12/17/2010

Auto Lenders Add Heat to Reg AB Protest

Auto lenders including Ford, General Motors, Nissan and Honda are putting increasing pressure on the SEC to ease back on proposed revisions to its Regulation AB.

The issuers, 16 in all, jointly contacted the agency in recent days about potential adjustments that would either make it easier to comply with the new Reg AB codes or allow them to sidestep certain aspects of the rules. They say that without the changes, securitization costs would rise to the point where some smaller players would be forced out of the market.

This actually marks the second incarnation of the lobbying effort, after an initial round of comments to the SEC gained little traction. The lenders are acting now largely out of a feeling that the

coming months will represent their final opportunity to sway the regulator.

The SEC's Reg AB revisions, released May 2, would tighten disclosure procedures for a range of issuers. While a number of aspects of the overhaul have met resistance from industry players, the changes are likely to be finalized by mid-2011 — with implementation following 90 days to one year after that.

The auto lenders' efforts are aimed at two measures in the new Reg AB draft that would affect all types of asset-backed bond deals. One is a high-profile risk-retention requirement under which issuers would need to retain a 5% stake in each of their securitizations. The other necessitates disclosure of additional collateral information to clients, along with the use of “waterfall-modeling” software that would allow issuers to project investor cashflows under various scenarios.

Even with the full-court press, however, auto lenders aren't confident the SEC will relent. “We're not optimistic they're going to listen, but we have to try if we intend to keep issuing,” one issuer said.

The case rests in part on the idea that captive and specialty auto lenders aren't as well equipped as large banks to adhere to the new version of Reg AB, known as Reg AB 2. “The SEC's one-size-fits all model doesn't work for us,” one issuer said.

The SEC's risk-retention rule dovetails with a mandate that the agency enact such a provision under the Dodd-Frank Act, along with separate FDIC “safe harbor” guidelines for depository institutions. The auto lenders, who interpret the measure to mean they would have to keep a 5% interest in each class of their securitizations, are arguing that they should have more wiggle room or even an exemption. Some say it's good enough that many issuers already hold onto large subordinate interests in their bond issues. If they had to retain senior paper as well, the thinking goes, securitization could become prohibitively expensive.

As for the added disclosure requirements, auto lenders — like players in some other asset classes — argue that public dissemination of information such as individual loan terms and borrowers' credit scores could give competitors too much insight into their businesses and might endanger customers' privacy. They also say it would be impossible to gather the needed data on all of their loans.

The waterfall-modeling measure would require issuers to use new software to forecast how bondholder payments might change under varying levels of loan defaults and prepayments. However, there are few vendors that offer such services, which can be costly. BNY Mellon is among those shops.

Why are the Reg AB rules of particular concern to auto lenders, as opposed to players in other asset classes? Auto lenders issue far more frequently, and often have to juggle hundreds of thousands of loans at a time.

Should the rules cause auto lenders to retreat from securitization, the impact on the broader asset-backed bond market could be considerable. There have been $53.9 billion of auto-loan bonds sold in the U.S. this year, accounting for more than 40% of the nation's overall asset-backed securities volume, according to Asset-Backed Alert's ABS Database. ?

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