H. R. 5816
IN THE HOUSE OF REPRESENTATIVES
July 22, 2010
Mr. Minnick (for himself, Mr. Shuler, Mr. Simpson, Ms. Kosmas, Mr. LaTourette, Mr. Heinrich, and Mr. Marshall) introduced the following bill; which was referred to the Committee on Financial Services
To establish a commercial real estate credit guarantee program to empower community banks and other lenders to make loans while stabilizing the value of small denomination commercial real estate assets, and for other purposes.
This Act may be cited as the
Commercial Real Estate Stabilization
Act of 2010.
There is hereby established the Oversight Board (hereinafter in this Act referred to as the Board) to provide advice to the Secretary of the Treasury (hereinafter in this Act referred to as the Secretary) with regard to the implementation, operation, and oversight related to, and in accordance with, the Commercial Real Estate Credit Guarantee Program established under section 3. The Board is hereby charged particularly in advising the Secretary with regard to the development of appropriate underwriting guidelines and credit risk assessments in connection with the Program, subject to the provisions of section 3(e)(4), and is further charged with the design and operation of the Program in such ways as to encourage both participation by eligible institutions as well as the prompt displacement of the Program by private market interests.
The Board shall consist of the following 9 members:
The Chairman of the Board of Governors of the Federal Reserve System.
The Chairman of the Securities Exchange Commission.
The Chairperson of the Federal Deposit Insurance Corporation.
The Director of the Federal Housing Finance Agency.
Four members to be appointed by the President, from among individuals who have comprehensive and practical experience in the financial industry.
Not later than the end of the 3-month period beginning on the date of the enactment of this Act, and quarterly thereafter, the Board shall issue reports to the Secretary, the Committee on Financial Services of the House of Representatives, and the Committee on Banking, Housing, and Urban Affairs of the Senate on—
the Program; and
the current state of the credit system in the United States with respect to commercial lending, including small business and commercial real estate lending.
The Board shall terminate on the date that is the end of the 1-month period following the program termination date.
Commercial Real Estate Credit Guarantee Program
The Secretary shall establish a Commercial Real Estate Credit Guarantee Program (hereinafter in this Act referred to as the Program) in accordance with this section.
A sponsor may apply to have a credit instrument guaranteed under the Program by submitting an application to the Secretary in such form and manner as the Secretary may require.
Applications approved in order of receipt
The Secretary shall approve applications submitted pursuant to paragraph (1) by a sponsor for a guarantee of an eligible credit instrument in the order they are received by the Secretary, as long as the guarantees issued under the Program do not relate to credit instruments having an aggregate, cumulative principal balance in excess of $25,000,000,000 (exclusive of interest).
Fifty percent of program to be used for small- and mid-sized institutions
Notwithstanding paragraph (2), not less than 50 percent of the credit instruments guaranteed under the Program, by principal balance, shall be for credit instruments created by eligible institutions specified in subparagraph (A) of the definition of eligible institution, as of the credit instrument issuance date. No more than 50 percent of the credit instruments guaranteed under the Program, by principal balance, shall be for credit instruments created by eligible institutions specified in subparagraph (B) of the definition of eligible institution, as of the credit instrument issuance date.
In exchange for receiving a credit guarantee under the Program, the related issuer shall pay to the Secretary an up-front or periodic guarantee fee at the rate specified by the Secretary with respect to that specific credit guarantee. Each guarantee fee shall be at least 200 basis points per annum, and shall be the sum of the following three components:
The risk component, which shall be no less than 100 basis points per annum, 100 basis points per annum being that level used by the risk assessment entities in determining the investment grade status of the related credit instrument (or portion thereof) to be covered by the guarantee; the Board may, or the Secretary may, increase the risk component above such 100 basis point per annum level with respect to any individual credit guarantee, in their discretion.
An overhead component, which shall be no less than zero, and which shall be determined by the Secretary as being the amount (expressed in basis points per annum) which, in the aggregate when assessed across the Program, will be at least sufficient to fund in full the reasonably estimable costs to the government of staffing and administering the Program, including without limitation, the costs of the Board, the costs of processing applications, the costs (including the costs of the risk assessment entities involved) of developing the underwriting guidelines described in subsection (f) and the costs of legal, accounting and other professional advisors as may be retained by the Board.
