Industry Urges SEC to Coordinate Overlaps in Reg AB and Dodd-Frank

Several mortgage finance industry groups are urging the Securities and Exchange Commission (SEC) to coordinate with other regulating entities on its proposed revisions to Regulation AB (Reg AB). Certain requirements under the SEC’s proposals, including 5% risk retention, overlap with provisions of the recently signed Dodd-Frank Act, they say. The SEC’s proposals also address the offering process, disclosure and reporting for asset-backed securities (ABS). One proposed rule would provide for public loan-level data disclosures, upon request, in all private ABS transactions. The American Securitization Forum (ASF) noted that, while the disclosure proposal aims to ensure sophisticated investors are able to consider and understand the risks, it raises several concerns. “The presentation of asset-level information has been a long time coming in some asset classes such as residential mortgages and, as such, the ASF is very supportive of some of the SEC’s proposals,” said executive director Tom Deutsch. “At the same time, the proposal aimed at providing asset-level information is wholly unworkable for other asset classes such as credit card ABS and [asset-backed commrcial paper], where asset-level disclosure requirements would radically shrink these critical financing markets for consumer and business credit.” Another of the SEC’s proposed rules would require the sponsor to retain a minimum of 5% of the credit risk of securitized assets. The Mortgage Bankers Association (MBA) urged SEC to consult with other agencies to “harmonize” the risk retention requirements that exist under the Dodd-Frank. Additionally, MBA noted that the Federal Deposit Insurance Corp (FDIC) issued proposed modifications to its securitization safe harbor rule for banks, which also contains provisions for similar issues addressed by the SEC’s proposal. The Dodd-Frank Act, the FDIC’s proposed securitization rule and the SEC’s proposals differ in terms credit risk retention. The MBA noted, for example, that Dodd-Frank provides exemptions for securitizations of certain high-quality mortgages, as well as those the government insures. “MBA is concerned that the failure to harmonize these various mandatory risk retention standards may result in higher risk retention requirements than those called for in the Proposal,” the MBA said. With respect to commercial real estate, MBA said it believes 5% risk retention would be costly and would be less effective than alternative methods to encourage lenders to maintain high underwriting standards. “MBA believes a more flexible standard that takes into account a number of factors would have the desired effect of maintaining asset quality without impeding the market and would be more consistent with the legislation, which calls for a ‘menu’ of options for commercial mortgages,” the MBA said. “These alternative factors could include: 1) ownership of the non-rated securities (the ‘B Piece’) by a third party investor with a true economic stake in the first loss piece; 2) representations and warranties with respect to the mortgage loans being placed into the securitization; or 3) minimum underwriting standards.” Write to Diana Golobay.