WASHINGTON (CN) – Issuers of asset-backed securities will be required to perform, and make public, a review of the assets underlying the securities, under regulations adopted by the Securities and Exchange Commission.
The regulations 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 new review and disclosure provisions are the third major reform adopted by the SEC since the passage of Dodd-Frank, following the requirement that credit rating agencies that rate asset backed securities must provide investors with new disclosures about representations, warranties, and enforcement mechanisms governing asset backed securities and rules revising the disclosure, reporting and offering process for asset backed securities by setting minimum data requirements for the information contained in offerings.
When the SEC proposed the new regulations in October it did not include a minimum standard of review but did propose that 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.
Those minimums are included in the new rule, and the SEC has adopted a minimum standard of review that requires an issuer to “maintain disclosure controls and procedures to provide reasonable assurance that the issuer is able to record, process summarize and report the information required.”