Originally published July 23, 2009
Earlier this week, the Obama Administration released legislative language attached as Exhibit A to this Memo proposing changes to laws affecting asset-backed securities ("ABS").1 The proposed legislation is the Administration's follow-up to its June 17, 2009 release of recommendations for reform of our financial regulatory system (the "Proposal")2, which we described in our clients and friends memorandum summarizing the Proposal3 and our clients and friends memorandum summarizing the Proposal's impact on the securitization markets4.
The key features of the proposed legislation include:
A regulatory mandate to impose a minimum of 5% credit risk retention by securitizers (no hedging allowed) for such period of time required by the applicable regulators; A requirement that the risk retention requirements apply to bank and non-bank securitizers; A definition of "securitizer" that includes issuers and underwriters of ABS; Continued periodic reporting under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), by issuers of ABS even after the number of registered holders falls below 300, at least for such period of time and under such conditions prescribed by the Securities and Exchange Commission (the "SEC"); A mandate for SEC regulations requiring (1) detailed disclosures regarding the assets underlying ABS (including loan-level detail), (2) disclosure of information identifying loan brokers and originators, the nature and extent of their compensation and the amount of risk retained by the originator or securitizer and (3) standardization of the format of data provided by issuers; A mandate for SEC regulations as to the use of representations and warranties, requiring (1) rating agencies to analyze representations, warranties and enforcement mechanisms of ABS offerings in rating agency reports, and (2) disclosure in ABS offerings as to historical repurchases by originators; and Repeal of Section 4(5) under the Securities Act of 1933, as amended (the "Securities Act"), which exempts offers and sales of mortgage notes from the registration requirements under the Securities Act. The proposed legislation does not address certain matters addressed in the Proposal: There are no proposed changes to accounting principles relating to gain on sale or consolidation; and There is no required linking of compensation of loan brokers, originators and ABS deal participants to the performance of...