Sellers of bonds backed by mortgages and auto loans would have to give investors details including the borrowers’ income and credit scores under rules the U.S. Securities and Exchange Commission is poised to consider this week, according to two people briefed on the plan.
The SEC will vote Aug. 27 on the final rules, which were mandated by the Dodd-Frank Act after investors were burned by soured debt sold by Wall Street before the 2008 credit crisis. The biggest sellers of asset-backed securities include Bank of America Corp., JPMorgan Chase & Co., Deutsche Bank AG, Citigroup Inc. and Goldman Sachs Group Inc.
Securities backed by loans for houses, autos and commercial real estate would fall under the rules, which require more extensive disclosure to bond buyers than the SEC’s initial 2010 plan, said the people, speaking on condition of anonymity because the details aren’t public. The agency’s move comes amid a surge in subprime auto loans that are being fed into securities, a business being probed by U.S. prosecutors.
“Prior to the crisis, many investors were not as diligent as they should have been, and that was part of the problem,” said Jeff Mahoney, general counsel of the Council of Institutional Investors, whose members include the country’s largest public pension funds. “However, they also pointed out that even if they wanted to be diligent, there was not much information they could get.”
SEC spokeswoman Gina Talamona declined to comment.
Dodd-Frank required the SEC to improve disclosures about loans packaged into bonds for investors who had relied on flawed credit ratings. The SEC requirements would extend to private sales of asset-backed securities, which historically have been exempted from reporting to the agency.
Bonds backed by student loans or business inventory purchases aren’t included. The SEC plans to complete rules for bonds based on those assets later, one of the people said.
Earlier this year, the agency suggested that bond issuers create and maintain restricted electronic repositories for the data. Firms including Deutsche Bank objected, saying they shouldn’t be responsible for policing use of the information under consumer-privacy laws. The rules indicate that instead, the SEC will provide access to the loan data, the person said.
Banks and privacy advocates have warned that if the data aren’t well-protected, identity thieves could fish for information to learn a borrower’s identity.
The SEC will have to monitor the dissemination of data so it isn’t obtained by brokers who sell personal information about consumers, said Pam Dixon, executive director of the World Privacy Forum. The regulator also should scotch its original idea of requiring that the data include reasons why a borrower fell behind on payments, including whether the person was ill or had gone through a divorce, she said.
“The first proposal was the most flawed proposal we had ever seen,” Dixon said. “It’s very important this data not become a new source for unregulated consumer scores about individuals.”
The new SEC requirements would apply to the $750 billion market for private mortgage-backed securities. The private market, which imploded in 2008, financed just one percent of new mortgages in 2013, according to a report last month by Goldman Sachs Group Inc.
The rules wouldn’t affect issuers of government-backed mortgage bonds, including Fannie Mae and Freddie Mac, which dominate the market. Those sellers provide information that helps investors judge borrowers’ ability to repay loans. The disclosures include states of residence, credit scores and debt-to-income ratio, but aren’t as extensive as the ones proposed by the SEC.
Sponsors of securities linked to auto loans haven’t disclosed details of individual loans in the past. Instead, investors typically received indicators showing the performance and quality of loans made during different months and years. Outstanding securitized auto debt stood at $168 billion through March, according to the Securities Industry and Financial Markets Association.
Industry groups, including auto-finance firms such as Ford Motor Credit Company LLC and General Motors Financial Company LLC, have previously opposed the SEC’s call for disclosure of loan-level data. “Even though there have been no material changes to disclosure practices specifically for Auto ABS, the Auto ABS markets continue to be robust and active,” a group of 17 auto lenders including Ford and GM wrote in August 2012.
In first proposing the rules four years ago, the SEC said it wanted to ensure debt sellers don’t avert new disclosure rules by using the private market. The crisis that followed wide-scale home-loan defaults threw cold water on the assumption “that sophisticated investors do not need the types of protections that come” with SEC rules, then-SEC Chairman Mary Schapiro said at the time.