WASHINGTON (CN) – Issuers of asset-backed securities would be required to perform, and make public, a review of the assets underlying the securities, under new regulations proposed by the Securities and Exchange Commission.
The rules would implement sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Asset backed securities are created by bundling loans like residential mortgage loans, commercial loans or student loans and creating securities backed by those assets. They first came to the public’s attention during the recent financial crisis as it became clear that securities backed by bad home mortgages were issued without the issuers having any understanding of the condition of those underlying mortgages.
The proposed review and disclosure provision is the third major reform proposed or adopted by the SEC since the passage of Dodd-Frank.
Most recently, the SEC proposed requiring credit rating agencies that rate asset backed securities to provide investors with new disclosures about representations, warranties, and enforcement mechanisms governing asset backed securities.
Last April, the SEC proposed rules revising the disclosure, reporting and offering process for asset backed securities by setting minimum data requirements for the information contained in offerings.
While the proposed rules do not include a standard of review to which the required reviews must conform, the reviews must at a minimum disclose information about how the loans in the pool differ from the disclosure in the prospectus about the underwriting criteria; identify the specific shortcomings of loans that did not meet the disclosed underwriting criteria but were still included in the offering, and identify who made the determination that such loans should be included in the pool, despite not having met the disclosed underwriting standards.
The SEC is accepting comments on the proposed rule until November 15th of this year and is particularly interested in comments defining the standard of review the SEC should adopt.