SEC Adopts New Disclosure and Review Requirements for Asset-Backed Securities

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 press release.

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 securities agreement.

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.