At the recent American Securitization Forum (ASF) Sunset Seminar, panelists looked back at the first year of Dodd-Frank, saying regulators are still missing the bigger picture.
"Is there anybody really thinking about the cumulative effect? I don't think so," said Kirkland & Ellis partner Kenneth Morrison. "Are we going to have a market that's left for us after all these regulations are put in place?"
His questions reflected the panel's overall tone and the general uncertainty regarding different potential regulations under the act and their impact on the securitization market's future.
The primary concern among panelists was the various regulators' failure to cater to the differences in each securitization asset class. Rather than create specific rules for each securitized product, regulations are being applied broadly.
"One of the really elegant things about securitization is that each deal, each structure is tailored to the problems, to the issues for that asset class or that distribution channel," Morrison said. "And just because something is a feature for another asset class, like required minimum seller's interest for credit card, doesn't mean its in a deal or floor plan transaction."
He noted that while a majority of the problems in the industry resulted from the RMBS sector, all asset classes, such as autos, equipment and credit cards, are being penalized in the same way.
"Many of them [regulators] had a very strong flavor of 'Well, this is how we think it works in RMBS, so this is how this exemption or this proposal, this provision will work for other asset classes,'" Morrison continued.
Too Much Information
One requirement that received significant criticism from the panel as being not suited for broad application to all securitization market sectors was the proposed required disclosure of loan-level data.
Not only was this degree of disclosure considered as not completely necessary to investors, but several panelists expressed fear that this level of information could endanger the privacy of consumers.
Julia Landes, director of securitization at Harley-Davidson Financial Services, had a "strong objection" to the required disclosure due to the inclusion of sensitive geographical data, which poses a unique threat to auto ABS borrowers.
"There are some motorcycle models that don't sell large volumes in North Dakota or Montana, and it's possible that you could have the ability to figure out who that consumer is just from the information that could be put out on a public Web site," Landes said.
Other disclosure items such as model type and year information, would also make it easy to identify borrowers backing certain deals.
This unease was not limited to auto securitizations, as CNH Global Manager Julie Schlueter shared similar concerns over the "huge impact" the required disclosure would have on the equipment sector.
"We wouldn't put our firm at risk by supplying loan-level detail on that. There's also the case of if it's something like a ZIP code and a farmer, some ZIP codes have only one farmer," Schlueter said. "You'd kind of know who that is, and his neighbors would know and they would complain they didn't get the same rate, so there's a lot of different things about that, and that could affect the market in great detail."
The disclosure would disrupt market dynamics by forcing ABS issuers to divulge negotiated rates and deal terms with commercial borrowers to their competitors, which these competing firms can take advantage of. Morrison referred to the disclosure as being "way overboard" for both the auto and equipment sectors.
Schlueter also said that there is a general lack of investor demand for the data. Of the 40 ABS investors she polled, only three answered yes to wanting the information.
Landes agreed with the findings by saying, "I've never had an investor ask for loan-level details - we don't give it to the rating agencies, and they don't ask for it."
"You can look at all the loan-level detail you want to; you're not going to be able to see that change unless you look at the industry as a whole, and nothing in Dodd-Frank is going to change that," Schlueter said.
The topics of securitization disclosure and reporting requirements are on the agenda for a July meeting of the Securities and Exchange Commission (SEC), Barclays Capital analysts noted in a recent report. Given the SEC's inclusion of these items in its list of things to talk about, analysts believe that these issues will likely remain at the forefront of regulatory news in the coming months.
On a separate note, Landes expressed optimism that regulators are beginning to discuss the possibility of a qualifying auto loan exemption, a potential sign they recognize that regulatory adjustments for the individual asset classes are needed. She added that no auto loan qualifies under current standards.
Fellow panelist Edward Fine, a partner at Sidley Austin, aptly captured the essence of the issue well, saying, "One-size fits all doesn't work all of the time."
The Great Unknown
The market is still in the dark about what the future holds on the regulatory front.
Kirkland & Ellis' Morrison said that there were "too many variables" currently for him to attempt to make any prediction for the market. "We've got a lot of things that fall into the category of 'Well, we don't yet know what's going to happen.'"
"Obviously regulatory uncertainty plays very heavily in RMBS," Fine added in agreement. "We have some clarity in the regulations, but there are a lot that are still in proposed form, and frankly some of the ones that are in final form are pretty ambiguous in various respects."
Fine referenced the various difficulties facing the "beleaguered" RMBS market that may result from final decisions on Dodd-Frank's proposed rules on risk retention, QRM definition and capital requirements. He added that the associated cost and time burdens could also potentially shift ABS issuance to larger companies that can afford to come to market with securitized deals.
Barclays analysts expressed hope that the extended comment period for the proposed rules on risk retention is an indication that regulators recognize the fragile state of the securitization market and the need for more tailored regulations.
Among the unclear regulatory proposals Morrison singled out as unresolved were the SEC's proposed rules regarding third-party due diligence report requirements as well as the precise definition of "hedge fund" and "private equity fund" under the Volcker Rule.
The panelists also brought up the issue of how the proposed requirements under Dodd-Frank would play out against existing European regulations. "How are you going to harmonize Europe and the U.S.?" Fine asked. "Maybe that's wishful thinking; first we've got to get a domestic RMBS market working, but at some point that may be an issue."
Panelists recalled just how much the industry has changed since the onset of the financial crisis. "We've gone from an industry that was relatively lightly regulated to an industry that's under tremendous congressional and regulatory scrutiny right now and is increasingly the subject of considerable regulation, and some might say a fairly intrusive regulatory regime," Fine said.
However, panelists also gave credit to regulators such as the Federal Deposit Insurance Corp. and the SEC for their swift response in adjusting some of the proposed rules that these agencies were required to implement under the Dodd-Frank Act that have threatened to freeze deal issuance in the securitization market.
Panelists also admitted that some of the rules have not been as grim as the industry initially feared. "Things, so far, are not quite as bad as I thought. But emphasis on the so far," Morrison said.
Progress Report on Dodd Frank
One Year Later
Regulators have overall completed 51, or 13%, of the 400 rulemaking requirements in Dodd -Frank.
Risk retention regulations, in terms of qualifying collateral such as the Qualified Residential Mortgage or QRM, remain uncertain after regulators' proposed rules. These proposals received considerable feedback and criticism from the various industry trade groups.
July figures (as of July 22)
Regulators have completed 33, or 20%, of the 163 required rulemakings to date.
Rule makers have missed 130 deadlines and have 190 future deadlines to meet.
Rules fulfilling 13 rulemaking requirements were finalized and 104 rulemaking deadlines were missed.
Source: Davis Polk & Wardwell and Standard & Poor's