Implementation of Securitization Regulatory Reform

Abstract

This panel was held on February 10 at the ABS Vegas 2015 Conference. This article summarizes topics discussed by the panel including implications of the “high-quality securitization” (HQS) standard proposed by European regulators, possible amendment of Regulation AB II to require asset-level disclosure for additional asset types, shelf-eligibility requirements in Reg AB II, dispute-resolution provisions in Reg AB II concerning breaches of warranty and other matters, and third-party due diligence reporting requirements in the new NRSRO (nationally recognized statistical rating organization) rules. Policy makers in Europe are hoping that developing a HQS label can mitigate some of the financial crisis stigma associated with securitization and allow for greater confidence in the market. But a key concern in the United States regarding a HQS framework is its potential “Scarlet Letter” effect, whereby deals that don’t receive the HQS label would, regardless of their actual quality or liquidity, necessarily become far less liquid. Another concern is that different regulatory treatment of HQS across jurisdictions could make it far more difficult to carry out simultaneous offerings of HQS in multiple jurisdictions. In the asset-level disclosure requirements in Reg AB II, regulators have attempted to balance investors' need for granular borrower and asset-level data with privacy concerns of issuers and obligors. Open questions related to the implementation of Reg AB II include whether dispute-resolution procedures should be pre-agreed and disclosed in the prospectus and the role of the asset representations reviewer for both mortgage and non-mortgage asset classes. Questions concerning the due diligence reporting requirements in the new NRSRO rules include the definition of “due diligence services,” who would be considered due diligence providers, and the scope of applicability.