Alert August 04, 2009

Proposed Legislation Regarding Asset-Backed Securitization

As part of its financial regulatory reform program, the Obama Administration, through the Treasury, submitted to Congress proposed legislation.  The proposed legislation is designed to implement recommendations made in the Treasury’s June 2009 White Paper on financial regulatory reform (see the June 23, 2009 Alert). 

Generally, the proposed legislation relating to asset-backed securitization would require the SEC and Federal banking agencies to implement detailed regulations and would effect two statutory changes of note. The key provisions of the proposed legislation are (1) a requirement that the SEC and the Federal banking agencies propose regulation requiring any bank or non-bank issuer or underwriter of an asset-backed security to retain an interest in at least 5% of the credit risk in such assets for a specified period, in a specified form and without hedging; (2) an amendment to Section 15 of the Securities Exchange Act of 1934 to require continued reporting by issuers of asset-backed securities even if the number of holders falls below 300; (3) a requirement that the SEC propose regulations requiring disclosure of standardized asset-level or loan-level data and standardized compensation and risk retention information; (4) a requirement that the SEC propose regulations on the use of representations and warranties in the asset-backed securities market that would require credit rating agencies to include additional analysis in their reports and would require disclosure permitting investors to identify originators with clear underwriting deficiencies; and (5) the elimination of the offering exemption for certain real estate mortgage notes and related participation interests under Section 4(5) under the Securities Act of 1933.  These proposals are consistent with the securitization market goals expressed in the White Paper to require risk retention, to increase standardization and transparency, to require robust reporting by issuers of asset-backed securities, and to strengthen the regulation of credit rating agencies, but do not address the stated goal of alignment of compensation and performance other than by increasing disclosure of compensation to loan brokers and originators, or the stated goal of reducing regulators’ use of credit ratings.  The impact of these proposals, if adopted, on the securitization market will depend significantly on the nature and scope of the regulations that are developed to meet the requirements; accordingly, the Alert will continue to monitor developments in this area.