Regulation AB impacts mortgage loan salesMortgagePress.comSEC Regulation AB
The impact of the U.S. Security and Exchange Commission's (SEC)
Regulation AB (17 C.F.R. §§229.1100-229.1123) is
beginning to be felt. The final version of Regulation AB was
published on Dec. 22, 2004, and took effect on Jan. 1, 2006 for
most offerings, although certain registration statements filed
after Aug. 31, 2005 must conform to the new rules, as well.
Issuers of asset-backed securities, such as mortgage-backed
securities, are now subject to increased disclosures and reporting.
The intent of Regulation AB is to unify and codify the SEC's
regulations and guidances relating to asset-backed securities, to
increase the transparency of transactions involving such securities
and to provide investors with a clearer picture of the assets
underlying the securities.
The effect of the new reporting requirements for issuers of
mortgage-backed securities is trickling down to the loan originator
level. In order to provide the disclosures and transparency
regarding the performance of the assets backing the securities,
purchasers of loans who securitize such loans are seeking increased
reporting from the originators who sold them the loans.
The impact of these requirements is just starting to be
understood by the mortgage industry; one potentially controversial
interpretation of such requirements is evidenced by the recent
release of the American Securitization Forum's (ASF) model
provisions for residential mortgage loan purchase and servicing
agreements. Such release is aimed at addressing the requirements of
Regulation AB from the perspective of the loan purchasers and
securitizers. Under the model provisions issued by the ASF,
originators and servicers would be required (among other things) to
provide reports on certain policies and procedures and on the
performance of loan pools over a three-year period and to disclose
any material litigation or financial condition that would have an
effect on the loans in the pool or the originator's or servicer's
ability to perform its obligations under a sale or servicing
agreement. The intent of the ASF model provisions is to provide
investors in mortgage-backed securities with better information
regarding the risks associated the secured loans; loan sellers,
however, may object to the many pages of additional
representations, warranties and indemnifications that the model
provisions attempt to require from the sellers.
Changes involving mortgage-backed securities transactions will
include:
• Increased disclosures about the sponsors of such
transactions, including a description of each sponsor's
securitization program and historical information about other pools
of similar assets.
• Static pool data for the five years preceding the issuance.
The data will include prepayment rates as well as delinquency and
loss information.
• Disclosures regarding the allocation of servicing
responsibilities among the parties.
• Increased disclosures regarding servicing policies,
including the charge-off policy used for assets in the pool, and
material changes in the servicer's servicing policies in the last
three years. The extent of the disclosures required is determined
by the percentage of the pool being serviced by a servicer.
• Increased disclosures regarding the originators of the
loans. The extent of the disclosures required is determined by the
percentage of the pool that consists of an originator's
loans.
• Any affiliation between parties to the transactions must be
disclosed.
The most significant changes brought about by these new
requirements will be in the areas of reporting and liability. Loan
originators and servicers can expect investors to revisit existing
loan purchase and servicing agreements seeking changes to
accommodate the Regulation AB requirements. New agreements will
contain Regulation AB language that many originators and servicers
have not previously considered. It is important for those being
asked to provide greater disclosure and assume additional
liabilities for the accuracy of those disclosures to conduct a full
assessment of the new risks associated with Regulation AB, as well
as determine what changes will be needed in the data collection
efforts to be able to deliver the company and loan performance data
that may be required under Regulation AB.
One significant area of uncertainty raised by Regulation AB is
the absence of a definition of originator. In its comments to the
final rule, the SEC expressed its view that a definition of the
term is not necessary. The lack of a clear definition leaves open
the possibility of making any mortgage lender originating loans and
selling them on the secondary market subject to the rule's
reporting requirements, even if the loans are not securitized until
they have passed through several purchasers.
Given the uncertainty of what constitutes an originator,
mortgage lenders should anticipate the possibility of being subject
to the disclosure requirements of Regulation AB if their loans
constitute 20 percent or more of any securitized pool. Such lenders
will be required to disclose how they are structured, as well as
the size and composition of their origination portfolios, and
information material to determining the performance of the pool's
assets, such as underwriting criteria. Even lenders whose loans
only consist of 10 percent or more of the loan pool will have to be
identified. Such lenders, however, will be spared some of the
disclosure requirements discussed above. Many loan originators who
are not typically involved in transactions leading to
securitizations or who do not sell directly to Wall Street firms
may find the purchasers of their loans updating seller guides,
amending loan purchase agreements or requesting additional
reporting that the loan originator may not be currently equipped to
provide.
The new reporting requirements require sellers and purchasers of
loans to negotiate new contract terms regarding the reporting
responsibilities under Regulation AB, as well as the scope of the
reports and the liabilities for reporting errors under the new law.
Many sellers and servicers will be required to begin collecting
data that they have previously not been required to report,
particularly loan performance metrics for originators who do not
engage in any loan servicing. The impact of Regulation AB will also
most likely trickle down to various third party participants who
support servicers and loan originators.
Servicers and loan originators faced with potential liabilities
if reports are inaccurate or not filed in a timely manner may feel
pressured to exert greater control over the loan securitization
process and demand greater accountability from the various
participants in the process. Third-party servicer providers for
originators and servicers will likely see new demands and requests
to amend existing contractual relationships. Software vendors can
expect customers to request reporting capabilities that meet
Regulation AB requirements. The larger customers of software
providers will likely seek to include in the applicable software
license agreements representations and warranties regarding the
accuracy of the reporting capabilities of software products used in
tracking loan performance. In some instances, the need for
increased control may result in some originators exploring the
possibility of bringing servicing functions in-house; other
originators may seek to outsource the reporting requirements to
vendors with the proven capability to perform this function.
For more information, visit www.sec.gov.
