On August 27, the Securities and Exchange Commission expanded disclosure requirements for publicly issued asset-backed securities as mandated by the Dodd–Frank Act. Tara Castillo of the firm’s Finance Group and a speaker at the upcoming Servicing Symposium discusses the rules’ impact on the securitization market.
What impact will the final rules have on the securitization market?
The immediate impact will be limited to publicly issued securities backed by residential mortgage loans, commercial mortgage loans, automobiles loans or leases, corporate debt and resecuritizations. After the rules take effect, issuers of securities backed by these assets will be required to include standardized asset-level information in prospectus offerings and thereafter on Form 10-D.
Another significant change will be to the offering process itself. The SEC has replaced the requirement that asset-backed securities (ABS) be rated investment grade, substituting instead four new requirements for shelf registration statements and adopting new Forms SF-1 and SF-3, which are specifically tailored to registered ABS offerings.
Issuers will also be required to file a preliminary prospectus supplement at least three days before pricing the underlying transaction. The SEC implemented this three-day “speed-bump” to allow investors more time to review and consider the information relating to the offering’s underlying collateral.
For issuers that are subject to the new reporting requirements, when will they need to comply?
Registrants will be required to comply with the new offering and disclosure requirements (other than the asset-level disclosures), including registering ABS on Form SF-1 or Form SF-3, one year after the final rules are published in the Federal Register. Registrants will have two years to comply with the new asset-level disclosure requirements.
Now that the final Reg AB II rules have been adopted, are we likely to see a slowdown in future regulatory reform?
No. The August 27 rulemaking marks only a first step in SEC reforms mandated by Dodd-Frank. The SEC initially released Regulation AB II proposal in 2010 and then reissued a re-proposal in 2011 in light of Dodd-Frank. There are still several proposed rules on the drafting table. The initial 2010 rule proposed including asset-level disclosure requirements for publicly issued securities backed by other assets (e.g., equipment loans and student loans), as well as the requirement that issuers of structured finance products (including ABCP and CDOs) issued under Rule 144A provide the same level of disclosure applicable to a registered offering.
What aspect of the final rules will be the hardest/most costly for industry participants to comply with?
The final rulemaking will alter existing market practices in terms of how loan level information is collected and disclosed to investors. The specific data requirements will vary by asset class. For example, as adopted there are 270 data points applicable to residential mortgage loans, 152 data points applicable to commercial mortgage loans, 72 data points applicable to automobile loans and 66 data points applicable to automobile leases. The exact impact on issuers subject to the rule remains to be seen and will depend largely on what internal compliance procedures issuers currently have in place. It also remains to be seen whether issuers will attempt to pass on the costs of compliance to the underlying consumer borrowers.
What questions are left outstanding after the SEC’s open meeting?
Unanswered questions include when will the SEC roll out the next stage of its final rulemakings and when can the industry expect to see a final rulemaking relating to credit risk retention? Section 941(b) of the Dodd-Frank Act requires the SEC, federal banking agencies and, with respect to residential mortgage loans, the Secretary of Housing and Urban Development and the Federal Housing Finance Agency to adopt regulations mandating that certain securitizers have “skin in the game” through the retention of at least five percent of the risk related to any asset that is being transferred to a third party. During the August 27 meeting, the SEC noted that it was undertaking to finalize the rulemaking relating to credit risk retention with the other financial regulators. The SEC gave no clear indication as to timing but noted generally that it hopes to complete its rulemaking mandates with respect to ABS by the end of the year.