As an integral part of the Securities and Exchange Commission's proposed new reporting requirements for asset-backed and mortgage-backed securities, the commission is proposing to require a report of the "responsible party" on an assessment of compliance with specified, uniform servicing criteria. The report is to be filed as an exhibit to the ABS Form 10-K, together with a report of a public accounting firm on its examination of the responsible party's assertion of compliance with the servicing criteria.
The Commission believes that the current reporting criteria (USAP or its equivalent) does not address the totality of activities and parties involved in servicing an ABS transaction, such as flow of funds allocation and distribution functions that are important to the transaction, particularly as the complexity of waterfalls has increased. In addition, the current regime does not adequately take into account the fact that multiple unaffiliated parties may be involved in servicing and potentially leaves gaps in servicing compliance reporting.
Responsible party The responsible party would be either the depositor if the depositor signs the 10-K, or the servicer if the servicer signs on behalf of the issuing entity, or the master servicer, if multiple servicers are involved.
Platform level reporting The proposal contemplates an assessment of compliance with respect to all ABS transactions involving the responsible party that are backed by assets of the type backing the ABS covered by the 10-K. This "platform" level assessment would permit a single assessment as compared to requiring separate assessments for each individual transaction involving the responsible party.
Proposed scope: Entire servicing function The proposal contemplates that the responsible party would assess material compliance with all of the servicing functions in the broadest sense (e.g. sub servicers, primary servicers, master servicers, bond administrators, trustees, paying agents, etc.). The responsible party would be required to use reasonable means to assess whether the parties performing the various functions that are material to the servicing function as a whole are complying with the servicing criteria in all material respects, which will often necessitate relying upon unaffiliated third parties. The information from the unaffiliated party also could be at a "platform" level of assessment with respect to ABS or pool assets serviced by that party.
The proposed criteria
The proposed servicing criteria are designed to replace and be incremental to the current USAP criteria. They consist of four broad categories:
General servicing considerations relates to policies and procedures for structural monitoring of the ABS securities such as triggers or events of default and other general administrative tasks during the period covered by the report as set forth in the transaction agreements, such as monitoring the activities of third parties to which material servicing activities have been outsourced, maintaining a back-up servicer and maintaining certain insurance coverage in force, if applicable.
Cash collection and administration relates to administering the collection of cash from obligors, segregating and reconciling such cash for investors and maintaining transaction accounts as set forth in the transaction agreements.
Investor remittances and reporting relates to calculating amounts due to investors and reporting such amounts to investors in accordance with the flow of funds in the transaction documents and allocating and remitting distributions to investors in accordance with the transaction agreements and filing the appropriate distribution statements with the Commission.
Pool asset administration relates to maintaining the pool assets as set forth in the transaction agreements, which includes:
* Maintaining specified collatera
* Administering changes to the asset pool
* Posting payments and other changes regarding pool assets;
* Instituting loss mitigation or recovery actions
* Administering funds held in trust for an obligor, if required for the pool assets
* Maintaining external credit enhancement or other support.
Accountants' attestation report A public accounting firm would have to be engaged to express an opinion as to whether the responsible party's assessment of compliance with the servicing criteria was fairly stated in all material respects, or an opinion to the effect that an overall opinion cannot be expressed and why. The accountants' report would be issued in accordance with AICPA standards on attestation engagements, and will be available for general use and cannot contain restricted use language.
Disclosure of instances non-compliance If the responsible party's report on compliance with servicing criteria identified any material instance of noncompliance with the criteria, disclosure would be required in the Form 10-K report of any material impacts or effects that have affected or that may reasonably be likely to affect pool asset performance, servicing of the pool assets or payments or expected payments on the asset-backed securities. Disclosure would be required of material instances of noncompliance during the reporting period, even if such noncompliance was subsequently corrected in the period.
Proposed standard servicing
* Policies and procedures are instituted to monitor any performance or other triggers and events of default in accordance with the transaction agreements.
* If any material servicing activities are outsourced to third parties, policies and procedures are instituted to monitor the third party's performance and compliance with such servicing activities.
* Any requirements in the transaction agreements to maintain a back-up servicer for the pool assets are maintained.
* A fidelity bond and errors and omissions policy is in effect on the servicer throughout the reporting period in the amount of coverage required by and otherwise in accordance with the terms of the transaction agreements.
Cash collection and
* Payments on pool assets are deposited into the appropriate custodial bank accounts and related bank clearing accounts no more than two business days of receipt.
* Disbursements made via wire transfer on behalf of an obligor or investor are made only by authorized personnel.
* Advances of funds or guarantees regarding collections, cash flows or distributions, and any interest or other fees charged for such advances, are made, reviewed and approved as specified in the transaction agreements.
* The related accounts for the transaction, such as cash reserve accounts or accounts established as a form of overcollateralization, are separately maintained (e.g., with respect to commingling of cash) as set forth in the transaction agreements.
