Ford Motor Credit went the extra mile in complying with Regulation AB II, but it turns out that other auto lenders don’t have to.
Ford enlisted in a pilot program with Securities and Exchange Commission last year in which the auto lender registered a shelf entity, Ford Credit Auto Receivables Two, intended to serve as a template for other issuers of bonds backed by auto loans to comply with new registration and compliance requirements.
When Ford’s vehicle was approved, it created a stir because it contained more data than required at that point. Other lenders, and their lawyers, were concerned that the SEC would expect the same level of disclosure from all registrants, something they were not yet prepared to do. But some market participants, including Moody’s Investors Service, welcomed the prospect of having more insight about the credit quality of securitized assets and an easier way to compare credit quality across different issuers.
As it turns out, both the concerns of issuers and the enthusiasm of investors were unwarranted.
Since the first stage of Reg AB II took effect in November, more than half a dozen other auto ABS issuers have filed a prospectus under the SF-3 registration statement, and very few have provided the kind of additional collateral or performance information, according to Moody’s.
The SEC has not specified the terms of information that issuers need to disclose under Reg AB II. Ford Credit, however, added a number of new metrics in its first SF-3 for its retail auto loan securitization shelf, including the weighted-average loan-to-value ratio (LTV) of the collateral pool; the pool’s weighted-average payment-to-income (PTI) ratio; the percentage of subvented contracts – those with interest rates that are kept low because the automaker pays a subsidy; and the percentage of commercial-use vehicles in the pool.
According to Moody’s, automakers' “captive” finance subsidiaries, such as Ford Credit, had not previously disclosed LTV or PTI characteristics about their securitized loan pools. Banks and independent finance companies do regularly disclose pool LTV characteristics for their auto loan pools, but only a few such issuers regularly disclose PTI information.
As of Feb. 22, eight other issuers, GM Financial/AmeriCredit, Ally Bank, CarMax, Nissan, BMW, Santander, and Toyota, have all completed offerings that are in compliance with Reg AB II. These offerings encompassing the three major auto ABS asset classes: loans, leases, and dealer inventory financing (also known as floorplan). Yet few have followed in Ford’s footsteps and disclosed additional information about the credit quality of collateral.
Why is this information so important?
“Previous comparative analysis has shown that bank-sponsored auto loan pools perform worse than captive-sponsored pools with similar weighted-average FICO scores, and additional disclosed information could shed more light on the performance difference,” Moody’s stated in a report published in November. For example, the data that Ford Credit disclosed in its prospectus indicate that captive-sponsored pools have lower weighted-average LTVs than do bank-sponsored pools. “Such LTV data support our belief that the weaker performance of bank-sponsored pools is a result of weaker credit characteristics including longer payment terms and a greater portion of used vehicles as collateral,” the report stated.
Moreover, Ford’s disclosure shows that these characteristics have been consistent for the past five years, which Moody’s says helps explain the overall steady performance of the collateral pool.
Since other issuers have not followed in Ford’s footsteps, the market will have to wait a little longer for the additional insight on credit quality of different issuers that this kind of data would provide. Under the second stage of Reg AB II, which takes effect in November, issuers must disclose additional loan-level information.
The primary change introduced under the first stage of the regulation is the inclusion of a new kind of party in these transactions, an asset representations reviewer (ARR). Prospectus filed under SF-3 registration statements outlines the circumstances under which an ARR will perform a review of whether the receivables comply with the representations that a seller/servicer makes upon the sale of the receivables to a special purpose entity.
Here issuers have taken a nearly uniform approach: All have hired the same entity, Clayton Holdings; paid similar fees; and established similar triggers for involving the ARR; and similar review procedures.
There are usually two triggers for involving ARR, according to Moody’s: an asset performance trigger and a voting trigger. For both auto loan and lease transactions, the asset performance triggers are based on delinquency levels and for Ford Credit's dealer floorplan transaction, it is based on status dealer percentage (a “status” receivable is one where the dealer failed to make a payment, filed for bankruptcy, or there are other circumstances that require immediate action).
New shelf registrations also indicate that complying with Reg AB II isn’t adding too much to the cost of securitization, which is good news for both issuers and investors.
These costs include the ARR fees, legal fees in conjunction with the new SF-3 registration form, and legal fees for the new integrated disclosure document by combining the prospectus and prospectus supplements. A portion of these fees will be paid using the available funds of the trust. However, given the small costs of the requirements, Moody’s views this is only a slight credit negative.
Jeff Berg, Clayton’s vice president of key client initiatives, said the role of an ARR is more circumscribed, and less costly, than that envisioned for a rep and warranty reviewer in private-label residential mortgage bonds.
“The key difference is that, for an ARR, there’s certainty about the required scope of the review and where it ends,” he said. “That differs from what’s done in more private transactions by a rep and warranty reviewer. Reg AB II specifically prohibits an ARR from determining materiality or recommending recourse. Our testing is very objective; the result is either a pass or a fail.”
While these costs could increase if review is triggered, it seems unlikely that this will happen. The asset performance triggers are typically sized by applying a multiple of 1.75 to five to the average or peak delinquency levels or status dealer percentages of prior transactions. According to Moody’s, these triggers are typically higher than the highest levels ever seen for these shelves.
Delinquency levels on subprime auto loan securitizations tend to be higher, but most of these deals are done privately and so are exempt from Reg AB II.
Issuers must comply with the second-stage requirements of Reg AB II, which mandate loan level disclosures about pools of securitized collateral, by Nov. 23 of this year. These disclosures will include data about the cash flow related to auto loans or leases, such as contract terms and scheduled payment amounts, data about the financed vehicles, such as the loan to value ratio, data about the performance of each loan or lease over time and data about the loss mitigation efforts by the servicer on a loan-by-loan basis. The loan-by-loan data will also result in more disclosure of collateral pool level data.