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Auto ABS: Turbocharged or Stuck in Neutral?
Friday, April 08 2011 | 07:08 AM
SNR DENTON US LLP
|On March 29, 2011, several federal agencies issued a notice of proposed rulemaking (NPRM) to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act provisions regarding mandatory risk retention by “securitizers” of various asset classes. The Act established a baseline five percent risk retention, but authorized the agencies to establish higher (or lower) thresholds for identified asset classes. In the NPRM, auto loans received particular attention. The question remains whether the agencies’ proposals will turbocharge auto ABS--or leave it stuck in neutral.
Page 159 of the NPRM proposes “a zero percent risk retention requirement (that is, the sponsor would not be required to retain any portion of the credit risk) for ABS issuances collateralized exclusively by loans from one of the asset classes specified…and which meet the proposed underwriting standards.”
The good news is that the agencies recognized that “establishing a risk retention requirement between zero and five percent…may not sufficiently incent [sic] securitizers to allocate their resources necessary to ensure that the collateral backing an ABS issuance satisfied the proposed underwriting standards”. Other welcome news is that the NPRM added that “[t]o facilitate compliance…supervision and enforcement of the rule, the proposed standards are generally prescriptive, rather than principle-based.” That enables securitizers to avoid a regulatory guessing game.
However, ABS sponsors who have included commercial auto loans or leases in their securitized pools will be disappointed at the narrow approach taken by the agencies “to establish conservative requirements that are consistent with underwriting standards commonly used by the industry for unsecured [emphasis added] installment credits.” The proposed rules would exclude any lease financing and any loans to finance fleet sales or the purchase of a commercial vehicle. So the reduced risk retention would appear to be available to the larger auto consumer finance companies and not to ABS sponsors which finance commercial auto loans and leases.
The rules would force originators to determine that each obligor has a monthly total debt to income ratio of less than or equal to 36%. Documenting this analysis will require the originator to obtain data from each obligor about his monthly housing payments and other amortizing payments, credit card and lease obligations, alimony, child support and other court-ordered payments. Beyond this potentially intrusive investigation, the proposed rules would restrict qualifying auto loans to those with a fixed interest rate, maximum five year term using straight-line monthly amortization, and 20% minimum down payment. Each originator and securitizer will have to make its own determination whether these and other standards in the proposed rule are practical and worthwhile to obtain zero risk retention for any auto ABS issuance.
Because of the high likelihood that a few loans in the securitized pool could fail to meet the agencies’ standards, the proposed rules require the depositor to certify as to “the effectiveness of its internal supervisory controls for ensuring all of the loans backing the ABS are qualified loans” and the sponsor to (a) repurchase nonqualifying loans within 90 days “after the determination that the loans do not satisfy the underwriting standards” and (b) disclose to the ABS investors the loans which are repurchased and the cause for each repurchase. Much of this is customary in auto ABS, but the agencies ominously “seek comment on whether the sponsor should be required to repurchase the entire pool of loans [emphasis added] collateralizing the ABS if the amount or percentage of the loans that are required to be repurchased…reaches a certain threshold.” If adopted, this imposition would be a dramatic departure from industry practice.
The comment period for the proposed rules runs through June 10, 2011.
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