Volume 7, Issue 33, August 30, 2011

Claire J. Mezzanotte Managing Director, ABS/RMBS/Covered Bonds Structured Finance, +1 212 806 3272 cmezzanotte@dbrs.com Mike Babick Senior Vice President, ABS Structured Finance +1 212 806 3229 mbabick@dbrs.com Jan Buckler Senior Vice President, Research and Modeling Structured Finance +1 212 806 3925 jbuckler@dbrs.com Chris OConnell Senior Vice President, ABS Structured Finance +1 212 806 3253 coconnell@dbrs.com Quincy Tang Senior Vice President, RMBS Structured Finance +1 212 806 3256 qtang@dbrs.com Kathleen Tillwitz Senior Vice President, Operational Risk, ABS/RMBS Structured Finance +1 212 806 3265 ktillwitz@dbrs.com Chuck Weilamann Senior Vice President, ABS Structured Finance +1 212 806 3226 cweilamann@dbrs.com New York 140 Broadway, 35th Floor New York, NY 10005 +1 212 806 3277 Chicago 101 North Wacker Drive Suite 100 Chicago, IL 60606 +1 312 332 3429 Toronto DBRS Tower 181 University Avenue Suite 700 Toronto, ON M5H 3M7 +1 416 593 5577 London 25 Copthall Avenue London, EC2R 7BP United Kingdom +44 (0)20 3137 9511

RULE 17G-7 COMPLIANCE GET READY

On January 20, 2011, the Securities and Exchange Commission (the SEC) adopted rules required under Section 943 and Section 945 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The newly adopted rules include rule 17g-7 (Rule 17g-7). Pursuant to Rule 17g-7, on or after September 26, 2011, each nationally recognized statistical rating organization (each an NRSRO) must include in any report accompanying a credit rating on an Exchange Act asset-backed security, a description of the representations, warranties and enforcement mechanisms available to investors and how they differ from the representations, warranties and enforcement mechanisms in issuances of similar securities. With less than one month to go before NRSROs must comply with Rule 17g-7, it seems appropriate to discuss the efforts undertaken to comply with this rule and its potential impact. In its adoption of Rule 17g-7, the SEC was clear to communicate that a credit rating would be construed to include any expected or preliminary credit rating issued by an NRSRO, and thus that Rule 17g-7 would extend to any presale report issued by an NRSRO. Consequently, in any presale or new issue report to be published on or after September 26th, the NRSRO must include Rule 17g-7 disclosures. These reports will include a description of the representations, warranties and enforcement mechanisms that relate to: The counterparties to the transaction and their capacities; The characteristics of the underlying asset-pool; The security interests of the underlying assets; and The enforcement mechanisms or remedies available to noteholders.

To facilitate implementation NRSROs have devoted substantial existing resources to Rule 17g-7 compliance efforts. Some NRSROs have also needed to add personnel and engage outside counsel to ensure that they will be able to continue to provide reports. In addition, 17g-7 reporting is anticipated to add a significant volume to the report compared to that which has been issued to date, and in some cases could expand the size of reports substantially. Finally, there is the additional time that will be required to prepare Rule 17g-7 elements for report publication. To effectuate the smoothest transition, NRSROs may seek to develop benchmarks for each asset class which would be consistent with those of similar securities issued in that asset class. These benchmarks would then be used by the NRSRO to compare against the representations, warranties and enforcement mechanisms provided in a subject transaction. The use of benchmarks was contemplated by the SEC and discussed in commentary that accompanied the rule. Even with the benefit of the benchmarking approach there will still need to be changes in the mechanics of the rating process to ensure that deal timing is not disrupted. NRSROs will need to be supplied with transaction documentation early in the process, potentially earlier then that which has been the case, to afford them the time necessary to extract all of the representations, warranties and enforcement mechanisms. Once that is complete, the NRSRO will need to be provided time to perform the comparison against the benchmarks and description of differences from those benchmarks. With the diversity of structures, differing capacities of counterparties and varying terminology even within a single asset class, this may prove to be a challenging and time consuming exercise. Some industry participants have suggested that issuers, underwriters and their counsels may consider assisting NRSRO compliance with Rule 17g-7 to avoid potential delays and reduce costs. One way this may occur is by the issuer or their counsel performing the extraction of representations, warranties and enforcement mechanisms and providing this information to the NRSROs (which the NRSRO could then verify during their review of the transaction documentation). Some have suggested that the counsel drafting the transaction documentation would be the most logical party to perform this exercise since they are the closest to this information. Others have pointed out that this approach would provide greater efficiencies by removing duplicative work being done when more than one NRSRO is rating a transaction. Ultimately while these efforts may prove useful to investors, and are likely to drive more uniformity in the representations, warranties and enforcement mechanisms provided in a given asset class, a transition period is logical to expect. DBRS will continue monitoring Rule 17g-7 representations, warranties and enforcement mechanisms related matters and their possible impacts on the overall structured finance market. For questions or comments, please contact Chuck Weilamann at cweilamann@dbrs.com

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