Regulators closed the barn door Wednesday on a horse that galloped away two years ago.
The Securities and Exchange Commission proposed new rules that will force issuers of asset-backed securities – bonds backed by home mortgages or student loans or credit card receivables, for instance – to review the underlying assets and disclose the findings of the review to investors.
The rules are aimed at preventing a recurrence of one of the major abuses of the housing bubble – the Wall Street practice of bundling good mortgages together with various cats and dogs, and selling the resulting mishmash to pension funds and the like as supposedly high-quality bonds.
The realization that supposedly good securitized bonds were going bad helped fuel the credit crisis starting in 2007, as investors backed away from asset-backed securities of all stripes, causing a major source of financing to consumers and industry to collapse.
The SEC’s proposal would prevent abuses by giving investors more information about the loans that back the bonds. This, the agency hopes, will help to restore confidence in the ABS markets.
The SEC says issuers will be able to hire third parties to conduct the reviews, but the reviewers will have to agree to accept potential expert liability under the federal securities laws.
A provision of the Dodd Frank Act enacted in July made the credit rating agencies liable as experts – prompting the agencies to say they wouldn’t rate bonds under those circumstances. The SEC agreed to study that issue.