Financial Industry Developments

Deed of Trust Provisions Allowing Lenders/Servicers to Enter, Maintain, and Secure Encumbered Properties May be Unenforceable Under Washington Statute

On July 7, 2016, the Supreme Court of the State of Washington issued its opinion in Jordan v. Nationstar Mortgage, LLC, which, prior to foreclosure, may prevent servicers from securing property after a default or, at least, require heightened inquiry and investigation to ensure that the property has been abandoned or that notice of the anticipated entry has been provided to the borrower.  The Court answered two questions certified by the U.S. District Court for the Eastern District of Washington in the negative: 

1. Under Washington's lien theory of mortgages and RCW 7.28.230(1), can a borrower and lender enter into a contractual agreement prior to default that allows the lender to enter, maintain, and secure the encumbered property prior to foreclosure?
2. Does chapter 7.60 RCW, Washington's statutory receivership scheme, provide the exclusive remedy, absent post-default consent by the borrower, for a lender to gain access to an encumbered property prior to foreclosure?

For case background and analysis, please click here.

On July 19, 2016, DBRS published its criteria for rating CLOs backed by loans to European SMEs (small and medium-sized enterprises).  Report.

On July 18, 2016, Fitch published its criteria for assigning new and existing ratings to sovereign issuers.  Report.

On July 18, 2016, Fitch published an addendum that supplements its counterparty criteria for structured finance and covered bonds.  Report.

On July 14, 2016, DBRS published an update to its criteria for evaluating servicers in North American CMBS transactions.  Report.

On July 14, 2016 DBRS published its criteria for rating European covered bonds.  Report.

On July 14, 2016, DBRS published its master European structured finance surveillance methodology.  Report.

Investment Management

FinCEN Issues Customer Due Diligence Rule (CDD) FAQs

On July 19, 2016, the Financial Crimes Enforcement Network ("FinCEN") issued FAQs regarding the customer due diligence requirements ("CDD") that it published on May 11, 2016, for certain financial institutions, including brokers, dealers, future commission merchants and introducing brokers in commodities.  The FAQs provide interpretive guidance with respect to these requirements, including, in particular, the new regulatory requirement to identify and verify the identity of the "beneficial owners" of virtually all legal entity customers, other than a sole proprietorship and an unincorporated association.  The CDD defines "beneficial owner" as:

• "each individual, if any, who, directly or indirectly, owns 25% or more of the equity interests of a legal entity customer; and
• a single individual with significant responsibility to control, manage, or direct a legal entity customer, including an executive officer or senior manager. . .
• or any other individual who regularly performs similar functions."  

The FAQs states:  "In short, covered financial institutions are now required to obtain, verify, and record the identities of the beneficial owners of legal entity customers."

European Financial Industry Developments

EBA Publishes Interim Report on MREL

The European Banking Authority (EBA) has published an interim report on the minimum requirement for own funds and eligible liabilities (MREL).  Under the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD) the EBA is required to submit a report to the European Commission on the implementation of MREL by October 31, 2016.  This report will assist the Commission in its work on a legislative proposal on the harmonized application of MREL as well as a legislative proposal to review MREL and implement the total loss absorbing capacity standard in the EU.

The EBA's interim report is intended to provide input into the Commission's deliberations ahead of the preparations of the EBA's final report and contains a number of provisional recommendations.  Preliminary quantitative findings on the financing capacity and needs of EU banking groups are also available in the interim report, although these are subject to several methodological caveats.  In the absence of MREL decisions for institutions to date, and given the limited information related to the resolution authorities' MREL policy approach, the EBA was required to make assumptions on the likely scope and calibration of MREL.  These assumptions are by definition different from the actual levels of MREL which will ultimately be determined by resolution authorities in relation to each institution and group.

The interim report is available here.

ESMA Updates Q&A on Application of UCITS Directive

The European Securities and Markets Authority (ESMA) has published an updated version of its Q&A paper on the application of the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive (2009/65/EC) as most recently revised by UCITS V (2014/91/EU).  The purpose of the Q&A is to promote common supervisory approaches and practices in the application of the UCITS and its implementing measures.  The most recent updates reflect a Q&A relating to the valuation of OTC derivatives and are highlighted in yellow in the paper.

The latest version of the Q&A is available here.

EBA Final Draft RTS on Assessment Methodology for Internal Ratings-Based Approach

The EBA has published final draft regulatory technical standards (RTS) on the specification of the assessment methodology for competent authorities regarding compliance of an institution with the requirements to use the internal ratings-based (IRB) approach in accordance with Articles 144(2), 173(3) and 180(3)(b) of the Capital Requirements Regulation (Regulation 575/2013) (CRR).

The final draft RTS provide a mapping of the minimum IRB requirements as laid down in Chapter 3, Title II, Part Three of the CRR, into fourteen chapters.  Each chapter starts with a brief description of the assessment criteria to be used by competent authorities relating to verification requests and of the methods to be used by competent authorities in this context.  Under the IRB approach, institutions determine their own funds requirements for credit risk, taking into account their own estimates of risk parameters.  Competent authorities may, under the CRR, permit institutions to use the IRB approach, provided that the relevant conditions set out in the CRR are met.

The draft RTS are available here and will now be submitted to the European Commission for endorsement.