In transaction agreements that govern a securitization, issuers or originators of asset-backed securities, or ABS, typically make “representations and warranties” about the characteristics and the quality of loans included in a securitization. If a loan does not comply with the representation or warranty, an ABS issuer or lender can be required to repurchase the loan from the pool or replace it with a substitute asset.
According to the SEC, many investors and other transaction parties have questioned whether the loans in the bundle meet the characteristics specified by the representations and warranties, and have been seeking to enforce repurchase provisions. The Dodd-Frank Wall Street Reform and Consumer Protection Act imposes new disclosure obligations about the representations, warranties and repurchase history so that investors may identify originators with clear underwriting deficiencies.
Section 943 of the Dodd-Frank Act requires the SEC to prescribe regulations on the use of representations and warranties in the market for SEC securities. The SEC has approved final rules to implement Section 943.
Disclosure of Repurchase History on New Form ABS-15G
The final rules require ABS issuers to file with the SEC, in tabular format, the history of the requests they received and repurchases they made relating to their outstanding ABS. The table will provide comparable disclosures so that investors may identify originators with clear underwriting deficiencies. Specifically, issuers are required to disclose the last three years of repurchase history in an initial filing on EDGAR due by Feb. 14, 2012.
After the initial filing, the ABS issuer is required to file updated information on a quarterly basis, including:
- Repurchase history for all outstanding ABS (regardless of whether the securities were offered in a transaction registered with the SEC) if the underlying transaction agreements include a covenant to repurchase or replace a pool asset.
- History of all fulfilled and unfulfilled repurchase requests, including investor demands upon a trustee and pending requests.
- The disclosure requirements will apply to issuers of unregistered ABS, including municipal ABS. However, municipal ABS are provided an additional three-year phase-in period and will be permitted to provide their information on EMMA, the Municipal Securities Rulemaking Board’s centralized public database for information about municipal securities issuers and offerings.
Disclosure of Repurchase History in Prospectuses and Ongoing Reports
The final rules also provide investors with ready access to the most current information regarding an issuer’s repurchase history by requiring an issuer in a registered ABS offering to include — in the body of a prospectus — repurchase history for the last three years for ABS of the same asset class as the securities being registered. This information must be included in registered offerings in a phase-in period commencing on Feb. 14, 2012. In its ongoing reports, an issuer will be required to provide updated repurchase history for the particular, related asset pool beginning with distribution reports required to be filed on Form 10-D after Dec. 31, 2011.
Disclosure in Any Report Accompanying a Credit Rating by an NRSRO
As required by Section 943(1) of the Dodd-Frank Act, the final rules also require Nationally Recognized Statistical Rating Organizations, or (NRSROs, to provide a description of the representations, warranties and enforcement mechanisms available to investors in an ABS offering. NRSROs will be required to disclose how the representations, warranties, and enforcement mechanisms differ from those of similar ABS. NRSROs will be required to make the disclosures in any report accompanying a credit rating, including in presale reports that are distributed prior to the sale of the security. NRSROs will be required to provide this information for any report issued on or after six months after the effective date of the rules.