The final steps implementing new Dutch receivables transfer legislation are slated for early October 2004, and market pundits are now questioning how much the long-awaited legislation will actually affect market dynamics going forward.
"We'll probably see more of an impact on rate receivable or consumer loan deals but in terms of impacting RMBS deals, we don't really expect the new legislation to have much of an impact because of the type of mortgages that are securitized under Dutch structures," a source at Standard & Poor's said.
Under the terms of the new legislation, originators would no longer be obligated to notify borrowers of the assignment of a receivable. The aim of the law is to simplify the assignment of receivable pools and reduce the administrative costs of borrower notification. It is also expected to bring Dutch legislation more in line with neighbouring laws.
Under the new law, a valid legal assignment requires a private deed registered with the tax authorities or a notarial deed. This eliminates the need for notification of the assignment of the debtors in order to perfect the assignment against third parties. "Both existing and future receivables rights can be assigned as long as they arise under an existing contract or another legal relationship," a partner at Simmons & Simmons explained.
For Dutch RMBS structures, informing mortgage holders of the mortgage transfer has proved cumbersome in the past and has also led some originators to skip the process at closing, which did not allow for a clean transfer of assets on day one of the transaction (see ASR 6/23/2004).
Once the new law is implemented later this year, the SPV issuer used in RMBS will be able to achieve legal ownership of the receivables without notifying the borrowers of the assignment, according to S& P. Analysts projected that the most cost-effective method will be through registering the deed with tax authorities. They added that many of the existing RMBS structures include a provision for registering the deed of assignment once the law became effective.
But the nature of mortgage lending in the Netherlands could potentially limit the benefits that this new law might have for RMBS structures. In most cases, it's expected that borrower notification will still be required of the lender. "An estimated 99% of Dutch mortgage lending is done at the same time with other services like overdrafts that the bank might offer a borrower, and under these circumstances a borrower would still require notification," the analyst said.
He explained that most Dutch MBS is secured by bank or credit mortgages so it's not certain that the collateral acting as security would follow the assignment of a bank or credit mortgage loan. "To get rid of this problem, the seller is required to give up his rights on the collateral as security for all the claims other that the mortgage loan," said the analyst. "This partial termination mitigates the risk that the underlying collateral is not exclusively available to the securitized mortgage loan but also for other debts that the borrower continues to have with the seller."
To date, the market has seen two deals that have notified borrowers up-front, most borrowers are not notified unless something occurs within the transaction that requires a true-sale of the assets. Most of the deals have a put option or step-up date, where originators then opt to pay the bonds outstanding. "However, with this change in law it could be that lawyers become more comfortable with better understanding structuring techniques under the new terms of the legislation and more comfortable with a potential court proceeding that might arise after the fact," said one market source.
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