Recently, the Securities and Exchange Commission (“SEC”) unanimously adopted new rules concerning loan-backed securities linked to autos and mortgages. Loan-backed securities generally are created by bundling a large number of loans, which are then securitized and sold to investors. The new rules take effect in 60 days.
Why the Changes to Loan-Backed Securities?
Securities backed by loans had a major role in the 2008 financial crisis. For example, home mortgages were bundled and sold as securities, which resulted in billions of dollars of losses after the housing market crashed.
The new SEC rules will require firms that sell securities backed by loans to provide borrower credit and income information to investors in a standardized format. The SEC will then post the submitted information on its website. The idea is that investors will then be able to make more informed decisions regarding the risks involved with loan-backed securities. To protect consumer information, the SEC will not include borrower names or other identifying information in the data it collects on its website.
These changes are especially important given a recent report issued by the Federal Reserve that revealed that the number of auto loans issued is at an eight-year high. While the percentage of high-risk, or subprime, loans still make up a lower percentage of total auto loans in comparison to before 2008, the Federal Reserve report indicated the current high auto loan rates are due, in part, to increased lending to risky borrowers. The changes occur in the larger context of SEC efforts to increase transparency and oversight in securitized assets.
SEC chairwoman Mary Jo White said of the new rules, “These reforms will make a real difference to investors and to our financial markets.”
The new SEC rules will also:
- allow investors more time to consider a securitization offering;
- change the criteria for determining eligibility in expedited securitizations known as “shelf offerings”; and
- revise the reporting requirements for loan-back securities.
New SEC Rules Also Impact Credit Rating Agencies
In addition to the other changes with loan-backed securities, the new SEC rules also require credit rating agencies to make reports to the SEC on how they are safeguarding their rating process to ensure that ratings are determined fairly. The new SEC rules prohibit credit rating agency’s salespeople from participating in the ratings process. This portion of the new rules passed by the SEC was not unanimous, but rather will be implemented after a 3-2 vote.
The SEC has taken an interest in credit rating agencies and potential conflicts of interests post-financial crisis. In the past, some credit rating agencies have been criticized for rating securities as low risk when in fact they were high risk. Consumer confidence in credit rating agencies has suffered post-recession.
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