The Securities and Exchange Commission has proposed new rules that would alter the disclosure, reporting and offering process governing asset-backed securities in an effort to better protect investors in the securitization market.
The new rules would require ABS issuers to provide specific data for each loan in the asset pool both at the time of securitization and on an ongoing basis. The loan-level data would cover items such as the terms and underwriting of the loan, credit information about the borrower, and/or characteristics of the property securing the loan, according to the SEC.
To make the required information comparable among issuers of the same asset class and more usable to investors, the rules require that the data be provided according to proposed standards and in a format tagged in Extensible Markup Language, or XML, so that it could be processed by computer.
Examples of the types of information that would be provided for each loan in the pool include:
A number identifying each loan so that the loan and its performance can be tracked throughout the life of the security.
Disclosure of whether or not the loan was made without following the stated loan underwriting standards.
Disclosure of the extent to which the obligor's income was verified (e.g., did the lender look at W-2 forms and tax returns?).
Detailed information about the steps being taken by the servicer to limit losses on loans that are not being paid in full.
Asset-backed securities, particularly subprime loan mortgage-backed securities, were some of the main culprits behind the financial crisis and the credit meltdown. One of the thornier problems in unwinding the mortgages was figuring out exactly what became of the loans since so many of them had been securitized, meaning they could be owned by thousands of investors.
While the proposed reporting requirements would be more stringent, they could eventually make it easier to figure out exactly what kinds of assets are really backing the securities and hopefully make them less complicated to untangle later in case the loans go awry, as so many have during the financial crisis and its aftermath.