The Securities and Exchange Commission (SEC) voted 5 to 0 on Wednesday to place tougher rules on asset-backed securities, including the pooled mortgage securities that were a major contributor to the financial crisis.
The proposal will also affect credit card and auto loan securities, requiring financial institutions to hold at least 5% of these loans. These rules follow up on the SEC’s commitment to increase transparency and better protections for investors in the securities markets.
Other legistlation being considered by the commission will make issuers bear some of the risk contained in these securities. Part of the reason creditors gave inappropriate risk assessments is believed to be due to the fact that those who were packaging these mortgage-backed securities did not experience any of the repercussions of the assumed risk.
New Rules for Transparency
Central to the new SEC rules is a commitment to increased transparency, with requirements that issuers file reports on the specifics of all of the assets in the pool of loans. By providing specific information about the health of the loans, as well as verification of the borrower’s income, the SEC hopes that it can elimiate some of the guesswork that goes into risk assessment and reduce the reliance upon credit-rating agencies.