If a credit ratings agency calls a commercial mortgage bond servicer with a question or a request for information, the phone call likely goes unreturned.
A Securities and Exchange Commission rule known as 17g-5 installed in June 2010 requires issuers, sponsors and underwriters to provide information about an asset-backed securitization to all credit ratings agencies simultaneously. The idea was to eliminate conflicts of interest in the ratings process.
Yet, the rule has indirectly kept some commercial mortgage servicers from speaking on the phone with a CRA because of the term "simultaneously," market players say.
Katie Schwarting, an attorney for Bryan Cave warned servicers about the unintended but costly consequences of the rule at the Mortgage Bankers Association commercial real estate and technology conference this week in Dallas.
If an employee at a servicing shop does pick up the phone with a CRA, the conversation has to be transcribed and loaded onto a shared website the same day in order to meet the "simultaneous" stipulation.
"They don't care if the phone call happens at 5 p.m. It has to be the same day," Schwarting said. "It's risky business. I recommend if communication comes in, to not respond but to answer the question via the shared website, then you can go back to the original CRA that requested the information."
Panelist Daniel Bober, executive vice president of CMBS servicing at Wells Fargo (WFC), said it's difficult to manage what 50 to 70 employees are doing at a given time. Phone conversations do happen, he said.
"The process has become incredibly clunky," Bober said.
Other firms have become very strict about the rule.
"Our policy says we cannot speak with a credit ratings agency," said Cystal Kalinowsky, vice president of the servicer Bernard Financial Group. "We are prohibited from doing so in our subservicing deals."
The consequences could be dire. Schwarting said if a servicer is found to be in violation, the issuer could lose its shelf — meaning it would have its ability to register the bond with the SEC suspended — sometimes for up to one year.
The credit ratings agencies approved of the rule as a way to increase transparency.
"Fitch believes that Rule 17g-5, particularly if strengthened further, is the most effective and efficient way to provide investors with greater disclosure and transparency regarding NRSRO selection," said Charles Brown, general counsel at Fitch Ratings, in a letter to the SEC in September.
Schwarting said the SEC has "added a hammer" to its regulations, and the agency even acknowledged the rules would slow down the process. It is serious about eliminating the conflicts of interests, she said.
"I strongly encourage you to have a policy and procedure in place around this rule," Schwarting said.