Pending financial regulation — including updated standards for risk retention, increased disclosure requirements, and the creation of a Bureau of Consumer Financial Protection (BCFP) — will affect consumer ABS in various ways, according to Barclays Capital analysts in a recent report.
The Federal Deposit Insurance Corp. (FDIC) and the Securities and Exchange Commission (SEC) have recently updated their own rulemaking initiatives for risk retention and disclosure. These updates provide the industry with what could be a preview of future requirements post-reform, Barclays Capital analysts said.
Congress is currently in the process of finalizing the Dodd-Frank Wall Street Reform and Consumer Protection Act, which has passed in the House and will face a Senate vote in coming weeks. Changes already underway at the FDIC and SEC incorporate some of the major tenets of the congressional bill and may ease the regulatory transition for the consumer ABS markets, according to Barclays analysts.
The newly created BCFP will also play a substantial role in the consumer ABS market. Barclays analysts suggested that the agency could impose new costs and additional restrictions on financial products unrelated to the credit crisis. Its impact, however, will depend on the dissemination and enforcement of new rules and regulations, Barclays analysts said.
While analysts expect pending reform to impact the market, they are confident in the ability of the consumer ABS industry to adjust. The market is expected to exhibit the resiliency it displayed through the credit crisis, and will likely overcome what Barclays analysts called “the latest in a series of hurdles.”
The legislation before Congress will incorporate several reforms already undertaken by agency regulators, who will ultimately be responsible for working together to enforce the new rules. Updates to agency rulemaking initiatives provide the industry with potential insight into what the regulatory environment will look like once the Dodd-Frank bill becomes law.
Although the proposed regulation leaves a certain amount of discretion to individual regulatory entities, it does require that they establish separate retention rules for various asset classes as well as a required retention of 5% of the credit risk for any asset (unless the originator meets specific underwriting standards ordered by the regulators).
The bill would prohibit the hedging of retained risk and would specify the permissible forms and minimum duration of risk retention while applying risk retention requirements to all issuers, whether or not these are an insured depository institution.
The regulation would also require the SEC to set standards for disclosure of information relating to underlying assets in a format that allows for comparison across securities backed by similar types of assets.
Additionally, it requires issuers to disclose asset- or loan- level data so that investors can independently perform due diligence, a mandate similar to SEC’s proposed revisions to Regulation AB.