The market component, which shall be no less than zero, and which shall be determined by the Board, with respect to any individual credit guarantee, as being an amount (expressed in basis points per annum) which, when added to the other two components of the guarantee fee, will encourage the participation of the private market in the provision of credit as an alternative to the guarantees provided under the Program.
General program details
With respect to a credit instrument that is approved for the Program under subsection (b), the Secretary shall guarantee payments of interest and principal on such credit instrument.
Credit instrument defined
The term credit instrument, as used in this Act, means each and all of the following: a mortgage loan or a participation therein, a bond or certificate backed by one or more mortgage loans or participation interests therein, a guarantee other than a guarantee issued under the Program, or any other lending arrangement (including aggregation facilities) approved by the Secretary upon recommendation of the Board, provided that the ultimate collateral for any such credit instrument is commercial real estate described in subsection (d). In no event shall a credit instrument be eligible for a guarantee under the Program if such credit instrument was issued prior to the effective date of this Act.
The payment by the Secretary under a guarantee shall not discharge the liability of the related issuer with respect to the defaulted payment, and the Secretary shall be fully subrogated to the rights of the owner of the credit instrument to receive the full amount of such defaulted payment from the related issuer, and shall be entitled to receive such amounts from such issuer, subject to the availability of funds thereof.
No credit instrument shall be eligible for a guarantee under the Program if such credit instrument is issued after the earlier to occur of—
the date that is the end of the 3-year period beginning on the date on which the first guarantee is issued under the Program; and
the date on which the Board has delivered a certification to the Secretary that the commercial real estate credit market has recovered to such an extent that the Program is no longer necessary.
Timespan of guarantee
A credit instrument guarantee under the Program shall expire at the end of the 10-year period beginning on the date on which the credit instrument is issued.
Use of profits
All profits made from the Program shall be used for deficit reduction.
In order to be an eligible credit instrument for purposes of the Program, the credit instrument must be a performing commercial real estate loan, or be backed by one or more performing commercial real estate loans which, in either case, at the time of the issuance of such credit instrument, are performing commercial real estate loans—
where each loan is either—
newly originated, including a new loan on a commercial property which was REO; or
a refinancing of an existing loan made by the same borrower;
for which payments of interest and principal are not past due;
which has a loan term of 10 years or less, and which amortizes over its terms;
which was originated within the past 180 days (or other similar time period, to be determined by the Board based on the applicable asset class) preceding the issuance date of such credit instrument; and
which complies with such other requirements as the Board may specify to ensure that the Program is not used in a manner that was not intended.
A loan relating to a credit instrument, as described in subsection (d), shall meet the following criteria:
Such loan shall have been originated by an eligible institution as defined in section 5.
The principal amount of such loan must be $10,000,000 or less.
No requirement for owner-occupied property
Such a loan may be with respect to either owner-occupied or nonowner-occupied commercial real estate.
Risk assessments and underwriting guidelines
No guarantee shall be issued under the Program unless the application submitted to the Secretary demonstrates that the guarantee fees associated with such guarantee, based upon the credit risk associated with the related credit instrument, shall create reserves sufficient, with regard to that individual credit instrument, to meet the anticipated claims by paying for any related losses and to ensure that the Secretary and the taxpayers are fully protected, based on 2 risk-assessment analyses conducted by 2 independent third-party risk assessment entities.
Each such risk assessment shall be conducted by an independent third party approved by the Board. With respect to bonds or certificates backed by pools of commercial real estate assets, or aggregation facilities relating to such assets, such third party may be any nationally recognized statistical rating organization approved by the Board, or any other third-party entity which, upon application to the Board and approval by the Board, has a demonstrable expertise in the assessment of credit risk involving pools of commercial real estate assets. With respect to individual commercial real estate loans, such third party may be any entity, including any nationally recognized statistical rating organization, which, upon application to the Board and approval by the Board, has a demonstrable expertise in the assessment of credit risk involving individual commercial real estate assets.
