SEC Proposes Private MBS Issuer Rule

The Securities and Exchange Commission is proposing that private issuers of mortgage-backed securities retain 5% of the credit risk when conducting an expedited sale or shelf offering. Issuers would no longer need to get an investment grade rating. The SEC commissioners voted 5-0 to issue the proposed changes to its asset-backed securities rules for a 90-day comment period. As proposed, "the ABS sponsor would hold 5% of each class of asset-backed securities and not hedge those holdings," SEC said. In addition, the issuer's chief executive must certify that the assets have characteristics that provide a reasonable basis to believe they will produce cash flows as described in the prospectus. SEC chairman Mary Schapiro said the changes would increase investor protections and "better alignment of the interests of issuers and investors through a retention or 'skin in the game' requirement." But commissioner Kathleen Casey warned that the 5% risk retention requirement would create a permanent competitive advantage for Ginnie Mae, Fannie Mae and Freddie Mac MBS, which are exempt from SEC ABS rules. The SEC proposal also requires issuers to provide computer-readable loan-level data to investors and the SEC five days before the first sale in an offering. Issuers would be expected to update this loan level data on an ongoing basis if the proposal is adopted and finalized later this year.