federal reserve bank of new york residential mortgage note repository/revisions · pdf...
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![Page 1: Federal Reserve Bank of New York Residential Mortgage Note Repository/Revisions · PDF file · 2016-12-01Federal Reserve Bank of New York Residential Mortgage Note Repository/Revisions](https://reader033.vdocument.in/reader033/viewer/2022052710/5aa1064f7f8b9a0d158efe2f/html5/thumbnails/1.jpg)
November 9, 2016
Federal Reserve Bank of New York
Residential Mortgage Note
Repository/Revisions to UCC 1, 3, 9
Commercial Law Discussion
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Proposed National (Residential) Mortgage Note Repository Act
• Addresses residential mortgage notes in paper or electronic form,
deposited into proposed new mortgage note repository
• Deposit destroys or makes ineffective the original paper or electronic
record and replaces it with an electronic mortgage note (EMN) in the
system
• Only applies to residential mortgage notes. Does not apply to
commercial mortgage notes or to debts not secured by residential real
property
• Repository Act and accompanying proposed revisions to UCC Articles
1,3 and 9 are still being drafted and still under consideration
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Brief Overview of Key Commercial Law Principles Related to
Residential Mortgage Notes
• Who is the person entitled to enforce an EMN and, correspondingly, to
whom is the obligation to pay the note owed?
• How can the owner of an EMN effectively transfer ownership of that
note to another person or effectively use that note as collateral for an
obligation?
• Does a secured party with a security interest in an EMN (a) need to be
listed as a registrant in order to perfect its security interest; (b) obtain
other benefits by being the registrant; or (c) gain sufficient protection
by filing a financing statement and being designated as authorized
transferor?
• What are the duties/obligations/liabilities of a registrant or an
authorized transferor?
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Rights and Responsibilities of Registrant (Page 1 of 2)
• Must have relationship with gateway
• Identified on records of repository as registrant; identity available to borrower and
others
• Makes deposit warranties (See Draft Act 8(d)(4))
• Has rights of holder of negotiable instrument (except no HDC status if underlying
instrument non-negotiable) (See Draft Act 9(b))
• Has authority to direct payments (See Draft Act 9(b)(2))
• Deemed to be in possession (See Draft Act 9(c))
• Pays fine to repository operator for delay in submitting loan modifications to
repository (See Draft Act 10(a))
• Has liability for harm to borrower for delay in submitting loan modifications to
repository (See Draft Act 10(a))
• Represents and warrants that has submitted all modifications to repository
system (See Draft Act 10(d))
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Rights and Responsibilities of Registrant (Page 1 of 2)
• Must give notice of discharge to borrower and repository operator (See Draft Act
11(a))
• Can only transfer entire obligation (but may transfer payment rights outside
registry) (See Draft Act 12)
• Makes UCC Article 3 transfer warranties (but may be permitted by rule to give
only limited warranties)
• Has access to information about its EMN on the system; may authorize another
person to access that information with warranty to borrower that information will
remain confidential
• Must provide borrower disclosures and borrower information changes (such as
contact information) to system operator (See Draft Act 17(b))
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Overview of Approach to Key Commercial Law Issues, including
Discussion of How Proposal Applies to Paradigm Transactions
• Deposit of instrument results in instrument being treated as destroyed
or ineffective.
• Person named in registry as registrant is person entitled to enforce
(PETE).
• Person named in registry is in possession and, per UCC Article 9, is
perfected by possession with heightened priority under certain
circumstances.
• Mortgage follows the note.
• Ownership not expressly addressed.
• Person named in registry as authorized transferor (AT) has the right to
change registrant. Open question as to whether AT has special UCC
benefits in terms of deemed possession and/or ability to achieve
heightened priority. Open question as to whether AT can block other
changes.
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Whole Loan Sale (Single Loan)
Party
A
Party
B
Mortgage Note
$
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Whole Loan Sale (Single Loan) – Commercial Law Principles
• Negotiable Instrument (Today): Sale agreement and transfer of possession with
blank or special endorsement. Buyer = holder = PETE. May be HDC.
• Non-negotiable Instrument (Today): Sale agreement with or without transfer of
possession. Buyer = owner. Cannot be HDC.
