New Rules Require Lenders to Keep at Least 5% Of Loans on Their Balance Sheets

While conduit loan issuances have risen steeply in the last few years, the amount of lenders has actually fallen slightly— and experts believe that’s a direct result of new federal risk retention rules that took effect in Dec. 2016. Before the market crash of 2008, the CMBS market was incredibly hot, and lenders were quite liberal with who they provided loans to— especially because they knew they could transfer 100% of the risk to CMBS bondholders.

Two years after the crash, congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which, among other things, was intended to insure that banks had more skin in the game when it came to CMBS loan transactions. To do that, Dodd-Frank mandated that lenders keep 5 percent of the risk for at least 5 years. While Dodd-Frank was passed back in 2010, the rule was issued with a 6-year waiting period, which is why it didn’t go into effect until late 2016.

While these rules may be good for investors, they aren’t the greatest for CMBS borrowers. Since banks and other conduit lenders can now suffer direct losses as a result of CMBS loan defaults, they are likely to tighten underwriting standards, issue less interest-only CMBS loans, and perhaps issue less conduit loans to riskier asset classes, such as student housing properties.