A disagreement between the Big Four accounting firms and the ABS community could mean that issuers have even more Regulation AB-related paperwork than they expected at the end of 1Q07 - when the deadline for most revamped 10-K filings for registered securitizations rolls around.

The overwhelming bulk of filings on the horizon relates to the assessments each entity deemed a participant in the servicing function must fill out and submit to their respective accountant for attestation under section 1122. In a recent development some say could hinder the ability to complete the reports by the approaching deadline, industry sources say the accounting firms are not seeing eye-to-eye with issuers as to whether unaffiliated third party servicers can be included under the umbrella of the servicing party's assessment and attestation reports.

"Parties have been proceeding now for almost all of 2006 based on their understanding of how 1122 would be applied. It would be very disruptive four months before 10Ks are filed if they had to adopt a radically different course," Ed Gainor, a partner specializing in securitization and structured finance at law firm McKee Nelson LLC, said. He added that the expense of accounting for such unaffiliated third parties - which provide an array of subcontracted functions from tracking vehicle title certificates to providing foreclosure services - could fall into the "untold millions of dollars and months of delay."

Some issuers had been planning on using the so-called responsible party concept in the case of unaffiliated third parties participating in the servicing function, but the accounting firms are not interpreting the rules to allow for the concept, said Tom Deutsch, associate director of the American Securitization Forum.

The stance could require such entities as foreclosure attorneys, for example, to go through the assessment and attestation process - significantly increasing Reg AB-related compliance costs. The ASF is currently considering developing an interpretive request to the Securities and Exchange Commission to help clarify the rules.

New assessment criteria

Servicer assessment and attestation reports are a part of the revised 10-K filings ABS issuers will need to file for registered securitizations. Aside from creating a new servicing standard to be used as a basis for measuring the performance of each party participating in servicing activities, the regulation also requires an accountant's attestation report for each servicer assertion on an annual basis.

While Reg AB sought to create more uniform and transparent 10-K filings for publicly issued deals, issuers are cringing under legal and accounting fees as a result, particularly in regard to the labor intensive section 1122. Using a responsible party concept was one method industry participants had devised to help create a stopping point in what at times seems like an endless chain of entities tagged for evaluation under the new regulation.

The new servicer performance reporting replaces criteria that had been set forth by the Mortgage Banker's Association, called the Uniform Single Attestation Program. Regulation AB significantly broadens the definition of servicer to include any person responsible for the management or collection of the securitization pool assets or making allocations or distributions to ABS holders, according to accounting firm McGladrey & Pullen LLP. Each party must evaluate itself per the new criteria and have the information attested for compliance by its registered accountant. While the new reporting is required only for publicly filed securitizations, it is largely expected to become the new standard industry-wide.

"The logical conclusion is that the cost of diligent Reg AB compliance could exceed that of a USAP review," wrote Brian Miller, a managing director at Charlie Mac LLC, which buys loans originated by credit unions. The required number of filings for Reg AB is roughly six times that of an MBA USAP review, according to Miller, who says conservative estimates peg the fee for a Reg AB attestation and assertion at four times the average cost of a USAP audit.

The SEC has been working with issuers on several 1122-related issues since the final form of Reg AB was released. Because of the approaching filing deadline for a number of issuers, industry participants are hoping this one is settled quickly.

"I think we are all hopeful that if we can clearly explain the issue, we will get a positive result," McKee Nelson's Gainor said.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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