The Securities and Exchange Commission is seeking public comment on proposed regulations to require issuers of asset-backed securities (ABS) — and credit rating agencies that rate ABS — to provide investors with new disclosures about representations, warranties, and enforcement mechanisms.
Additional Materials
* SEC Proposal on ABS Representations and Warranties
* Submit comments on this proposal
Section 943 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires the Commission to prescribe regulations on the use of representations and warranties in the ABS market by Jan. 14, 2011 (180 days after enactment). A complete list of regulatory actions taken to date as required by the Dodd-Frank Act is available on the SEC’s website.
ABS are created by buying and bundling loans — such as residential mortgage loans, commercial loans or student loans — and creating securities backed by those assets that are then sold to investors. In the transaction agreements that govern a securitization, ABS issuers or originators of those loans typically make “representations and warranties” about the characteristics and the quality of those loans. If a loan does not comply with the representation or warranty, an ABS issuer or lender can be required to repurchase the loan from the pool or replace it with a substitute asset.
Since the financial crisis, many investors and other transaction parties have questioned whether the loans in the bundle meet the characteristics specified by the representations and warranties in transaction agreements, and have been seeking to enforce repurchase provisions. The Dodd-Frank Act imposes new disclosure obligations so that investors receive information about the representations and warranties and repurchase history so they may identify originators with clear underwriting deficiencies.
The SEC’s proposed rules would:
Require Disclosure of Repurchase History
Issuers would be required to file with the SEC in tabular format an issuer’s repurchase history for its outstanding ABS so that investors may identify originators with clear underwriting deficiencies. Specifically, at the time an issuer commences its first offering of the ABS (after the effective date of the rule), an issuer would be required to provide the last five years of repurchase history in an initial filing. After the initial filing, the ABS issuer would be required to file updated information on a monthly basis, including:
* Repurchase history for all outstanding ABS (regardless of whether the securities were offered in a transaction registered with the SEC) if the underlying transaction agreements include a covenant to repurchase or replace a pool asset.
* History of all fulfilled and unfulfilled repurchase requests, including investor demands upon a trustee and pending requests.
Require Disclosure of Repurchase History in Prospectuses and Ongoing Reports
The proposed rules would provide investors with ready access to the most current information regarding an issuer’s repurchase history by requiring an issuer of a registered ABS offering to include — in the body of a prospectus — repurchase history for the last three years for ABS of the same asset class as the securities being registered. In its ongoing reports, an issuer would be required to provide updated repurchase history for the particular, related asset pool.
Require NRSROs to Provide Disclosure in Any Report Accompanying a Credit Rating
The proposed rules would require Nationally Recognized Statistical Rating Organizations (NRSROs) to provide a description of the representations, warranties and enforcement mechanisms available to investors for an ABS offering. Credit rating agencies would be required to disclose how the representations, warranties, and enforcement mechanisms differ from those of similar ABS. NRSROs would be required to make the disclosures in any report accompanying a credit rating, including in presale reports that are distributed prior to the sale of the security.
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The public comment period ends on Nov. 15, 2010.
