Re: SEC Chairman’s Statement on Asset-Level Disclosure Requirements for Residential Mortgage-Backed Securities
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-1090
Dear Chairman Clayton:
On behalf of the American Bankers Association (“ABA”), the Housing Policy Council (“HPC”), the Mortgage Bankers Association (“MBA”), and the Securities Industry and Financial Markets Association (“SIFMA”) (collectively the “Associations”), we appreciate your leadership in directing the Securities and Exchange Commission (“SEC” or “Commission”) to review the asset-backed disclosure requirements adopted in the 2014 asset-backed securities (“ABS”) amendments (“Reg AB II”) and for providing the public with an opportunity to comment. The Associations’ members represent a large majority of interested parties involved in the residential mortgage-backed securities (“RMBS”) market, including originators, servicers, trust companies, investors, and technology vendors.
Historically, SEC-registered RMBS have been an important source of funding for mortgage originators, providing a valuable alternative to agency securities, backed by the Government-Sponsored Enterprises, Fannie Mae and Freddie Mac (“GSEs”), or Ginnie Mae. Prior to the 2008 financial crisis, registered securitizations represented a substantial portion of the RMBS market, as noted in your request for information. The contraction of the private-label securities (“PLS”) market in general, and the publicly-registered portion of the RMBS market, in particular, is of concern to our members. We believe that the long-term health and resilience of the mortgage market depends, in part, on maintaining a diverse set of securitization options that foster engagement from a broader array of issuers and investors. This, in turn, reduces lender reliance on any single source of liquidity and ensures that borrowers are receiving the lowest interest rates available.
Given the SEC’s mission to “protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation,”6 we commend you for identifying the new disclosure requirements established by the 2014 regulatory amendments as a possible constraint on market liquidity. In light of the initiatives underway by the Federal Housing Finance Agency (“FHFA”)7 and Consumer Financial Protection Bureau (“CFPB”)8 to address market imbalances caused by regulatory exemptions that advantage agency execution, the Associations believe the timing is right for the SEC to consider amendments to Reg AB II disclosure requirements that will help to restore the registered segment of the PLS market. We recommend harmonization, to the greatest extent possible, of disclosures across all mortgage securitization types, beginning with alignment of registered deals under Reg AB II with the comprehensive disclosures currently used in private 144A transactions, a model that has proven to be acceptable to private issuers and investors alike. If undertaken appropriately, we believe these changes will be a significant driver in fulfilling the SEC’s mission by both protecting investors and enabling capital formation for this important part of the residential mortgage finance system. We ultimately would like to see the agency MBS market achieve the same standard of disclosure.
As you referenced in your October 30, 2019 statement, SEC-registered RMBS have been non-existent since the Regulation AB amendments were finalized. The stalled recovery suggests that there are entrenched market impediments that must be addressed. Based on feedback from our members and other market participants, we believe that Reg AB II’s revised disclosure requirements are a major contributor to the lack of SEC-registered issuances. Additionally, over the course of the last decade, policymakers have imposed a number of significant legislative and regulatory changes on the residential mortgage market. Some of these changes created a competitive advantage for agency MBS, including expansion in the scope of eligible loans accepted into government-backed securitizations and additional GSE regulatory exemptions. In other words, a number of new regulatory mandates, stipulations, and limitations – with added operational requirements and costs – are applicable only to non-government backed loans.
The GSE exemption from the CFPB Ability to Repay/Qualified Mortgage Rule, for example, was a regulatory privilege that had a tremendous market impact. As a result of the “GSE Patch,” which granted Qualified Mortgage status to all GSE-eligible mortgages, the majority of the market was confined to the GSE underwriting parameters, an unfair advantage that undermined important market innovation, including critical advances in the mitigation, management, and distribution of risk. Collectively, the changes that have occurred, largely through government intervention, have, until recently, created a significant competitive disadvantage for private securitizations. Reforms to Reg AB II disclosure requirements alone may or may not prove to be sufficient to generate a robust market for SEC-registered securities, but changes are an essential component necessary for such a market to develop.
Since adoption of Reg AB II, lenders who have sought to issue private-label RMBS have chosen to pursue non-registered issuances under SEC Rule 144A, which allows for commercially reasonable negotiated agreements between the issuer and investor where material disclosures are made, but prescriptive loan-level disclosure requirements are not mandated by regulation. The flexibility to set the terms and conditions and associated pricing has offered private market participants the opportunity to assess the quality of the assets in the securities and the strength of their counterparties in ways that appropriately balance and minimize risk. These arrangements are an important component of the private market. While Rule 144A offerings provide an excellent option for some issuers and investors, 144A offerings limit the pool of investors available to purchase exempt securities, which leaves private capital that could be deployed to support residential housing through RMBS purchases, such as that of some institutional investors, on the sidelines.
