SEC Seeks Input on Modernizing RMBS Disclosure Requirements and Enhancements to ABS Registration to Revitalize Public Securitization Market

The Securities and Exchange Commission (SEC) has published a concept release inviting public comment on potential reforms to disclosure requirements for residential mortgage-backed securities (RMBS) in the registered asset-backed securities (ABS) market. The initiative aims to address longstanding concerns that current rules, particularly those under Item 1125 of Regulation AB, have stifled public issuance of private-label RMBS by imposing overly burdensome asset-level data requirements (including providing protected private information) as well as whether the public disclosure framework of Regulation AB prevents dissemination of important borrower-level information to investors. The SEC is also considering whether to harmonize the definition of “asset-backed security” in Regulation AB with the broader Securities Exchange Act of 1934 (Exchange Act) definition.

History and Background of RMBS Disclosure Requirements

The SEC adopted Regulation AB II in 2014, which, among other things, required issuers of registered RMBS to provide standardized, asset-level disclosures on hundreds of data points for each underlying mortgage. These requirements were intended to enable investors to perform independent due diligence and restore confidence in the market. However, since the adoption of these rules, no registered private-label RMBS has been issued, with agency-backed and unregistered (Rule 144A) deals dominating the landscape. In October 2019, the SEC under Chairman Jay Clayton solicited market feedback on how to address the issues that created the absence of registered private-label RMBS, but feedback was limited and the effort appeared to have stalled with the COVID-19 pandemic and subsequent administration change.

Focus on RMBS Disclosure Reform

The SEC’s current review is centered on whether the asset-level disclosure requirements for RMBS are too onerous and whether they have become a key barrier to public issuance. Market participants have argued that the sheer number and complexity of required data fields—up to 270 per mortgage—can be costly and difficult to collect and also requires the disclosure of information that is impossible to provide, especially for seasoned or legacy loans. The SEC is seeking input on which data points remain essential for investor due diligence, which could be streamlined or eliminated, and whether a more flexible “provide-or-explain” regime could be adopted. This approach would allow issuers to omit certain data fields if they explain why the information is unavailable.

Balancing Transparency and Privacy

Meanwhile, market practice for privately issued RMBS often includes the sharing of sensitive borrower and property data, such as five-digit ZIP codes, credit scores, and income information. While these data points are valuable for risk analysis, they also raise significant privacy and re-identification risks. The SEC proposes to explore alternatives, including the use of issuer-sponsored, permissioned websites to share sensitive data with certain investors—an approach already common in the Rule 144A RMBS market. This could help balance the need for transparency with privacy protections.

Changes to the Definition of Asset-Backed Security

The SEC’s adoption of Regulation AB in 2004 included a definition of “asset-backed security” that was intended to capture the securities and offerings to which the registration, disclosure and reporting requirements under the Securities Act of 1933 and the Exchange Act would apply.

An “asset-backed security” is defined under Regulation AB as a “security that is primarily serviced by the cash flows of a discrete pool of receivables or other financial assets, either fixed or revolving, that by their terms convert into cash within a finite time period, plus any rights or other assets designed to assure the servicing or timely distributions of proceeds to the security holders…” Because of the limitations of this defined term, assets classes and structures such as CLOs, series trusts and synthetic securitizations are not captured and so the disclosure regime and use of Forms SF-1 and SF-3 are not available.

As part of the litany of laws, rules, and regulations adopted as a result of the global financial crisis of 2008, the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Exchange Act to include a separate, broader definition of “asset-backed security”  Under the Exchange Act definition, an “asset-backed security” is defined as “a fixed income or other security  collateralized by any type of self-liquidating financial asset (including a  loan, a lease, a mortgage, or a secured or unsecured receivable) that allows the holder of the security to receive payments that depend primarily on cash flow from the asset…” Managed pool, series and master trust structures are expressly captured by this definition. The Exchange Act definition is used primarily in various rules adopted by regulators in response to risks and practices identified during the global financial crisis, including the credit risk retention rules, Rule 15ga-1 regarding repurchase and replacements, Rule 15ga-2 regarding third-party due diligence reports, and the SEC’s recently effective Rule 192 regarding certain conflicts of interest.

The SEC recognizes that securitization transactions have become more diverse and complex, both structurally and in the types of assets that are securitized. As a result, transactions and structures that do not meet the requirements of an “asset-backed security” under Regulation AB are not able to take advantage of the SEC’s disclosure regime or utilize Form SF-1 (absent staff no-action letters or guidance permitting exceptions) or Form SF-3 to issue publicly registered securities. The SEC also believes the competing definitions in Regulation AB and Exchange Act has caused market confusion with respect to the differences, overlap, and purpose of each definition. As a result, the SEC is seeking comment about whether it should amend the definition in Regulation AB to better align with the Exchange Act definition, and broaden the types of assets and transaction structures that can facilitate publicly registered transactions and use the SEC’s disclosure and reporting regime.

The SEC is also considering potential updates to other related definitions and/or providing additional interpretive guidance to clarify existing terms, including the terms “sponsor,” “originator,” “depositor,” and “issuing entity.”

Next Steps

Comments are due 60 days after publication in the Federal Register. In particular, the SEC asked for the public’s input with respect to (i) ways to reduce barriers to entering the ABS market, (ii) ways to expand registration, and (iii) ways to increase liquidity in the ABS market in general. Among other things, we would expect the SEC to use the feedback received on this concept release to develop and propose rules related to those topics.