The New York State Assembly has proposed a bill that may limit issuers from including receivables issued in New York state in auto loan securitizations, DBRS said today.
The Vehicle Lienholder Accountability Act requires the lienholder to provide notice to the vehicle owner when a security interest is assigned.
It also requires the lienholder to execute a release of his or her security interest within 10 days of the assignment. Failure to comply with this law would result in a fine not exceeding $1,000.
This law might make it difficult, expensive, and administratively burdensome to securitize auto loan receivables issued in New York, the rating agency said.
The regulation has been drafted as a response to issues faced by vehicle owners who find it difficult to determine who has a security interest in their vehicles. As a result, these owners are unable to obtain a clean certificate of title when they have paid off their vehicle loans in their entirety, according to the credit rating agency.
The legislation will pose several problems for auto loan securitizations if it is passed. Because auto loans are transferable, an originator can purchase an auto loan onto its balance sheet and then move it to a warehouse facility before finally funding the loan in a term securitization. Depending on the structure of the securitization and the amount of loan volume amassed, the originator will then transfer the loans again.
DBRS explained the issues that the new law will likely raise. “In each case, there would be a requirement to release the lien of the original lienholder and also the vehicle certificate would need to be re-titled in order to reflect the new lienholder,” the rating agency said.
In a similar case in Texas, the American Securitization Forum (ASF) lobbied for the legislature to clarify requirements in an attempt to minimize ambiguity.
The 2008 Texas law in question required secured lenders to place their names on certificates of title in order to have perfected security interests in the vehicle. The Governor of Texas later signed new legislation that assured that certificates of title need not be reissued reflecting the names of lienholders.
“This bill,” according to DBRS, “may call into question the validity of a lienholder’s security interest if the assignor fails to provide notice or a release of the lien to the owner of the vehicle.”
The ASF is preparing a response to this proposed legislation that is currently with the New York State Assembly’s Committee on Codes.