• Negotiable EMN: Instrument destroyed or ineffective, buyer’s interest noted in
registry. Buyer = registrant = PETE. May be HDC.
• Non-negotiable EMN: Instrument destroyed or ineffective, buyer’s interest noted
in registry. Buyer = registrant = PETE. Cannot be HDC.
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Whole Loan Sale (Single Loan) – Additional Issues
• Timing of purchase price and deposit into registry must be coordinated
• Each market participant’s role in the registry must be considered: holder/owner,
servicer, traditional custodian, pledgee. There can only be one registrant and
one authorized transferor. Partial interests/joint registrants are not contemplated
(although there is an ability to transfer payment rights outside the system, so
participation structures may still work)
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Portfolio Sale
Party
A
Party
B
1,000 notes
$
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Portfolio Sale – Commercial Law Principles
• Negotiable Instrument (Today): Sale agreement and transfer of possession with
blank or special endorsement. Buyer = holder = PETE. May be HDC.
• Non-negotiable Instrument (Today): Sale agreement with or without transfer of
possession. Buyer = owner. Cannot be HDC.
• Negotiable EMN: Instrument destroyed or ineffective, buyer’s interest noted in
registry. Buyer = registrant = PETE. May be HDC.
• Non-negotiable EMN: Instrument destroyed or ineffective, buyer’s interest noted
in registry. Buyer = registrant = PETE. Cannot be HDC.
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Portfolio Sale – Electronic Notes/Transferable Records
• What changes if portfolio
consists of electronic
notes/transferable records
stored in a control system?
– Registrant becomes PETE
– Status as transferable record
and strength of control
system impact HDC status
Party
AParty
B
1,000 notes
$
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Portfolio Pledge (Warehouse Line or Secured Financing)
Pledgor
Secured
Party
Pledges
1,000 notes
$ (must be
repaid)
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Portfolio Pledge – Commercial Law Principles
• Pledge (Today): Written security agreement or possession to attach security
interest; UCC financing statement or possession to perfect security interest.
Possession gives higher priority.
• Pledge (with registry, Secured Party or its agent as registrant): If Secured Party
or its agent becomes registrant, possession deemed through registry; sufficient to
perfect pledge and receive higher priority. However, this would make Secured
Party or its agent the PETE and the publicly disclosed registrant, which may not
be desirable and may result in the Secured Party or its agent facing additional
responsibilities/risks.
• Pledge (with registry, pledgor remains registrant): If Secured Party is not named
in registry, pledgor remains the PETE. Pledgor is deemed to be in possession of
the note. Secured Party can only perfect its security interest by filing a financing
statement. Secured Party can become AT in order to provide practical ability to
foreclose, but Secured Party would be at risk of the Pledgor registering the note
in favor of someone else. Secured Party would need to search UCC records and
ensure no prior security interest that could not be trumped by filing. Secured
Party/AT can only enforce its security interest as an adverse claim under the Act.
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Portfolio Pledge – Additional Issues
• Same as above, but wet funding with security interest attaching at closing of pre-
deposit EMN. If security interest is an “adverse claim”, mortgage note cannot be
deposited into registry.
• Where financing party becomes Registrant/PETE (directly or through agent), on
enforcement of underlying EMN, financing party enforces in its own name or
transfers back (unperfects).
• Risks of becoming registrant would be removed if AT status also constituted
possession, but this could complicate UCC priority rules if it resulted in more than
one person being deemed to possess, and/or more than one person with
superpriority, at the same time.
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Portfolio Pledge – Electronic Notes/Transferable Records
• What changes if portfolio
consists of electronic
notes/transferable records
stored in a control system?
– Registrant becomes PETE
– Status as transferable record
and strength of control
system impact HDC status
Pledgor
Secured
Party
Pledges
1,000 notes
$ (must be
repaid)
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AGGREGATOR STRUCTURE
Aggregator Financing or
SecuritizationEMNs
$
Seller 1
Seller 2
Seller 3
Seller 4
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AGGREGATOR STRUCTURE
• Aggregator: EMNs purchased from small mortgage lenders by an aggregator
who then finances/sells/securitizers. As sales of promissory notes, the sales are
automatically perfected. However, depending on the terms of the sale they could
be deemed to be pledges to secure an obligation requiring perfection by filing or,
if available, possession. And, sale even if automatically perfected may not purge
prior security interests.
