SEC Stiffens Rules on Loan-Backed Securities

SEC Adopts Rules on Loan-Backed Securities
Mandel Ngan, AFP/Getty ImagesSecurities and Exchange Commission Chair Mary Jo White
By MARCY GORDON

WASHINGTON -- Financial firms that sell securities backed by loans, such as the kind that fueled the 2008 financial crisis, will have to give investors details on borrowers' credit record and income under action taken Wednesday by federal regulators.

The Securities and Exchange Commission adopted the rules for securities linked to mortgages and auto loans on a 5-0 vote.

The commissioners also imposed new conflict-of-interest rules on the agencies that rate the debt of companies, governments and issues of securities. That vote split 3-2 along party lines, with the two Republican commissioners opposing adoption of the rules.

Home mortgages bundled into securities and sold on Wall Street soured after the housing bubble burst in 2007, losing billions in value. The vast sales of risky securities ignited the crisis that plunged the economy into the deepest recession since the Great Depression and brought a taxpayer bailout of banks.

These reforms will make a real difference to investors and to our financial markets.

In requiring sellers of the securities to provide information on borrowers' credit and income, the aim is to enable investors to better assess the risks of the loans underlying the securities.

"These reforms will make a real difference to investors and to our financial markets," SEC Chair Mary Jo White said before the vote.

A recent report by the Federal Reserve Bank of New York showed that U.S. auto loans jumped to the highest level in eight years this spring, fueled by a big increase in lending to risky borrowers. The Fed also said that loans to borrowers with weak credit, known as subprime loans, continue to make up a smaller proportion of total auto loans than before the recession.

Still, the rapid increase in subprime auto lending has raised concerns among federal regulators in recent months that it could set off a wave of defaults such as occurred in the mortgage market collapse. Because auto loans are packaged into securities, an increase in auto loan defaults could be amplified.

The new rules on so-called asset-backed securities and credit rating agencies were called for under the sweeping financial overhaul law enacted in 2010 in response to the financial meltdown. The rules take effect in 60 days.

A number of big banks, including JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C) and Goldman Sachs (GS), have been accused by the government of abuses in sales of mortgage securities in the years leading up to the crisis. Together, they have paid hundreds of millions in penalties to settle civil charges brought by the SEC, which accused them of deceiving investors about the quality of the securities they sold.

In recent months, the Justice Department and state regulators have reached multibillion-dollar civil settlements over mortgage securities with JPMorgan, Bank of America and Citigroup.

New Rules for Credit-Rating Agencies

The new rules require credit rating agencies to report to the SEC on their financial safeguards to ensure that their ratings are determined through a fair process. The agencies' sales people will be barred from participating in the ratings process. And agencies will have to review and potentially revise their ratings in cases where an employee was later hired by a company he or she rated.

The rating agencies are key financial gatekeepers. Their ratings can affect a company's ability to raise or borrow money and also can influence how much investors pay for securities. Critics say the agencies have a built-in conflict of interest because they are paid by the same companies they rate. The three big agencies -- Moody's, Standard & Poor's and Fitch -- were widely criticized for giving low-risk ratings to the risky mortgage securities being sold ahead of the crisis, as they reaped lucrative fees. Investigations by a Senate panel and a congressionally appointed independent commission found that the three agencies contributed to the crisis by awarding high ratings to securities based on subprime mortgages.

The three big agencies together account for nearly 95 percent of the ratings market. Several other smaller rating agencies are officially recognized by the SEC.

A key problem is that companies choose which firms rate them and then pay for those ratings, critics say. It's like having a pitcher choose the umpire for a baseball game, they contend, and it puts pressure on the agencies to award better ratings in order to secure repeat business.

Critics say a better solution would be to create a government board that randomly assigns agencies to rate companies. Congress debated that idea, but ultimately decided not to direct regulators to adopt such rules. Instead, lawmakers asked the SEC to study the idea.



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Gumby

What the SEC ought to do is to require brokers to warn all traders that margin stocks are fodder for short sellers!

August 28 2014 at 2:06 PM Report abuse rate up rate down Reply
Wayne Dawson

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August 28 2014 at 2:53 AM Report abuse rate up rate down Reply
kitharris1

so are we now going to have to bail the banks out for selling packaged auto loans that are no good? i suggest this time, let's bail out the people stuck with these securities and make the banks that put them together pay for it. i don't like to have money taken from investors then repaid to the government via fines. it seems the american tax payer always pays the bill!! the vote was 5-0 for credit and income of the borrowers to be disclosed. the other vote was how the ratings agencies would be chosen to evaluate said loans..

August 27 2014 at 5:55 PM Report abuse rate up rate down Reply
morphiss7

Hahahahahahahahaha what a joke ! Just put down anything on that application, we are gonna sell it anyway ! No ones gonna check ! Definitely not the inept SEC !

