In prepared remarks at the PLS reform panel at ABS Vegas 2016, US Treasury deputy assistant secretary Monique Rollins outlined the main issues highlighted by the PLS Initiative working group, which was established in June 2014 by secretary of the Treasury Jack Lew.
“The pre-crisis PLS market was rife with conflicts of interest, inadequate investor protections, over-reliance on credit ratings, contractual enforcement failures and a lack of transparency,” said Rollins. The return of the market, she added, “must happen in a reformed and sustainable way”.
A key feature of the proposals to reform the market is the establishment of an independent “deal agent” role that will oversee transactions and ensure transparency — which is seen as central to increasing investor confidence in the asset class.
“The goal is for the deal agent to act like an owner. This is a governance function,” said Jim Callahan, executive director at PentAlpha Global Advisors and one of the co-chairs of the working group alongside Alessandro Pagani, head of securitized assets at Loomis Sayles and Company.
Question marks remain, however, on how the role of deal agent will work in practice. “While some investors felt it was imperative that a deal agent agreement should include a fiduciary duty, others felt the standard of care should be defined in a more circumscribed way,” said Rollins.
Speaking on the panel, MetLife director Scott Waterstredt was broadly positive on the steps the market had taken since the crisis, saying that increasing loans' transparency and the creation of a deal agent were both a “huge piece” of the efforts to resolve issues that had hurt investors.
Rollins said some market participants had raised concerns over the additional cost of a deal agent, particularly on deals with pristine collateral. “Some suggested that this framework could be better suited and make more economic sense for transactions with riskier loan attributes, or reperforming or nonperforming loans,” she said.
But Waterstredt, though he called the pricing issue “the elephant in the room”, said it was an issue that investors could overcome. Fitch’s Suzanne Mistretta also said it would be possible for transactions with a deal agent to benefit from better rating treatment, which could improve the cost of funding and offset the additional deal agent cost.