SEC Approves New Securitization Rules
Tuesday, January 25, 2011

The United States Securities and Exchange Commission (SEC) has voted to adopt two sets of new rules designed to help revitalize the asset-backed securities (ABS) market by encouraging better disclosure for investors.

"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," said SEC Chairman Mary L. Schapiro. "These rational measures are designed to help revitalize the important asset-backed securities market by encouraging better disclosure for investors."

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, and have been seeking to enforce repurchase provisions.

The Dodd-Frank Wall Street Reform and Consumer Protection Act imposes new disclosure obligations about the representations, warranties and repurchase history so that investors may identify originators with clear underwriting deficiencies. Section 943 of that Act requires the SEC to prescribe regulations on the use of representations and warranties in the market for asset-backed securities. The final rules now approved implement Section 943.

The SEC approved one set of rules that requires issuers of ABS to disclose, in tabular form, the history of the requests they received and repurchases they made related to their outstanding ABS. The table will provide comparable disclosures so that investors may identify originators with clear underwriting deficiencies. Specifically, issuers are required to disclose the last three years of repurchase history in an initial filing due by February 14, 2012.

After the initial filing, the ABS issuer is required to file updated information on a quarterly basis, including a history of all fulfilled and unfulfilled repurchase requests, including investor demands upon a trustee, and pending requests. The disclosure requirements will apply to issuers of unregistered ABS, including municipal ABS.

The final rules also provide investors with ready access to the most current information regarding an issuer's repurchase history by requiring an issuer in 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.

The SEC also approved a second set of rules that would require issuers of ABS to conduct a review of the assets underlying those securities. This requirement applies to all registered asset-backed securities, regardless of the assets that comprise the bundle. The review must, at a minimum, be designed and effected to provide reasonable assurance that the prospectus disclosure about the assets is accurate in all material respects.

Any registered offering of ABS commencing with an initial offer after December 31, 2011, must comply with the new rules.