August 27 2014 at 5:00 PM Report abuse rate up rate down Reply
kerberusii

In the past in financial regulation, certain fixed rules applied, like "know your customer:", a usury rate and a gold standard. Antitrrust too, and criminals went to jail even if it was only for "tax evasion". No lawyers with camera persona were to be found.

The purpose was elementary, to protect against human nature and to lesson opportunity for the enablers in the field to "lie, steal and cheat, from every one they meet".

Since LBJ, Nixon et al ad tempora nunc, the political establishment and the American voting populace has disposed of such governing agents.

All deserve credit for the libertine, not liberal, days of plunder that exist today in the financial and political spheres.

Nature excels in curbing excess and the current excess in the two areas will be curbed sooner or later and all must pay and have cake to eat.

August 27 2014 at 4:41 PM Report abuse rate up rate down Reply
justmyopnion

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C-span -- June 17, 2014 - Economic Growth - Sarah Bloom Raskin -- treasury.gov - note: the IRS participates in the ( OPM ) Federal Employees Health Benefits Program (FEHB). The Largest RETIREMENT Savings Plan ( OPM FEHB Health Insurance Program ) in the U.S.A. with 1.8 million FEDERAL EMPLOYEE [ INDIVIDUAL ] contributiors, treated as a 'TRUST ' Fund, exempt from taxation ( Tax Reform Act of 1986 Section 1147 Title 26 U.S.Code 7701 ( j ). THRIFT SAVINGS PLAN ( TSP ) G Fund ( Gov Securities investment fund ).
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"Shadow banking, as usually defined, comprises a diverse set of institutions and markets that, collectively, carry out traditional banking functions--but do so outside, or in ways only loosely linked to, the traditional system of regulated depository institutions. Shadow banking has grown in importance to rival traditional depository banking and was a primary factor in the subprime mortgage crisis of 2007-2008 and global recession that followed.
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Alternative DISPUTE RESOLUTION (ADR) (also known as external dispute resolution in some countries, such as Australia [1]) includes dispute resolution processes and techniques that act as a means for disagreeing parties [ fully launched in 1999 - denial of covered claims _ Federal hmo Hospital Insurance Fraud _ allowing patient dumping, and allowing illegal billing defrauded Retired OPM FEHB beneficiaries, to force illegal HCFA|CMS State medicaid hmo kickback conversion - eligibility poor - anti trust violation ] to a formal court hearing or litigation.
ADR http://www.pacourts.us/NR/rdonlyres/3859D3F1-70EB-493E-9837-9D5F59E588A2/0/PennsylvaniaPublicHealthLawBenchBook.pdf - are ways and methods of resolving disputes OUTSIDE the JUDICIAL Process (formal litigation – court). Criminal denial of civil and criminal rights for due process of *United States* _ Laws, Rules and Regulations T18CFR1001CRIME.
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Money laundering occurs when criminals disguise proceeds from criminal activities -[ OPM FEHB _ HMO Hospital Insurance Fraud and illegal CMS State Medicaid _ HMO kickback conversion: eligibility poor - ADR fully launched in 1999 http://www.michigan.gov/documents/HMO_Complaint_Informationa_158401_7.htm, unjust enrichment for the health insurance industry / anti trust violation ]- as legitimate funds. -- From 2000 to 2007, the median earnings of Michigan workers increased 5 percent, from $25,910 to $27,096. During that time [ illegal ] ANNUAL health insurance premiums for Michigan working families rose 17 times faster than median earnings -- FORCED POVERTY - causing U.S. Citizens to loose their Lives, HOMES and other personal property.
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Subj: SEC Division of Enforcement Confirmation Reply
Date: 3/22/2006 9:23:48 AM Eastern Standard Time
From: enforcement@sec.gov
To: LawISAmootIssue@aol.com
Sent from the Internet (Details)
Dear Sir or Madam:
Thank you for your recent e-mail / Michigan Attorney General looting the Retired OPM FEHB Trust Fund Account http://www.michigan.gov/documents/HMO_Complaint_Informationa_158401_7.htm /ADR / allowing Federal HMO Hospital Insurance Fraud, Patient Dumping and illegal billing, to force illegal State Medicaid HMO Kickback conversion ] to the group electronic mailbox of the Division of Enforcement at the United States Securities and Exchange Commission in Washington, D.C. We appreciate your taking the time to write to us. This automated response confirms that the Division of Enforcement has received your e-mail. You can rest assured that an attorney in the Office of Internet Enforcement will review your e-mail PROMPTLY.

August 27 2014 at 3:22 PM Report abuse rate up rate down Reply