Reporting Guidance for CMBS Trust Holdbacks
December 26, 2024
Overview of Trust Termination Process and Need for Holdbacks
CMBS securitizations have been around for 30 years. The governing securitization servicing document, the Pooling and Servicing Agreement (collectively referred to as the PSA for CMBS conduit transactions, Trust and Servicing Agreement for SASB transactions, and Servicing Agreement for CRE CLO transactions), expressly includes mechanics for the winding down of a trust, but it does not specifically address how the transaction parties are protected from, and reimbursed for, ongoing or anticipated costs and expenses following such wind-down.
The transaction parties in a securitization are hired by the trust on behalf of the certificate holders and have the contractual right to be indemnified by the trust for certain costs, expenses, and liabilities related to each deal party’s actions on behalf of the trust. As a practical matter, the value of the indemnification to the transaction parties is limited to the assets and resources available to the securitization trust. As pool assets dwindle, the value of the indemnification protection afforded to the transaction parties erodes and participants become more exposed to loss.
The use of Holdback Amounts can arise at the disposition of one particular asset or through the final loan liquidation of the trust that may at the time contain more than one asset.
The trust typically unwinds in one of two ways:
- A natural pay down of the loan(s); or
- election by one of the designated parties to acquire the remaining loans (also called a “clean-up call” or “pool collapse”).
In a natural pay-down of a trust, all of the loans are paid off and the investors receive the distribution of funds via the full payoff of loans and/or through the proceeds returned from the resolution of defaulted loans. In a clean-up call or pool collapse, one of the designated parties to the PSA elects to terminate the trust by purchasing the remaining assets from the trust in accordance with the terms of the PSA.
Whether unwound via natural pay down or a clean-up call, once unwound, the trust will no longer have any assets but is likely to have trailing or contingent liabilities (including, but not limited to, final legal bills, vendor invoices, and ongoing or potential litigation costs). Such amounts are costs and expenses of the trust for which the transaction parties are not liable. It is established servicing standard practice to have transaction parties determine the appropriate Holdback Amounts and report accordingly to investors.
CREFC IRP - Reporting Holdback Amounts to Investors
The current CREFC® IRP includes data fields to facilitate the reporting of Holdback Amounts to investors when it is tied to a specific loan liquidation. Specifically:
(1) [L116] (Amounts Held Back for Future Payment)
This scenario is typically seen when there are trailing expenses or potential litigation expenses tied directly to the asset being liquidated. The responsible transaction party (master servicer or trustee, as applicable) will report any Holdback Amount under this scenario per the CREFC® IRP for the reporting cycle during which the Holdback Amount was established. Reporting guidelines dictate that the loan level information is not reported in subsequent reporting cycles. As such, the remaining balance should be addressed in the annual deal-level reserve reporting.
At the unwinding of the trust, the transaction parties will incur certain expenses to effectuate the closing of the trust and associated accounts. Typically, these expenses are not significant and are resolved within the 12 months following liquidation of the final asset in the trust. Any remaining funds from the holdback are remitted to the Certificate Administrator for further remittance to certificateholders. There is no currently required additional reporting for these transaction-level Holdback Amounts other than the normal remittance process with the Certificate Administrator.
Due to the sensitive nature of disclosing the amount of estimated litigation exposure or potential settlement amounts, such information would likely constitute privileged information pursuant to the PSA, which generally is not shared with certificate holders or other transaction parties because the disclosure of that information could significantly compromise the trust’s position in litigation and related settlement discussions and also could increase overall trust losses. Inappropriate disclosure has the potential to undermine litigation defenses to the detriment of transaction parties, as well as certificate holders.
Considerations for Holdback Amounts Post-Wind-Down
Once a trust is wound down, there typically has been no additional reporting to investors required under the governing transaction documents. Alternatively, if a trust is wound down but there are material Holdback Amounts, market participants are asking that the transaction party holding such Holdback Amounts provide a deal notice identifying the Holdback Amount to the Certificate Administrator to be posted on the Certificate Administrator’s website and that any additional or outstanding Holdback Amounts after the trust has wound down should be updated, provided to the Certificate Administrator, and posted on the Certificate Administrator’s website on an annual basis until such Holdback Amounts are fully liquidated or disbursed. Such additional reporting would provide transaction parties and investors with heightened transparency regarding material Holdback Amounts, notwithstanding the fact that the trust no longer holds mortgage loan assets or REO property. The CREFC® IRP committee is working on future reporting templates. In the interim it is suggested that the Master Servicer annually provides notice to shareholders of holdbacks in excess of $1,000,000.
Please contact Rohit Narayanan (RNarayanan@crefc.org) with any questions.
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