While the negotiated arrangements of the 144A market result in a liability risk for 144A issuers that is lower than the strict liability standards and executive officer attestations required in SEC-registered RMBS, these latter features of the SEC-registered RMBS market are acceptable if the disclosure regime provides issuers with the confidence necessary to attest to the data included in those disclosures. In other words, the set of data fields must be relevant and meaningful for the assessment of risk and the definitions associated with those fields must be clear and unambiguous, to enable an issuer to be comfortable with taking on the nature and degree of liability that a registered offering carries. As we have seen in recent years, issuers do not have such comfort, registered RMBS have not been issued, and absent meaningful change to the existing disclosure requirements, a vibrant SEC-registered market will not develop.
To be clear, the Associations are not advocating for changes to the liability standards in existence for either exempt or non-exempt offerings. Rather, we advocate for registered RMBS disclosure requirements that are clearly defined and reasonably achievable.
Over the last several years, the 144A market for RMBS has gradually expanded through an iterative process; because there were no established data field disclosure requirements, issuers and investors worked together to determine the most appropriate set of data fields, based on the needs of investors and the reliability and consistency of data available to issuers. The consistency of disclosure format that has evolved and the regular oversubscription of transactions is a clear indication of the success of a market-driven solution. This organic development of appropriate disclosures represents a model for establishing and updating commonly-used data fields and is evidence that such a balance can be found for SEC-registered RMBS, as well. For this reason, the Associations believe the generally agreed-upon data fields found in 144A offerings are a natural starting point to use as a guidepost for SEC amendments to Reg AB II.
Since the adoption of Reg AB II, the Mortgage Industry Standards Maintenance Organization (“MISMO”) has gathered industry professionals to discuss the development of standards specific to the requirements outlined in Reg AB II. Recent initiatives being taken by FHFA and the CFPB, in conjunction with your letter to the industry, have energized MISMO members to focus on the development of standards to support a revived private securitization market.
In fact, the MISMO Private Label RMBS Valuation Development Workgroup (“PL DWG”) has already analyzed the data fields that are used by rating agencies when evaluating RMBS, many of which overlap with data fields required by Reg AB II. Through this process, the PL DWG has identified several asset-level data points which could be better aligned to fit with industry practice.
In response to recent developments, the Associations are working with MISMO to establish a formal Reg AB II working group and the Associations believe MISMO, as the preeminent industry data standard-setting body, would serve as the most effective vehicle for continuous refinement of data field definitions, as necessary. Therefore, we request that the SEC engage with MISMO to create and maintain the definitions for fields required by Reg AB II. This ongoing engagement will allow the data definitions to evolve with the entire industry’s input without becoming outdated in a rigid and difficult-to-change rule structure.
The Associations believe aligning disclosure requirements for SEC-registered securitizations with the disclosures used for government-backed and 144A issuances will provide standardization and consistency across securitization options and is essential for SEC-registered RMBS offerings to occur. We also believe a provide-or-explain regime combined with explicit clarification that Rule 409 is available for issuers of registered RMBS would be beneficial to account for instances in which an issuer is unable to reasonably obtain, or depend on the accuracy of, specific data.
We also recognize that the SEC and market participants would benefit from all parties being cognizant of the differences in data sets available and used for new originations relative to those available and used for seasoned loans. Issuers do not possess the same amount of data for seasoned loans and, barring any regulatory differences in acceptable data sets, issuers are unlikely to include seasoned loans in any new SEC-registered RMBS. If the SEC aligns the SEC-registered RMBS disclosure requirements with those of existing 144A RMBS issuances, and controls for the differences between new and seasoned loans, a provide-or-explain regime and safe harbor should be used sparingly as an exception and as a complement to, not a substitute for, meaningful reforms to Reg AB II.
