead manager or co-managers of the deal. That creates additional risk for the lead manager or co-managers that they may not want to take. As a result, some lead manager or co-managers may simply tell the small CMBS lenders that they do not want them to contribute loans to their CMBS issues, potentially leaving the small lenders out in the cold.
Many market professionals believe a solution may be found once lead managers get to see the rule in practice. Some may determine the benefits to the securitization of the additional collateral outweigh the additional certification risk. Some managers may seek additional compensation for certifying to the risk. Most will request small lenders to indemnify the lead manager against any losses resulting from a false certification. Other market participants hope the rule may result in smaller CMBS lenders leaving the market, reducing competition.
“What is good is the rule has no impact on ValueXpress,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We have long-standing relationships with our CMBS partners that have spanned many, many years, and our partners know the quality of our loans are exceptional. We are continually pressed to find more loans for CMBS securitizations.”