SEC Tweaks Its Asset-Backed Securities Plan Amid Privacy Concerns

U.S. regulators released a scaled-back proposal on Tuesday that seeks to soothe industry concerns over a plan to force issuers of asset-backed securities to disclose sensitive loan-level data to investors.

The Securities and Exchange Commission had been poised to vote on the new asset-backed disclosure rules earlier this month, but abruptly yanked it from the public agenda with little explanation.

On Tuesday, the reasons for the delay became clear after SEC staff released a 19-page memo that lays out a new and less- onerous disclosure alternative that aims to strike a balance between investor protection and privacy.

"Balancing privacy protections on consumer loans with the need for disclosing more loan level data to investors continues to be an extremely thorny set of issues for the SEC," said Tom Deutsch, executive director of the American Securitization Forum, in response to the SEC's revamped proposal.

The SEC wants issuers to provide greater information about the quality of loans and other assets underlying securities, after many investors were burned during the financial crisis by financial products tied to bad mortgages.

Under the prior proposal, the SEC wanted to require asset-backed issuers to file public financial reports containing information such as the geographic locations, credit scores and incomes and debt loads of borrowers.

In the proposal released on Tuesday, the SEC is seeking comments on an alternative that would require asset-backed issuers to make such asset-level data available to investors on their websites in a less public fashion.

This approach, the SEC said, "would enable issuers to address privacy concerns associated with such disclosures, including through restricting access to potentially sensitive information."

A copy the SEC's memo laying out an alternative approach to asset-backed disclosures can be found here:

The proposed loan-level disclosures are just one part of a much broader plan by the SEC to beef up investor protections in the market.

Once adopted, it will likely mark the biggest regulatory overhaul of the asset-backed securities market since the 2007-2009 financial crisis.

The SEC has been working on rules governing disclosures and sales practices for asset-backed securities for more than three years, after investors suffered major losses on soured mortgages.

In addition to requiring more disclosure about loan quality, the SEC's plan also requires ABS issuers to conduct more due diligence before they can take advantage of a speedier registration designed to avoid delays by letting them raise capital through multiple sales, without waiting for SEC approval each time.

Asset-backed securities are comprised of bundled loans, such as mortgages, student loans or auto loans.

The loans are often packaged by risk level, with holders of low-risk loans like 30-year-fixed mortgages getting paid first, and investors in high-risk assets such as subprime mortgages paid afterward.

During the crisis, however, many investors were unaware of the risks posed by subprime mortgages, which have floating interest rates that automatically reset.

When the rates went up, many homeowners were unable to afford the higher payments and were forced into foreclosure, leaving many investors in asset-backed securities holding the bag.

Although auto makers and banks still rely on the ABS market for funding, it took a dive during the crisis and has yet to recover.

(By Sarah N. Lynch)