Senate moves transparency front and center

This week the U.S. Senate released its version of financial reform with a bill titled “Restoring American Financial Stability Act of 2010.” Like the House bill passed last year, this bill, among other things, stresses the importance of transparency. In fact, the first line of the Senate Bill says it purpose is “To promote the financial stability of the United States by improving accountability and transparency in the financial system. …”

Download: Financial Stability Act of 2010 : Senate Reform Summary

Further than the House

The Senate bill, surprisingly, takes transparency requirements to a greater level than even the House bill. Specifically, the Senate Bill requires the SEC to form the “Investor Advisory Committee” that is responsible for protecting investors in general and the “Office of Credit Rating Agencies” that is charged with identifying and enforcing disclosure rules. The formation of these two groups clearly gives the SEC the mandate to increase disclosure and the enforcement authority to make it happen. While the House bill had a similar intent, the Senate bill provides much greater detail on what transparency means and how to enforce disclosure.

One of the biggest items in the new disclosure rules would be that rating agencies would disclose to their customers (the investors) the details of how the ratings were established. Rating agencies will need to include both the “qualitative methodology” and the “quantitative inputs” for all ratings determination. This is detailed on page 837 through 843 of the bill. The way I read it, this disclosure eliminates the “black box” ratings model and opens up the data to all investors.

For CMBS, I don’t see how inclusion of rent rolls in both new issuance and surveillance activities would not be required, as the “rent in place” is the number one “quantitative input” all CRE valuation models use.

Not all good news

While I applaud the new transparency requirements and believe those rules are critical, I am basically against almost all the rest of the reform proposals. Specifically, the Senate still has the concept of “skin in the game” where the issuer would have a retention requirement of 5 percent and the accounting concept that a securitization is not a true sale. Both these proposals, I believe, are unnecessary and could act as impediments to getting securitization going again.

Will the bill be law?

Despite that fact that the Bill is not perfect, the good outweighs the bad. The clear directive, roadmap and enforcement authority regarding transparency and disclosure is more important than the headache of retention and accounting concerns. We will have to wait and see if the Bill gets passed and how it gets reconciled with the House Bill. As the classic song goes,

I’m just a bill
Yes, I’m only a bill
And if they vote for me on Capitol Hill
Well, then I’m off to the White House
Where I’ll wait in a line
With a lot of other bills
For the president to sign
And if he signs me, then I’ll be a law.
How I hope and pray that he will,
But today I am still just a bill.

— — —

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.

www.cmbs.com

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