* Each custodial account is maintained at a federally insured depository institution as set forth in the transaction agreements. For purposes of this criterion, "federally insured" with respect to a foreign financial institution would mean that the laws or regulations of the foreign financial institution's home jurisdiction require the institution to insure its deposits.
* Un-issued checks are safeguarded so as to prevent unauthorized access.
* Reconciliations are prepared on a monthly basis for all asset-backed securities related bank accounts, including custodial accounts and related bank clearing accounts. These reconciliations: (A) Are mathematically accurate; (B) Are prepared within 30 calendar days after the bank statement cutoff date; (C) Are reviewed and approved by someone other than the person who prepared the reconciliation; and (D) Contain explanations for reconciling items. These reconciling items are resolved within 90 calendar days of their original identification.
Investor remittances and reporting
* Reports to investors, including those to be filed with the Commission, are maintained in accordance with the transaction agreements and applicable Commission requirements. Specifically, such reports are: (A) Prepared in accordance with timeframes and other terms set forth in the transaction agreements; (B) Provide information calculated in accordance with the terms specified in the transaction agreements; (C) Filed with the Commission as required by its rules and regulations; and (D) Agree with investors' and/or the trustee's records as to the total unpaid principal balance and number of pool assets serviced by the servicer.
* Amounts due to investors are allocated and remitted in accordance with timeframes, distribution priority and other terms set forth in the transaction agreements.
* Disbursements made to an investor are posted within two business days to the investor's records maintained by the servicer.
* Amounts remitted to investors per the investor reports agree with cancelled checks, or other form of payment, or custodial bank statements.
Pool asset administration
* Collateral or security on pool assets is maintained as required by the transaction agreements or related pool asset documents.
* Pool assets and related documents are safeguarded as required by the transaction agreements.
* Any additions, removals or substitutions to the asset pool are made, reviewed and approved in accordance with any conditions or requirements in the transaction agreements.
* Payments on pool assets, including any payoffs, made in accordance with the related pool asset documents are posted to the applicable obligor's records no more than two business days after receipt and allocated to principal, interest or other items (e.g., escrow) in accordance with the related pool asset documents.
* The servicer's records regarding the pool assets agree with the obligor's records with respect to the unpaid principal balance.
* Changes with respect to the terms or status of an obligor's pool asset (e.g., loan modifications or re-agings) are made, reviewed and approved by authorized personnel in accordance with the transaction agreements and related pool asset documents.
* Loss mitigation or recovery actions (e.g., foreclosures or repossessions) are initiated, conducted and concluded in accordance with the timeframes or other requirements established by the transaction agreements. Such programs include a hierarchy of workout procedures (e.g., forbearance plans, modifications and deeds in lieu of foreclosure, as applicable).
* Records documenting collection efforts are maintained during the period a pool sset is delinquent in accordance with the transaction agreements. Such records are maintained on at least a monthly basis and describe the entity's activities in monitoring delinquent pool assets including, for example, phone calls, letters and payment rescheduling plans in cases where delinquency is deemed temporary (e.g., illness or unemployment).
* Adjustments to interest rates or rates of return for pool assets with variable rates are computed based on the related pool asset documents.
* Regarding any funds held in trust for an obligor (such as escrow accounts): (A) Such funds are analyzed, in accordance with the obligor's pool asset documents, on at least an annual basis; (B) Interest on such funds is paid, or credited, to obligors in accordance with applicable pool asset documents and state laws; and (C) Such funds are returned to the obligor within 30 calendar days of full repayment of the related pool asset.
* Payments made on behalf of an obligor (such as tax or insurance payments) are made on or before the related penalty or expiration dates, as indicated on the appropriate bills or notices for such payments, provided that such support has been received by the servicer at least 30 calendar days prior to these dates.
* Any late payment penalties in connection with any payment to be made on behalf of an obligor are paid from the servicer's funds and not charged to the obligor, unless the late payment was due to the obligor's error or omission.
* Disbursements made on behalf of an obligor are posted within two business days to the obligor's records maintained by the servicer.
* Delinquencies, charge-offs and uncollectable accounts are recognized and recorded in accordance with the transaction agreements.
* Any external enhancement or other support, identified in Item 1113(a)(1) through (3) of this Regulation AB, is maintained as set forth in the transaction agreements.
Alternative Servicing Criteria
The proposal indicates that if other suitable criteria were to be developed for use in assessing servicing compliance, the SEC would consider such criteria for purposes of the proposed requirement. A suitable framework would need to: be established by a group or body that has followed due process procedures; be free from bias; permit reasonably consistent qualitative and quantitative measurements; be sufficiently complete so that relevant factors that would alter a conclusion about the subject matter were not omitted; and be relevant to the subject matter. This would include criteria that address all material aspects of the servicing function with respect to an asset-backed securities transaction.
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