In an effort to minimize post-closing and post "final certification" loan document deficiencies and the existence of incomplete mortgage loan files in CMBS transactions, a joint task force of the Commercial Mortgage Bankers Association (CMSA) and the Mortgage Bankers Association (MBA) has come out with guidelines called "Best Practices."
Prior to these guidelines, it was unclear from transaction to transaction who was responsible for curing document defects. It was also unclear what was material and adverse as far as loan documents were concerned. These guidelines are an attempt to answer these questions.
"In every CMBS securitization there are a number of critical documents that need to be delivered to the trustee for each loan deposited into the pool," said Deborah McKinnon, a vice president at MBA. "These guidelines identify the documents and the time frame for which these documents are to be delivered."
The "Best Practices" also highlights the documents that are necessary in the event of default in order to foreclose on a loan. Not all the documentation that may be specified for inclusion in a loan file is necessary to foreclose on a related property so to avoid technical defaults, "Best Practices" focuses on the documents that are critical to lenders to enforce their rights.
Though the guidelines are specific in terms of required documents, and certain cure periods, a recent Merrill Lynch said the guidelines are also dynamic because they "also purposely allow the servicer to use its judgement as to the seriousness of an infraction."
Even though there is a matrix of cure periods specified under the guidelines, the serivcer can determine the level of risk severity on a loan. Whereas before the only option open to the the issuer was to repurchase the loan, now the servicer can use its judgement to determine the level of risk involved and based on the level of risk, assess what the issuer's response should be.
These guidelines are a product of the combined efforts of more than 95 participants coming from 60 organizations which include investors, rating agencies, servicers and trustees.
In a related development, future Fitch trustee reviews will include a discussion on the custodial duties of trustees, which would encompass the issue of document defects. Fitch was part of this effort.