Mortgage & Securitization News

SEC ADOPTS NEW RULES Today, the Securities and Exchange Commission (SEC) adopted new rules that would require issuers of asset-backed securities (ABS) to disclose more information about the underlying loans (see attached rule). The SEC also voted today to tighten controls on credit rating agencies (see attached rule).

In her opening statement, SEC Chairwoman Mary Jo White said the reforms before us today will add critical protections for investors and strengthen our securities markets by targeting products, activities and practices that were at the center of the financial crisis. With these measures, investors will have powerful new tools for independently evaluation the quality of asset-backed securities and credit ratings.

All five commissioners approved the rules that require issuers of ABS to disclose more information about the loans. According the SEC, the new rules, in addition to requiring disclosure for certain assets, such as residential and commercial mortgages and automobile loans, provides more time for investors to review a securitization offering. The rules also revise the eligibility criteria for using shelf offerings. Of note, in his statement, Commissioner Luis Aguilar said in addition to these rules, the SEC should adopt a risk-retention rule that would align the incentives of the securitizer with the investor. He noted that a risk-retention rule was an important and overdue initiative. The rules will be effective 60 days after publication in the Federal Register and issuers must comply with new rules, forms, and disclosures other than the asset-level disclosure requirements no later than one year after the rules are published in the Federal Register. Offerings of ABS backed by residential and commercial mortgages, auto loans, auto leases, and debt securities (including resecuritizations) must comply with the asset-level disclosure requirements no later than two years after the rules are published in the Federal Register.

The rules on rating agencies were not well-received by all of the commissioners. The two Republican commissioners, Daniel Gallagher and Michael Piwowar, criticized the rules at great length and ultimately voted against the rules. According to the SEC, the rules address perceived conflicts in the business model of rating agencies. In doing so, the rules are aimed at prohibiting sales considerations from influencing their rating, require agencies to have internal procedures for setting and revising their ratings, and will also be required to increase disclosure of their accuracy. Both Gallagher and Piwowar noted the rules would decrease competition among agencies. Gallagher also said the provisions to prevent marketing considerations and other factors from influencing the ratings were too vague and contain loopholes.

Certain provisions of the rules on credit rating agencies will become effective 60 days after publication in the Federal Register. The amendments with respect to the annual report on internal controls and the production and disclosure of performance statistics will be effective on Jan. 1, 2015. The following provisions are effective nine months after publication in the Federal Register: prohibiting the sales and marketing conflict; addressing look-back reviews to determine whether the credit analysts prospects of future employment influenced a credit rating; requiring the disclosure of rating histories; addressing rating methodologies; requiring the form and certification to accompany credit ratings; addressing issuer and underwriter disclosure of third-party due diligence findings; addressing the certification of a third-party due diligence provider; and addressing credit rating agencies standards of training, experience, and competence; and addressing universal rating symbols.