It’s taken four years, but the Securities and Exchange Commission has adopted a rule requiring more disclosure about the quality of loans in asset-backed securities.
The rule, mandated by Dodd-Frank, addresses concerns that investors who got burned by mortgage bonds during the credit crisis did not have enough information to independently assess the credit risk in these securities. In addition to residential mortgages, it applies to securitizations of commercial mortgages, auto loans and auto leases and debt securities, as well as re-securitizations of these assets.
This loan information must be provided in a format that standardized and available in a tagged XML format to ensure maximum utility in analysis. Issuers must also provide periodic updates on the performance of the loans.
The rule also requires that the principal executive officer of the issuer certify that the information in the prospectus or report is accurate.
The requirements do not apply to other assets, including student loans and equipment leases and loans, though several Commissioners indicated in remarks preceding the vote that they would like to address these at a later date.
It also excludes securities issued by master trusts from non-revolving asses from the definition of an asset-backed security, which means that covered bonds are not asset-backeds.
The rule is also designed to give investors more time to make informed decisions on investments. It requires investors to file a preliminary prospectus at least three days prior to the sale of any securities, though this waiting time was cut from five days in an earlier version of the rule.
Importantly, the reporting requirements were not extended to asset-backed securities that are privately offered to a few large, sophisticated investors.
Although the SEC has yet to release a final text of the ruling, the outline presented at today’s open meeting is not expected to be too onerous for issuers.
Depending on the timeline for implementation (likely at least a year as with the first version of Reg AB in 2006), and the magnitude of the asset-level details required, analysts at JP Morgan expect that auto ABS issuers may need to temporarily turn to the 144A market until they can meet the new requirements.
So far, this year, 144a issuance has accounted for 23% of 2014 auto ABS issuance. Within the auto subsectors, 144a makes up 16%, 39% and 22% of prime auto loans, non-prime auto loan and auto lease ABS 2014 supply, respectively, according to JP Morgan.
SFIG thanks the U.S. Securities and Exchange Commission for its ongoing efforts to reform the securitization market, which is an essential source of core funding for the real economy. The long anticipated completion of Regulation AB II (“Reg AB II”) is a critical step in removing market uncertainty exacerbated by many pending regulations. SFIG believes that it is imperative that sufficient and transparent information be available to investors, while it is equally important to balance those needs against the proprietary, operational and privacy considerations for issuers. It is through these dual lenses that our membership will review and digest the full content of the final Reg AB II rule. We look forward to continuing to work with policymakers and regulators to ensure that reforms create a viable, liquid and transparent securitization marketplace.”