According to a
report, the final disclosure rules for asset-backed bonds issuers
are to be announced by the U.S. Securities and Exchange Commission
(SEC), later this week on Aug 27. As per the proposed rules, which
were commanded by the Dodd-Frank Act, sellers of bonds backed by
mortgages and auto loans will be bound to provide investors full
information including the borrowers' income and credit scores.
Notably, for investors, asset-backed securities act as an
alternative to corporate debt.
Implementation of such rules commensurate from the bad loans sold
by Wall Street before the 2008 financial crisis. Bank of America
), JPMorgan Chase & Co. (
), Deutsche Bank AG (
), Citigroup Inc. (
) and Goldman Sachs Group Inc. (
) are among the largest sellers of asset-backed securities.
Rising subprime auto loans, which are packaged into securities,
drew the attention of U.S. regulators to investigate such business.
Under the purview of tougher disclosure rules, the SEC includes
securities backed by loans for houses, autos and commercial real
estate. However, complete rules for bonds backed by student loans
or business inventory purchases will be considered later by the
According to officials, investors require due diligence before
investing in asset-backed securities. The SEC rules would include
more informative disclosures to be provided to investors about
loans which are bundled into bonds by issuers so that the bond
buyers are not driven by faulty credit ratings. Notably, the agency
requirements would also include private sales of asset-backed
securities, which were prior exempted from reporting to the SEC.
The private mortgage-backed securities market worth $750 billion
will be under the new SEC requirements. Notably, the private market
impacted by the financial crisis of 2008, financed only 1% of new
mortgagees in 2013.
However, issuers of government-backed mortgage bonds, including
Fannie Mae (
) and Freddie Mac (
) would not be affected by the new rules. These sellers already
provide investors with information related to borrowers' ability
for repaying loans. Such issuers' disclosures include states of
residence, credit scores and debt-to-income ratio, though these are
not as tough as proposed by the SEC.
Asset-backed securities lose value if the homeowners, car buyers or
credit-card users default on their debts. During the financial
crisis of 2008, such defaults led financial institutions and
investors with bad securities worth billions of dollars. Therefore,
to combat such crisis, SEC is set to finalize a new set of
disclosure rules for such asset-backed bonds issuers so that
investors are safeguarded and fully abide by the risks underlying
in such securities.
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