Last week, the SEC adopted two sets of new rules that will affect disclosure
and review requirements for asset-backed securities (ABS), according to
a Jan. 20 SEC
Asset-backed securities are securities backed by bundled loans (i.e. student
loans, mortgages, commercial loans, etc.) that are sold to investors.
Problems arose during the financial crisis when many investors suffered
significant losses from the securities and began to question the accuracy
of the required “representations and warranties” made about
the underlying loans. Typically, an ABS issuer or lender can be required
to repurchase or replace a loan from the security if it turns out the
loan does not meet the “representation of warranty” in the
To explain the need for the new rules, the press release quoted SEC Chairman
Mary L. Schapiro: “At one time, the securitization market provided
trillions of dollars of liquidity to virtually every sector of the economy.
However, during the financial crisis, ABS investors suffered significant
losses, causing the market for securitization to rapidly decline. These
rational measures are designed to help revitalize the important asset-backed
securities market by encouraging better disclosure for investors."
According to the release, the “Disclosure for Asset-Backed Securities
Related to Representations, Warranties and Repurchase Histories”
rule will require ABS issuers to:
- File with the SEC a history of any requests received and repurchases made
that are related to a currently outstanding ABS;
- File quarterly reports with the SEC that lists the repurchase history for
all outstanding ABS, including non-registered ABS transactions, and the
history of all fulfilled and unfulfilled repurchase requests; and
- Include in each ABS prospectus the recent three-year repurchase history
for ABS of the same asset-class.
The second rule adopted last week is the “Issuer Review of Assets
Underlying Asset-Backed Securities” rule. As reported in the release,
the new rule will require issuers of ABS to conduct a review of they underlying
assets of all registered asset-backed securities and to disclose both
the nature of the review and the review’s conclusions to potential
and current investors. Issuers are given the choice of whether to perform
their own reviews or to hire a third-party to review the assets. Any information
obtained during the review that indicates that an underlying loan differed
from the loan underwriting criteria listed in the ABS prospectus, or that
an underlying loan failed to meet the loan criteria listed and was still
included in the security, must also be disclosed.
The new rules will take effect within 60 days of publication in the Federal Register.