Financial services organizations have invested considerable time and money assessing the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known as Dodd-Frank. Securitizers should pay particular attention to Section 943. The rule requires all securitizers to disclose fulfilled and unfulfilled repurchase requests across all securitization transactions, whether or not those transactions were registered under the Securities Act of 1933.
[For a brief, 39-page synopsis of the nearly 1,000 page Dodd-Frank Act, download a free copy of the Dodd-Frank Cheat Sheet.]
Section 943 seeks to identify asset originators with potential underwriting deficiencies and make this information available to investors as well as to reduce reliance on credit rating agencies. Disclosures are required in the ABS-15G report, a tabular roll-up, to be filed via EDGAR. The initial filing, which is due on Feb. 14, will cover all repurchase activity for the three-year period ending Dec. 30, 2011. The ABS-15G report must be filed through EDGAR quarterly and annually on an ongoing basis. Additionally, new securitization transactions registered under the Securities Act of 1933 will need to include a rolling look-back period of one to three years in the prospectus document.
Although the initial deadline is fast approaching, many companies have just begun to direct their attention to Section 943 and the resulting organizational and technological challenges that the filing requirement poses. Firms must begin with the daunting task of identifying and gathering all of the information regarding covered transactions and repurchase requests. Securitizers must then design a process to verify that controls exist throughout the gathering and reporting process; establish overall governance for future reporting requirements (i.e., quarterly and annual filings and the rolling look-back); and establish ongoing monitoring and testing procedures.
Step 1. Commence Information Gathering
The effort required to identify transactions that are covered under Section 943 cannot be overstated. Firms already should have begun to identify individuals with the subject matter knowledge to spearhead the initiative across various lines of business. Active support from these experts and the internal audit, compliance, operations, technology and legal teams is necessary to understand the firm’s transaction universe and to determine scope and applicability of Section 943 based on the deal structure.
To ensure ongoing completeness, business processes must be evaluated and amended or newly defined to assess the applicability of the rule for all new products. A full scope of covered transactions may include transactions fully owned by non-affiliates and no longer monitored by an enterprise. Successfully identifying and tracking covered transactions may involve augmenting existing processes and systems or adding a simple flag denoting Section 943 applicability to systems of record. The most appropriate approach depends on the size, scale and complexity of the organization.
Once securitizers have identified covered transactions, they must identify internal and external contacts responsible for overseeing the transactions. Most firms, however, do not have a standardized process in place across the enterprise for receiving and evaluating repurchase demands. This makes it difficult to gather, aggregate and report on the information needed to meet the initial three-year look-back requirement. The list of external entities that must also be contacted for the initial look-back and for each quarterly filing may include trustees, master servicers, special servicers or any other party contractually able to receive a repurchase demand.
2. Ensure Governance
The required reporting under Section 943 adds a new layer of complexity to a firm’s governance structure. A securitizer can elect to file this report at the depositor or sponsor levels, or take a hybrid approach. Each merits the implementation of a consistent end-to-end oversight process.
When defining relevant roles and responsibilities, firms must identify the business areas, necessary reviews and individuals responsible for signing off on the report. They also must identify the business unit or units responsible for filing to EDGAR. Additionally, it is critical to determine key stakeholders that should have input into the decision methodology for the ABS-15G report and to make certain that all depositors and sponsors adhere to that methodology when gathering data for the report.
Organizations will find that many of the report categories defined by the rule are open to interpretation. For example, how are balances to be calculated? How long can a repurchase demand remain in dispute? A small number of firms are appointing governing bodies to ensure information is received from all lines of business in each reporting period and that all lines of business report the information consistently.