The SEC on Wednesday moved to implement a financial rule overhaul provision that would require Wall Street to review loans in asset-backed securities amid criticism that the proposal falls short of protecting investors.
Securities and Exchange Commission members voted 4-1 to consider a requirement that underwriters scrutinize the mortgages, credit card debt and auto loans packaged into bonds. The Dodd-Frank law enacted in July required the SEC to propose the rule after banks were faulted for selling debt to investors without concern for whether the underlying loans would go bad.
Public pension funds along with banks and insurance companies lost billions of dollars investing in bonds made up of risky home loans after credit markets froze in 2008.
“During the financial crisis, investors in the securitization market suffered significant losses,” SEC Chairwoman Mary Schapiro said. In response, lawmakers and regulators are seeking to “provide investors with better information about the loans backing (securities).”
SEC Commissioner Luis Aguilar voted against the agency's proposal, saying it gives securities firms too much latitude to conduct due diligence instead of requiring specific “standards or expectations.”
“This proposal will frustrate investor protection by endorsing an anything-goes approach for issuers,” Mr. Aguilar said. “The requirement to propose a minimum standard was specifically and consciously dismissed.”
The SEC, which didn't include specific requirements on how reviews must be conducted, plans to solicit public comment on the matter. Ms. Schapiro said it's “likely” the SEC will implement guidelines on how examinations must be performed before the agency approves a final rule.
“I don't think we have endorsed an anything-goes attitude by any means,” she said.
SEC Commissioner Elisse Walter, who voted for the proposal, said she favors specific requirements for loan reviews. A Dodd-Frank requirement that the SEC approve a rule within 180 days of the law's enactment put the agency under “tremendous time pressure,” which is one reason why guidelines were left out of the proposal, she said.
The rule allows underwriters to examine loans themselves or hire an independent firm to conduct reviews. It stipulates that the level and type of review can vary depending on the “nature of the assets being securitized,” the SEC said in a statement.
Securities firms would be required to disclose how they performed reviews, as well as findings and conclusions. They would also have to reveal information about loans that didn't adhere to “disclosed underwriting criteria,” the SEC said.
The SEC will seek feedback from investors and securities firms before the agency's staff makes any changes. The rule requires a second vote by SEC commissioners to become binding.