No guarantee shall be issued under the
Program unless each of the related independent third-party risk assessment
entities shall have concluded in writing that the related risk to the
Secretary, after taking into account the reserves created by the related
guarantee fee, the Secretary’s subrogation rights, and the credit
characteristics of the related credit instrument, is not less than investment
grade, where the term investment grade shall have its generally
understood meaning in the context of the fixed-income investments rated by
nationally recognized statistical rating organizations. No guarantee shall be
issued under the Program covering a portion or tranche of any credit
instrument. Such investment grade risk assessment shall be required on a
guarantee-by-guarantee basis, and shall not take into account the
cross-collateralization resulting from Program-wide reserves as
may be accounted for by the Secretary relating to the Program as a
Any third-party risk assessment entity shall be independent of the issuer, sponsor, placement agent, arranger, or underwriter (if any) of the related credit instrument. In approving third-party risk assessment entities, the Board shall, to the maximum extent practicable ensure the inclusion and utilization of minority, women-, and veteran-owned businesses. The cost of each risk assessment shall be paid by the related issuer or the related sponsor, and shall in no event be a cost borne by the Secretary or by the Board.
All risk assessments shall be evaluated on the basis of the underlying credit instruments, the level of the guarantee fee and the Secretary’s subrogation rights, but shall not take into account the credit support provided by the guarantee itself.
The Board shall, within 60 days of the effective date of this Act, issue standardized underwriting guidelines for participation in the Program for credit instruments which are individual commercial mortgage loans.
Such guidelines shall seek to—
make the Program a profitable investment for the Government;
provide a safety net for more conservative borrowers; and
promote the reestablishment of the private credit market for commercial real estate.
Such guidelines shall be developed with the assistance of not fewer than 3 independent risk assessment entities approved by the Board, which shall have each concluded that bonds or certificates backed by pools containing performing commercial real estate loans meeting such underwriting guidelines would be rated at least investment grade if the risk of the related guarantee fee were 100 basis points per annum.
The Board shall, within 60 days of the effective date of this Act, by regulation, require the related issuer or sponsor or a third-party purchaser that has specifically negotiated for the purchase of such economic interest and has conducted due diligence on such loan or pool of loans, in each case to retain an economic interest in a portion of the credit risk for each loan or pool of loans as prescribed in section 941(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. For the avoidance of doubt, the forms of such economic interest shall include, but are not limited to, subordinated excess interest strips, subordinated principal, and subordinated securities. Such regulations shall further provide that the owner of such economic interest not directly or indirectly hedge or otherwise transfer the required credit risk, and shall specify the minimum duration of the risk retention required under this subsection.
Not later than the end of the 180-day period beginning on the date of the enactment of this Act, and quarterly thereafter, the Secretary shall issue a report to the Congress containing a review of credit instruments being guaranteed under the Program and information on the loans and properties backing such credit instruments, including the number of loans and properties, the value of the loans and properties, and information on the performance of the loans and properties.
The Secretary shall make all reports made under paragraph (1) available to the public, including on a Web site.
Status of guaranties
All guarantees issued pursuant to this section shall constitute general obligations of the United States, for which the full faith and credit of the United States is pledged. All such guarantees shall be treated as loan guarantees under section 502(3) of the Federal Credit Reform Act of 1990.
There is hereby authorized to be appropriated, out of funds in the Treasury not otherwise appropriated, in addition to such amounts as may be necessary for the reasonable costs of administering the Program, such sum as may be necessary to issue guarantees of credit instruments having an aggregate, cumulative principal balance not in excess of $25,000,000,000, as determined in a manner consistent with the Federal Credit Reform Act of 1990.
Guarantees not under TARP
The guarantees provided for hereunder are established as a separate and distinct program from the guarantees described in section 102 of the Emergency Economic Stabilization Act of 2008. No eligible institution, sponsor, or issuer shall be considered a recipient of the Troubled Asset Relief Program solely by virtue of participation in the Program.
Program utilization To be encouraged
The Congress finds that, with respect to the smaller insured depository institutions, the lingering financial crisis and lack of liquidity and leverage in the commercial real estate market has resulted in a substantial number of small bank failures, with the result that the FDIC and its Deposit Insurance Fund have absorbed many of the resulting losses. The Congress has concluded that the Program established under this Act is, under certain circumstances, a preferred approach to this problem, as opposed to continued reliance on the FDIC’s resolution authority, which was never intended to provide liquidity and leverage to the commercial real estate markets.
