Sellers of bonds backed by mortgages and auto loans would have to give investors details including the borrowers’ income and credit scores under rules the U.S. Securities and Exchange Commission is poised to consider this week, according to two people briefed on the plan.
The SEC will vote Aug. 27 on the final rules, which were mandated by the Dodd-Frank Act after investors were burned by soured debt sold by Wall Street before the 2008 credit crisis. The biggest sellers of asset-backed securities include Bank of America Corp., JPMorgan Chase & Co., Deutsche Bank AG, Citigroup Inc. and Goldman Sachs Group Inc.
Securities backed by loans for houses, autos and commercial real estate would fall under the rules, which require more extensive disclosure to bond buyers than the SEC’s initial 2010 plan, said the people, speaking on condition of anonymity because the details aren’t public. The agency’s move comes amid a surge in subprime auto loans that are being fed into securities, a business being probed by U.S. prosecutors.
“Prior to the crisis, many investors were not as diligent as they should have been, and that was part of the problem,” said Jeff Mahoney, general counsel of the Council of Institutional Investors, whose members include the country’s largest public pension funds. “However, they also pointed out that even if they wanted to be diligent, there was not much information they could get.”
SEC spokeswoman Gina Talamona declined to comment.
Dodd-Frank required the SEC to improve disclosures about loans packaged into bonds for investors who had relied on flawed credit ratings. The SEC requirements would extend to private sales of asset-backed securities, which historically have been exempted from reporting to the agency.
Bonds backed by student loans or business inventory purchases aren’t included. The SEC plans to complete rules for bonds based on those assets later, one of the people said.
Earlier this year, the agency suggested that bond issuers create and maintain restricted electronic repositories for the data. Firms including Deutsche Bank objected, saying they shouldn’t be responsible for policing use of the information under consumer-privacy laws. The rules indicate that instead, the SEC will provide access to the loan data, the person said.
Banks and privacy advocates have warned that if the data aren’t well-protected, identity thieves could fish for information to learn a borrower’s identity.