The Securities and Exchange Commission is likely to issue the long-awaited final ruling of Regulation AB II at an open meeting in February, according to former chairman Christopher Cox.
Cox, who is now a partner at Bingham McCutchen, told participants at ABS Vegas that the securitization industry should expect “improvements” from the reporting and disclosure rules that were re-proposed in 2011.
In particular, Cox said, the controversial waterfall program, which would require deal sponsors to disclose detailed information about individual assets in a pool of collateral, will be left out and likely re-proposed as a separate rule further down the road.
This loan-level disclosure is expected to be onerous, as ABS issuers would be required to create and file an interactive payment waterfall computer program that would allow investors to vary underlying pool performance assumptions, in order to better understand the allocation of cash flows in the ABS transaction.
“As the SEC is hyper-conservative when it comes to technology, I expect this proposal will die of its own weight,” he said.
Cox, who left the SEC in 2009, also expects regulators to take a more “relaxed” approach to requirements that securitizers retain at least 5% the risk of any loan they securitize.
The exception to this rule for loans defined as “qualified residential mortgages” is likely to be broad, rather than narrow, he said.
In September 2013, the SEC and other regulators proposed a broad definition that includes loans with no down payment. But the proposal also contained an alternative definition that was much narrower.
While handicapping the final version of the rule is difficult the Commission appears to be split 2:2, giving current Chairman Mary Jo White the swing vote -- Cox expects the QRM rule will be “relaxed” to avoid stifling the mortgage market.
