SEC adopts rules on loan-backed securities
WASHINGTON — Federal regulators voted unanimously Wednesday to require financial firms that sell securities backed by loans — the kind that fueled the 2008 financial crisis — to give investors details on borrowers' credit records and incomes.
The Securities and Exchange Commission adopted the rules for securities linked to home mortgages and auto loans on a vote of 5 to 0.
Commissioners also imposed new conflict-of-interest rules on agencies that rate the debt of companies, governments, and issuers of securities. That vote split 3 to 2 along party lines, with the two Republicans opposed.
Mortgages bundled into securities and sold on Wall Street soured after the housing bubble burst in 2007, losing billions in value. The vast sales of risky securities ignited the crisis that plunged the economy into the deepest recession since the Great Depression and brought a taxpayer bailout of banks.
Requiring sellers of the securities to give information on borrowers' credit and income histories will enable investors to better assess the risks of the loans underlying the securities, commissioners said.
''These reforms will make a real difference to investors and to our financial markets,'' SEC chairwoman Mary Jo White said before the vote.
A recent report by the Federal Reserve Bank of New York said US auto loans jumped to the highest level in eight years this spring, fueled by a big increase in lending to risky borrowers. The banks also said that loans to borrowers with weak credit, or subprime loans, continue to make up a smaller proportion of total auto loans than before the recession.
Still, the rapid increase in subprime auto lending has raised concerns among regulators. Because auto loans are packaged into securities, an increase in auto loan defaults could be amplified.
The new rules on so-called asset-backed securities and credit rating agencies were called for under the sweeping financial overhaul law enacted in 2010 in response to the financial meltdown. The rules take effect in 60 days.
A number of big banks, including JPMorgan Chase, Bank of America, Citigroup, and Goldman Sachs, have been accused by the government of abuses in the selling of mortgage securities before the crisis. Together, they have paid hundreds of millions of dollars in penalties to settle civil charges brought by the SEC, which said they deceived investors about the quality of securities.
Recently, the Justice Department and state regulators have reached multibillion-dollar settlements over mortgage securities with JPMorgan, Bank of America, and Citigroup.
The new rules require credit rating agencies to report to the SEC on their safeguards to ensure that their ratings are fair. Sales people will be barred from participating in the ratings process. And agencies will have to review ratings if an employee is later hired by a company he or she rated.
Ratings affect a company's ability to raise or borrow money and can influence how much investors pay for securities. Critics say the agencies have a conflict of interest because they are paid by the companies they rate. Moody's, Standard & Poor's, and Fitch were criticized for giving low-risk ratings to securities sold before the crisis, as they reaped lucrative fees.