Compliance reviews on mortgage balance asset securitization

Mortgage balance asset securitization refers to the asset-backed securities (ABS) of a business in which cash flow generated by accounts receivable on mortgage balance assets serve as the backing for repayment. As of the end of March 2018, more than 20 mortgage balance ABS products had been successfully offered on the market, amounting to approximately RMB30 billion. This column summarizes the key points of the compliance reviews of the application for such projects by the two major national stock exchanges (the Exchanges).

Scrutinization of loan agreements for real estate projects. Oversight of payment under a loan agreement for real estate projects and the monitoring of cash flow under payment accounts are key concerns that the Exchanges pay attention to. As the bank extends a loan to real estate developers, it will usually specify in the loan agreement the way in which the real estate purchase of sales payments are to take place and will also place restrictions on the liquidity of the funds in the payment account. The Exchanges will usually require project legal counsels to disclose any particulars in the loan agreement executed by the original beneficial owner and its subsidiaries. Furthermore, it will require project legal counsels to express a clear opinion on whether the loan agreement places restrictions on the original beneficial owner and its subsidiaries when using real estate purchase of sales payments for financing purposes. The authors would recommend that the project legal counsel collate all of the loan agreement documentation that relates to the underlying assets and, presenting the data in a table or other formats, list all of the terms under the various agreements that relate to any financing restrictions; and in light of the actual circumstances of the various projects, demonstrate that such terms do not constitute as material impact on the project sales payments. Additionally, the authors would recommend that the original beneficial owner be required to provide a thorough undertaking on financing restrictions.

Scrutinization of down payment loans. As to whether the underlying assets are in the pool involved with down payment loans, this is a concerning issue to which the Exchanges pay special attention. Pursuant to the Notice on Regulating Housing Purchase Financing and Strengthening Anti-Money Laundering Work, the provisions strictly prohibit buyers using down payment financing by real estate developers, real estate intermediary firms, etc. Accordingly, for ABS businesses whereupon final payment of house-purchasing takes place, if the average down payment percentage relating to the underlying assets in the pool is relatively high, the Exchange may require the project legal counsel to scrutinize whether the down payments under the housing purchase contracts correspond to the underlying assets involved in the down payment loans. The authors would recommend that the project legal counsel requires the original beneficial owner to provide all the documents evidencing the sources of the buyers’ funds and request the original beneficial owner to give an undertaking specifically to the effect that they did not provide down payment loans to buyers in any manner whatsoever.