The proposal for the new Draft Act,' which will make changes to the Dutch law with regard to borrower notification of any asset transfer, was submitted to parliament on May 14, 2003. Although it is not possible to predict when the new Draft Act will be promulgated, it is hoped this will not take too long and that it could happen in the second half of this year.

There has always been an unresolved legal issue in Dutch RMBS securitizations: institutions needed to inform mortgage holders if they were transferring their mortgages as collateral for bonds. This is obviously cumbersome, so for commercial reasons, originators usually did not notify their customers of their assignment at closing.

However, this did not allow for a clean transfer of assets on day one of the transaction. Instead, notification occurred only with the occurrence of specific "Notification Events," which could include bankruptcy, specific downgrade triggers, and in some transactions minimum solvency ratios.

Therefore in most Dutch RMBS until now, perfection of assignment of mortgages remains subject to notification occurring.

The Draft Act' by the Ministry of Justice is now currently under review, clarified Victor de Seriere, partner in the securitization group at Allen & Overy in the Netherlands. "Under these new proposals there would no longer be the requirement for notification to the borrowers on the transfer of receivables," he added.

"This is a generic law and therefore not written just for the securitization market, although clearly it will bring some very needed and important benefits to that market," explained de Seriere.

"The changes will be good news for the securitization market in the Netherlands. One of the most troublesome aspects of current Dutch legislation is the necessity, in order to achieve a perfected assignment of mortgage loans from the originator to the SPV, of notifying the borrowers of the transfer of their mortgage," said Natalia Bourin, analyst at Fitch Ratings, in a press release. "The proposed legislative amendment promises to eliminate that necessity and thereby provide investors with extra comfort from a legal perspective," she added.

According to Fitch, the proposal aims to amend the existing law so that notification to borrowers is no longer required. In the proposal (as it now stands), for a transfer of assets to be completed for future transactions, then either of two things must happen: the assignment must be recorded in a notarial deed, or the assignment document (the deed of transfer) in respect of the securitized receivables must be registered with the tax authorities attaching a list of the securitized mortgages in order to give the assignment an effective date. Fitch adds that the latter option would be the simplest solution.

Some outstanding issues....

However, even under these new proposals, there are still some outstanding issues. For instance, if the originator has gone bankrupt before notification, then payments received after the bankruptcy date might fall in the bankruptcy estate. "The SPV would then have an entitlement to claw back that money, but there is obviously the uncertainty of what priority the SPV would have in the bankruptcy situation, and the length of time it would take to resolve this," explains de Seriere at Allen & Overy.

This remains one of the outstanding issues. However, the problem also existed before, under the silent pledge method. "This is an issues, that I believe the rating agencies have already got comfortable with, and therefore should not cause any additional problems to securitization transactions," said de Seriere.

Another issue, that the draft law does not resolve is that under the new proposals future receivables cannot be transferred in advance. But de Seriere also believes that this, hopefully, will not be too much of a concern. This is because the need to separately transfer future receivables as and when they arise should not be too cumbersome since the rules requiring such receivables to be separately identified have been relaxed. Moreover, the need to effect separate transfers in anyhow be limited in the case of RMBS transactions, which are principally based on a fixed pool of receivables, he added.

The benefits...

"If passed, the amendment would contribute significantly in assisting assignment for securitization, in avoiding disturbing the commercial relationships originators have with their customers, while enabling noteholders to be assured of a perfected assignment as of closing," said Bourin at Fitch.

De Seriere also explained that the benefits to the Dutch securitization market included simplification of the underlying structures. "The risk whereby notification does not occur on assignment of the receivables has to be covered in some way, and this is usually done through a supporting pledge arrangement. However, this makes transactions more cumbersome, and the elimination of this would streamline transactions and make them more in line with the U.K. structures," he said.

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