The Securities and Exchange Commission recently released clarifying guidance on Regulation AB - Item 1122 (ASR, 08/14/06). ABS market participants have since applauded the move, although some have said that the clarifications are highly technical and do not address important issues that are still confounding the industry about Reg-AB implementation. Meanwhile, other market players have highlighted the clarifications that will benefit the asset-backed industry the most.
Ed Gainor, a partner at McKee Nelson, said that the new SEC clarifications were most helpful in defining what constitutes a servicing platform. However, there are still three major issues that continue to plague ABS market participants that the recent interpretive responses did not address.
The first issue has to do with who must prepare an assessment of compliance with servicing requirements by parties participating in the servicing function. For instance, Gainor explained that there's some confusion in instances involving a third party contractor who may or may not be participating in the servicing function within the meaning of the rule. These subcontractors could be involved in the transaction in terms of providing lockboxes, disposing of REO for defaulted mortgages or implementing repossessions. The question is how to determine whether these parties and others are required to provide assessment and attestations under item 1122 of Reg AB.
Gainor also cited the issue of third party static pool disclosure, which is a problem for those lenders who do not securitize their own loans and, in many cases, do not retain control of the servicing of the loans that they sell. Aside from the two issues already mentioned, there is also no clear guidance under Reg AB when it comes to required financial disclosure for certain derivatives counterparties.
"Although the recent clarifications by the SEC are welcome, they were not a surprise. There are no bombshells there," Gainor said. "There are bigger issues that continue to hang out there." He added that the lack of clarity in terms of the disclosure requirements for the parties performing the servicing function could affect how market participants do business, specifically impacting the largest loan originators.
Robbin Conner, vice president and assistant general counsel of the Bond Market Association, said these are "helpful technical clarifications of the application of Reg AB."
Specifically, he stated that the SEC's clarifications are useful in the case of a transaction where there are multiple servicers involved and in determining issues related to the scope of a servicer's servicing platform. Through these new interpretations, the SEC makes it clear that a servicer involved solely in the preparation of investor reports or filings required by the SEC should not have to deliver an assessment or obtain an attestation with respect to calculations or other content that was provided by another servicer. As an example, a servicer responsible solely for preparing a report on SEC Form 10-D would be responsible only for assessing and obtaining an attestation on the report itself, such as whether the numbers and other information provided to it by another servicer were properly incorporated into the report, and not to the accuracy of the calculations of waterfall payments, pool factors or other information it placed into the report but did not calculate.
Another helpful clarification that Conner cited is for mortgage-related documents where the SEC clarified that it is only the documentary collateral that needs to be assessed and not the state of the underlying physical properties supporting the transaction.
On another technical point, Conner also noted that in assessing the compliance with servicing criteria, there could be parts of the assessment that might be considered immaterial at the servicing platform level - but still be considered material at the pool level under section 1123 of Reg AB.
Tom Deutsch, associate director at the American Securitization Forum, said that the additional guidance on Reg AB released by the SEC is largely the outgrowth of meetings that the SEC, ASF, the Mortgage Bankers Association and the big four accounting firms had participated in last April. "Though the market had a pretty good preview of the guidance, there are some new and interesting angles to the SEC's clarifications," Deutsch said.
He added that an issue ASF members have been "quite concerned" about is the determination of what constitutes a platform and how much discretion a servicer has in dividing the platform. In terms of geography, for example, loans from different regions may vary in terms of performance and underlying characteristics. Therefore, the new guidance allows these loans to be placed into multiple platforms.
"There are significant implications here as to the amount of discretion that servicers have," Deutsch said. He explained that if servicers choose to include less than all of the pools that they service in a particular platform, then they will probably need to note this in their reports. Also, they may need to note if they divide the same asset types from different regions into multiple platforms.
Deutsch added that the ASF supports the concept of servicers having the discretion to include or not to include GSE loans in their platform. "GSE loans have different servicing performance characteristics so including these loans might end up skewing the information in the reports," he said.
(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.