• Option A: Aggregator searches and files against individual dealers to ensure first
priority. Likely too cumbersome.
• Option B: Aggregator becomes registrant/PETE. Perfected and with
superpriority as if in possession.
• [Option C: Aggregator becomes Authorized Transferor to protect its practical
ability to transfer. ]
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Warehousing/Repo Transaction
Originator Financing
Party/Repo
Buyer
Sells notes in repo
$
•Transaction reversed at end of repo term
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Warehousing/Repo Transaction – Commercial Law Principles
• Negotiable Instrument (Today): Repurchase agreement and transfer of possession (likely to
custodian) with blank or special endorsement. Buyer = holder = PETE. Backup security
interest perfected by possession. UCC filings/searches not customary or practical.
• Non-negotiable Instrument (Today): Repurchase agreement with or without transfer of
possession. Buyer = owner. Backup security interest perfected by possession. UCC
filings/searches not customary or practical.
• Negotiable EMN: If buyer is willing and transaction is of sufficient term, buyer becomes
registrant. Buyer = PETE and deemed in possession to perfect backup security interest.
However, if buyer is unwilling to be named registrant, buyer would be required to search/file
UCC financing statements, which may not be customary or consistent with timing.
• Non-negotiable EMN: If buyer is willing and transaction is of sufficient term, buyer becomes
registrant. Buyer = PETE and deemed in possession to perfect backup security interest.
However, if buyer is unwilling to be named registrant, buyer would be required to search/file
UCC financing statements, which may not be customary or consistent with timing.
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Warehousing/Repo – Additional Issues
• For short term repos, not clear if repo buyer could become either the registrant or
the authorized transferor in a timely fashion. Repo buyer would have trouble
perfecting its backup security interest or enforcing its interest.
• Where repo buyer becomes registrant, repo buyer takes on responsibilities of
registrant. May not be consistent with expectations for transaction. Repo seller
may not be able to adequately compensate/indemnify repo buyer for this
risk/responsibility.
• Where repo buyer becomes authorized transferor, enforcement limited to
adverse claim rules prior to making itself registrant. As currently drafted,
authorized transferor status would not perfect backup security interest.
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Short-Form/Simplified
Term Securitization
Originator Indenture
Trustee
Depositor
Sells notes Sells notes
$ $
Statutory
Trust
May pledge
notes
May issue
certificates
Investors
$
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Term Securitization – Commercial Law Principles
• For Sales: See Portfolio Sale – Commercial Law Principles
• For Pledges: See Portfolio Pledge – Commercial Law Principles
• Topics for Discussion: In pledge structure, would Indenture Trustee or Delaware
Trustee be willing to be registrant? If not, will they be comfortable as AT with
practical control benefit but not perfection/priority benefit? How will servicer's
interest be recorded in the registry?
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Term Securitization – Additional Issues
• For multistep transaction, how many steps are recorded in the registry – just the
sale or the sale plus pledge? Would this impact true sale/nonconsolidation
analysis?
• Will registry identify spv entities separately from originator or report on a
consolidated basis?
• From a consumer perspective, what additional information if any is available in
the registry – ability to amend, identities of trustees plus servicers, etc.?
• What risk threshold will rating agencies be unable to bear re: competing liens,
etc.?
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Contact Information
• These materials have been prepared for discussion purposes only based on
available drafts of repository materials and proposed changes to the UCC. All
information in this presentation is preliminary and subject to change. Questions
or comments regarding the information in this presentation can be sent to:
• Edwin E. Smith, Morgan, Lewis & Bockius LLP
• One Federal Street, Boston, MA 02110-1726 and 101 Park Avenue , New York, NY 10178-0060
• Phone: (617) 951-8615 or (212) 309-6825 Email: [email protected]
• Professor Steven L. Harris, Chicago-Kent College of Law
• 565 W. Adams St., Chicago, Illinois 60661
• Phone: (312) 906-5218 Email: [email protected]
• Teresa Wilton Harmon, Sidley Austin LLP
• One South Dearborn Street, Chicago, IL 60603
• Phone: (312) 853-7863 Email: [email protected]