The Congress further finds that the utilization of this Program by smaller depository institutions may be inhibited due to concerns that the credit issuance transactions contemplated by this Act may, under current rules and regulations governing loss recognition, regulatory capital, and related accounting matters, result in unfavorable regulatory accounting treatment to such institutions, notwithstanding the other benefits accruing to such institutions, the commercial real estate markets and the economy at large by the utilization of this Program. In addition, the Congress specifically finds that the requirements of FAS 166/167 shall not be applicable to the Program, provided that any assets or liabilities created by the issuance of securities under the Program shall be reasonably and adequately disclosed.
Consequently, it is the intent of the Congress that this Program be utilized when such utilization otherwise proves beneficial, and that, in such cases, utilization not be unduly inhibited by concerns related to potential unfavorable regulatory accounting treatment. In furtherance of such Congressional intent, the Board is directed to confer with the Chairperson of the FDIC, representatives of the Conference of State Banking Supervisors, representatives of the Financial Accounting Standards Board, and representatives of the community banking industry, with the result that the FDIC shall issue, within 60 days of the enactment of this Act, such rules and regulations as are consistent with such Congressional intent stated herein.
Additionally, in order to ensure that State foreclosure laws do not contravene the mechanics and operational efficiency of this Program, all loans backing bonds issued under this Program shall be subject to an expedited Federal court foreclosure process should such loans default. The underlying documentation need not specify foreclosure remedies, and in furtherance of the Congressional intent described above, such foreclosure action instituted in Federal court shall be subject to removal to State court. No such foreclosure action shall be stayed as a result of the bankruptcy of the related borrower.
For purposes of this Act:
The term Board means the Oversight Board established under section 2.
The term cost has the meaning given such term under section 502(5)(A) of the Federal Credit Reform Act of 1990, as amended.
The term effective date shall mean the date on which the provision of this Act becomes law.
The term eligible institution means, for purposes of this Act, either—
any insured depository institution, which—
is not controlled by a bank holding company or savings and loan holding company that is also an eligible institution;
has total assets of equal to or less than $10,000,000,000, as reported in the call report as of the end of the fourth quarter of the most recently ended year for such fourth-quarter call report is available; and
is not directly or indirectly controlled by any company or other entity that has total consolidated assets of more than $10,000,000,000, as so reported;
any bank holding company which has total assets of equal to or less than $10,000,000,000;
any savings and loan holding company which has total assets of equal to or less than $10,000,000; or
any entity not described in subparagraph (A) above and which the Board has not determined is ineligible to participate in the Program.
Insured depository institution
The term insured depository institution has the meaning given such term under section 3(c)(2) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)(2)).
The term issuer means either—
with respect to a credit instrument which is an individual mortgage loan or a participation interest in an individual mortgage loan (including a new loan on a commercial property which was REO or a refinancing of an existing loan made by the same borrower), or a guarantee of an individual mortgage loan, the related borrower; or
with respect to a
credit instrument which is a bond or certificate, or with respect to a
guarantee relating to a pool of mortgage loans, participation interests in
mortgage loans (including a new loan on a commercial property which was REO or
a refinancing of an existing loan made by the same borrower), a
purpose vehicle entity (such as a trust or limited liability company)
that issues such a credit instrument;
The term Program means the commercial real estate credit guarantee program established under section 3.
The term REO means, with respect to an eligible institution, any real property to which such eligible institution holds title pursuant to foreclosure, a deed of lieu of foreclosure, assignment, conveyance, or any other action in connection with a mortgage made, held, insured, guaranteed, or securitized by such eligible institution.
The term Sponsor means, in the case of a securitization or aggregation arrangement, an entity that—
securitizes commercial real estate loans and that has met the Board’s expertise requirements for participation in the Program, provided that the Sponsor’s management expertise and previous bond performance will be strongly considered as part of the Sponsor’s approval process;
forms an issuer; and
creates the credit instruments issued by the issuer under the Program (and the sponsor described herein may also be an eligible institution with respect to the related loans).
Program termination date
The term program termination date means the date on which the last credit instrument has been paid in full (disregarding for this purpose any amounts owed to the Secretary on account of the Secretary’s subrogation rights).