Capital Markets

New ABS Rules Hit Nonfinancial Firms, Too

The SEC's proposed new rules for asset-backed securities would place new compliance burdens on financial and nonfinancial issuers alike.
Vincent RyanApril 12, 2010

If your company is an asset securitizer — even just an occasional one that doesn’t publicly register its issuances — get ready to spend more money and hours on reporting and compliance. New rules proposed by the Securities and Exchange Commission would require issuers of asset-backed securities (ABS), including those doing privately placed deals, to register transactions and provide loan-level data on terms and underwriting, borrower creditworthiness, and characteristics of the property or collateral securing a loan.

The proposed rules are designed “to improve investor protection and promote more efficient asset-backed markets,” the SEC says. (Total ABS issuance rose to $34.2 billion in the first quarter of 2010, up from $15.9 billion in Q1 2009 but multiples lower than the quarterly highs the market hit from 2004 to 2007.) The agency estimates that companies publicly disclosing ABS information for the first time would collectively spend an annual total of 214,791 hours gathering the data and disclosing it to investors. A large bulk of the work would probably be done by outside consultants and software programmers, the SEC suggests.

While financial-services firms that securitize frequently would be hardest hit by the rules, nonfinancial companies that securitize their own receivables, provide loans and leases to buy their equipment, and originate private-label credit cards would also be affected. In addition, the rules would mandate more transparency in the private structured-finance markets, where safe harbors such as Rule 144A allow companies to privately place securities without registering them with the SEC. (Collateralized debt obligations, largely seen as contributing to the collapse in liquidity during the financial crisis, are typically sold as private placements and then resold under Rule 144A.)

“Infrequent securitizers may not be as accustomed to some of these reporting parameters,” says Ann Kenyon, a partner in Deloitte’s financial instruments and securitization practice. “Operationally complying with these provisions may be onerous.”

In a detailed example provided by the SEC, an issuer of ABS backed by equipment-related financings would have to provide, in the case of loans, periodic loan-level reports on liquidation proceeds and any recovery of amounts previously charged off. For leases, the issuer would have to furnish the updated residual value, source of residual value, and reasons for termination.

The SEC’s proposal also contains technical requirements that will enable investors to compare and synthesize large amounts of data on the assets underlying an offering. Loan-level data on new issues, for example, would have to be formatted in XML, a markup language for encoding electronic documents. In addition, all securitizers would have to post the calculation of a security’s “waterfall” — how borrowers’ loan payments are distributed to investors and how losses are divided among investors — on their Website. The calculation would be written in Python, an open-source programming language, so that investors could run different stress scenarios on a security’s collateral, says Kenyon.

The SEC’s proposal does not give details on the specific data companies that securitize their own receivables would have to disclose. Also unclear is how the new rules may affect companies that enter into receivables securitizations with asset-backed commercial paper conduits, which are typically run by large commercial banks. “The SEC would have to [determine] what information the conduits would have to get from the sellers of receivables,” says Kenyon.

The American Securitization Forum, an advocacy group, says it supports the new disclosure regulations. “Whether you think it’s right or wrong, the consensus is we need to give investors in structured products some increased transparency,” says Kenyon.