As stated above, the Associations believe efforts to align Reg AB II with the disclosures used in the 144A market could be broadly supported by both the issuer and investor communities. While some market participants believe the disclosure requirements for SEC-registered securities should mirror the requirements associated with government-backed securities, the Associations believe that the increasingly active 144A market serves as evidence that revising the disclosure requirements in accordance with market forces is appropriate, and the SEC therefore should use the data fields for privately-backed offerings as its guidepost. As we have more fully detailed in the Appendix, this effort will require the elimination or modification of certain Reg AB II data fields. Note that these recommendations are intended for new origination issuances, not seasoned loan issuances for which less data is available. It would also entail adding certain data fields present in 144A deals but absent from Reg AB II. The presence of those data elements in 144A deals reflects an investor interest in the data and a demonstration that such data is available and reportable.
The Associations believe the SEC should also consider modifying its approach to the definitions provided for required data fields. As noted earlier, we believe it would be more prudent for the SEC to establish flexibility in its rules to allow for the industry to establish data field definitions through MISMO, and for the SEC to accept those changes through staff guidance to avoid the risk of certain definitions becoming outdated or obsolete. This approach will allow MISMO, in coordination with the SEC, to adjust definitions over time as technology advancements improve the collection, accuracy, and delivery mechanisms of data to issuers and investors.
Members of the Associations hold the privacy of borrower data as a top priority when conducting business, both because of the industry-wide commitment to serving borrowers responsibly, as well as the significant reputational, legal, and regulatory risks related to breaches or other unauthorized releases of such data. For these reasons, we believe strongly that what is published on the SEC’s EDGAR website and included in basic transaction disclosures should not include more than 3-digit ZIP codes, and exceptions must be available for instances in which an issuer, on behalf of a borrower or group of borrowers, determines it is necessary to limit public disclosure of the ZIP code to protect the identity or security of the borrower(s).
We do acknowledge that ZIP codes are a key variable in the analysis of mortgage credit risk, and we believe that a mechanism for investors to obtain this data must be available. In the alternative, risk analysis will be impaired, investor interest in registered RMBS will be lessened, and the economics of transactions will continue to favor 144A or other forms of execution outside of the registered markets. As several of the Associations highlighted in their 2014 comments to the SEC, RMBS investors demand asset-level data as part of their due diligence and ongoing valuations of portfolio risk. We continue to believe that the SEC should allow for a mechanism to deliver more granular loan details, including the full ZIP code, as well as other geographic information and sensitive data points, to investors of record. The 144A market has an established process that we believe could be leveraged for SEC-registered issuances, as well. In this process, the investor agrees to a “Click-Through” agreement which provides them access to the asset-level data (through a permissioned website or otherwise) in return for representations that the user will safeguard and limit the use and redistribution of the data. Revisions to Reg AB II should allow for this structure or a conceptually similar approach to enable the disclosure of full ZIP codes and other sensitive information, including explicit clarifications that the process comports with all relevant SEC rules.
As discussed above, the Associations are providing as an Appendix to this letter a detail of various asset-level data points that we believe should be added to or removed from the current Schedule AL. This Appendix represents feedback we have received from members to date and can serve as a starting point for further discussion with the SEC and other stakeholders. We continue to work with our members to analyze these asset-level data points. The Appendix is structured as follows:
The Associations thank you and the staff for your leadership in revisiting Reg AB II and believe that the market is at a critical juncture at which it is appropriate and necessary for revisions to be made. Our members further believe the most stable mortgage finance market is one that is diverse, with multiple securitization options, all of which feature the same level of disclosures. As the SEC knows, competition drives lower costs to consumers, and when combined with proper oversight and transparency, provides robust mechanisms to inhibit bad practices and bad actors. We believe prudent reforms as outlined in this letter will help meet that goal.
While we are all currently consumed with issues related to the COVID-19 crisis, it is important to look ahead and ensure revisions to Reg AB II disclosure requirements remain a top priority. The Associations and our members have a strong willingness to work with regulators and other market participants to complete these revisions in a manner that is acceptable to all interested parties. At an appropriate time, the Associations would like to meet with SEC staff to engage in an in-depth discussion of the content of this letter and to determine the most productive next steps. It is also critical that regular stakeholder sessions are established to achieve consensus on changes to Reg AB II. The undersigned associations pledge our support to facilitate these sessions and look forward to an ongoing partnership with the SEC.
For further discussion or for any questions you may have, please contact Rod Alba of ABA at [email protected], Meg Burns of HPC at [email protected], Dan Fichtler of MBA at [email protected], or Chris Killian of SIFMA at [email protected].
Thank you again, Mr. Chairman. We look forward to continuing the dialogue with you and your staff as you move forward with this important effort.
American Bankers Association
Housing Policy Council
Mortgage Bankers Association
Securities Industry and Financial Markets Association