Dodd-Frank Continues to Roil Leasing ABSBy Stephen T. Whelan, Blank Rome LLP
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 became law little more than a year ago. Federal government agencies charged with issuing implementing regulations have labored since then to produce guidance on subjects such as risk retention by securitization sponsors and reporting of warranty repurchases. The latest topic to inspire controversy stems from section 942 of the Dodd-Frank Act, which requires the Securities and Exchange Commission to
“adopt regulations…requiring each issuer of an asset-backed security to disclose, for each tranche or class of security, information regarding the assets backing that security.”
On August 5, 2011, the SEC published a re-proposed rule which would condition the availability of exemption from registration under Rule 506 and Rule 144A, upon disclosure of asset-level information during investor due diligence and in post-closing periodic reports. In effect, the Re-Proposal would impose upon the most popular private offering exemptions, the disclosure standards for registered shelf public offerings. The Commission requested information on possible data points for Equipment ABS and Equipment Floorplan ABS, and stated that “we preliminarily believe that more granular disclosure—either asset-level or grouped account data—is appropriate at the time of the offering and on an ongoing basis for Equipment ABS than provided by only pool-level disclosures.”
The proposals have elicited a variety of strong reactions from associations representing the equipment leasing business, the asset securitization industry, and the American Bar Association. This article will describe some of the more significant comments which were submitted in October and November.
The American Bar Association criticized several aspects of the Re-Proposal. For equipment loans and leases, the ABA stated its belief that the Re-Proposal is “likely to adversely affect the cost and availability of credit to the commercial obligors which comprise the overwhelming majority of underlying lessees and borrowers in equipment ABS”, especially “securitized ‘small ticket’ equipment loans [which] tend to be loans taken out by smaller businesses”. The ABA also concluded that mandatory asset-level disclosure is not needed, since “investors in equipment ABS have the marketplace power to force disclosure…of any data which investors deem material”.
More generally, the ABA complained that the SEC “should not use its authority to amend the safe harbors [Rule 144A and Rule 506] as a means to require issuers of structured finance products to make additional asset-level disclosures outside of the purpose of the safe harbors” and worried that “smaller entities that currently do not issue into the public markets may lose market access entirely because they do not have the resources to provide public-type disclosures.” The ABA perceptively recommended that the SEC conduct a regulatory flexibility analysis, pursuant to the Regulatory Flexibility Act, in view of the Commission’s admission that the cost of compliance with the 2011 Re-Proposal is expected to be significant.
The Equipment Leasing and Finance Association responded to the SEC question #88 (“could…initial and ongoing reporting of Auto ABS be used for Equipment ABS?”) by rejecting that notion and observing that 1) “Auto ABS is a much more homogeneous asset class as compared to Equipment ABS”, 2) “auto loans and leases are primarily a consumer product [and hence] are underwritten on a more standardized basis”, and 3) the wide range of equipment types renders impossible a one-size-fits-all disclosure regime.
ELFA did concede that asset-level disclosure may be warranted where either “an individual asset accounts for more than 10% of the aggregate asset base” or “an issuer or its sponsor has within the last 12 months arranged one or more registered public offerings of Equipment ABS for the same asset class and has made loan level or lease level disclosures in that public offering.”
In the event that the SEC were to insist upon grouped account disclosure, ELFA helpfully suggested nine categories of grouped data which could reasonably be required for “each significant equipment type”, but resisted (on confidentiality grounds) mandated disclosure of projected residual values, unless more than 10% of the asset base consists of expected equipment residual values.
The American Securitization Forum comment letter noted that its investor members were evenly split between those who favored the current industry standard of pool-level disclosure, those who prefer grouped account disclosure, and those desiring that the SEC impose the more granular asset-level disclosure. It observed that “One of the primary goals of Dodd-Frank Section 942 was to enable comparisons across issuers within a given asset class [but that] comparisons across the Equipment ABS market are largely meaningless because of the lack of homogeneity in Equipment ABS.” It further commented that “group-level disclosure or asset-level disclosure could substantially undercut issuance in the Equipment ABS market, paradoxically resulting in fewer investment opportunities for the very investors who were supposed to be aided by more granular data.”
ASF constructively offered the concept of a standardized servicer summary, to provide for easier use by investors. It reminded the SEC that “a Senate Report submitted by Senator Dodd…indicated that loan-level disclosure was not required where it would raise privacy concerns”, then closed by observing that:
“The Equipment ABS issuers strongly believe that disclosure at a more granular level than pool-level data would be highly detrimental to the industry for privacy, competitive, and relational difficulties without meaningfully enhancing the ability of Equipment ABS investors to conduct necessary due diligence. However, in the event that the Commission believes that disclosure beyond the pool-level is required, a majority of issuer members propose that…group-level data…be provided to investors.” (emphasis added)
Examples of the ASF-suggested groupings included the number of contracts and aggregate current collateral balance for: each of the ten largest state concentrations and all other states; for eight identified equipment types and all other equipment; new or used equipment; categories of payment frequency; categories of current balance; and categories of APR. ELFA had proposed, for each significant equipment type: type of receivable; number of contracts; new or used equipment; original term (by bands); remaining term (by bands); implicit contract discount rate (by bands); geographic region; aggregate original discounted contract balance; and aggregate original contract discounted balance.
At an American Bar Association meeting on November 18, an SEC official, voicing her personal views in response to a question about privacy and competitive issues arising from disclosure of loan-level data, indicated that the Commission might take the grouped account approach. When a questioner asked why a sophisticated “qualified institutional buyer” would need mandated disclosure for an investment grade auto ABS deal sold under Rule 144A, the SEC official acknowledged the burden placed on smaller deals but fretted that mandating disclosure only for public offerings could motivate issuers to migrate to the Rule 144A market.
At this writing, it is unclear which approach the Commission will take. It is not too late to submit comments to the SEC, via email: firstname.lastname@example.org. There is speculation that the SEC may announce its conceptual decisions at the ASF annual convention January 22-25, 2012.