MBA, Trade Groups Ask SEC to Amend Reg AB II Disclosure Requirements

The Mortgage Bankers Association and other industry trade groups sent a letter last week to the Securities and Exchange Commission, asking it to consider amendments to Reg AB II disclosure requirements that will help to restore the registered segment of the private-label securities market.

MBA; the American Bankers Association; the Housing Policy Council; and the Securities Industry and Financial Markets Association said such amendments would stem contraction of the PLS market and promote a diverse set of securitization options that foster engagement from a broader array of issuers and investors.

The letter comes in response to direction by SEC Chairman Jay Clayton, who asked the SEC to review asset-backed disclosure requirements adopted in the 2014 asset-backed securities amendments, known as “Reg AB II,” and for providing the public with an opportunity to comment.

The letter noted prior to the 2008 financial crisis, registered securitizations represented a substantial portion of the residential mortgage-backed securities market; contraction of PLS market in general, and the publicly registered portion of the RMBS market, in particular, is of concern to the associations’ members. 

“We believe that the long-term health and resilience of the mortgage market depends, in part, on maintaining a diverse set of securitization options that foster engagement from a broader array of issuers and investors,” the letter said. “This, in turn, reduces lender reliance on any single source of liquidity and ensures that borrowers are receiving the lowest interest rates available.”   

The letter said in light of initiatives underway by the Federal Housing Finance Agency and Consumer Financial Protection Bureau to address market imbalances caused by regulatory exemptions that advantage agency execution, the timing is right for the SEC to consider amendments to Reg AB II disclosure requirements that will help to restore the registered segment of the PLS market. 

“We recommend harmonization, to the greatest extent possible, of disclosures across all mortgage securitization types, beginning with alignment of registered deals under Reg AB II with the comprehensive disclosures currently used in private 144A transactions, a model that has proven to be acceptable to private issuers and investors alike,” the letter said. “If undertaken appropriately, we believe these changes will be a significant driver in fulfilling the SEC’s mission by both protecting investors and enabling capital formation for this important part of the residential mortgage finance system. We ultimately would like to see the agency MBS market achieve the same standard of disclosure.”

This past October, the SEC noted its registered RMBS have been “non-existent” since the Regulation AB amendments were finalized. “The stalled recovery suggests that there are entrenched market impediments that must be addressed,” the letter said. “Based on feedback from our members and other market participants, we believe that Reg AB II’s revised disclosure requirements are a major contributor to the lack of SEC-registered issuances. Additionally, over the course of the last decade, policymakers have imposed a number of significant legislative and regulatory changes on the residential mortgage market. Some of these changes created a competitive advantage for agency MBS, including expansion in the scope of eligible loans accepted into government-backed securitizations and additional GSE regulatory exemptions. In other words, a number of new regulatory mandates, stipulations, and limitations – with added operational requirements and costs – are applicable only to non-government backed loans.”

The letter noted other changes that have inhibited the PLS market:

–The GSE exemption (GSE Patch) from the CFPB Ability to Repay/Qualified Mortgage Rule, which granted Qualified Mortgage status to all GSE-eligible mortgages, creating a situation in which the majority of the market was confined to the GSE underwriting parameters, “an unfair advantage that undermined important market innovation, including critical advances in the mitigation, management and distribution” of risk. “Reforms to Reg AB II disclosure requirements alone may or may not prove to be sufficient to generate a robust market for SEC-registered securities, but changes are an essential component necessary for such a market to develop,” the letter said.

–Since adoption of Reg AB II, lenders who have sought to issue private-label RMBS have chosen to pursue non-registered issuances under SEC Rule 144A, which allows for commercially reasonable negotiated agreements between the issuer and investor where material disclosures are made, but prescriptive loan-level disclosure requirements are not mandated by regulation.  The letter noted while Rule 144A offerings provide an excellent option for some issuers and investors, 144A offerings limit the pool of investors available to purchase exempt securities, which leaves private capital that could be deployed to support residential housing through RMBS purchases, such as that of some institutional investors, on the sidelines.

The letter recommended the SEC look to industry standards, such as MISMO (which is owned by MBA). “Recent initiatives being taken by FHFA and the CFPB, in conjunction with your letter to the industry, have energized MISMO members to focus on the development of standards to support a revived private securitization market,” the letter said. “In fact, the MISMO Private Label RMBS Valuation Development Workgroup has already analyzed the data fields that are used by rating agencies when evaluating RMBS, many of which overlap with data fields required by Reg AB II. Through this process, the PL DWG has identified several asset-level data points which could be better aligned to fit with industry practice.”

The letter said aligning disclosure requirements for SEC-registered securitizations with the disclosures used for government-backed and 144A issuances “will provide standardization and consistency across securitization options and is essential for SEC-registered RMBS offerings to occur. We also believe a provide-or-explain regime combined with explicit clarification that Rule 409 is available for issuers of registered RMBS would be beneficial to account for instances in which an issuer is unable to reasonably obtain, or depend on the accuracy of, specific data.”

The letter also called on the SEC to consider modifying its approach to definitions provided for required data fields, believing it would be more prudent for the SEC to establish flexibility in its rules to allow for the industry to establish data field definitions through MISMO, and for the SEC to accept those changes through staff guidance to avoid the risk of certain definitions becoming outdated or obsolete. “This approach will allow MISMO, in coordination with the SEC, to adjust definitions over time as technology advancements improve the collection, accuracy and delivery mechanisms of data to issuers and investors,” the letter said.