The Securities and Exchange Commission last week laid out new rules for asset-backed securities, the financial practice in which lenders bundle loans and sell them off to investors to raise money to fund new loans.
The new SEC rules are primarily aimed at mortgages, but asset-backed securities backed by auto loans are also covered. The commission introduced some new rules for credit rating agencies, too.
The potential effect of all this on dealerships is probably not that immediate. However, subprime auto lenders are particularly reliant on asset-backed securities to raise money to fund new loans. If that becomes more difficult, dealerships could find it tougher to find financing for credit-challenged customers.
It’s a simple rule: More regulations, even if aimed at protecting investors, mean more paperwork. And the more paperwork, the less smoothly the wheels of commerce turn.
“ABS holders suffered significant losses during the 2008 financial crisis,” the SEC said in a written statement on Aug. 27.
That may be true for mortgages, but according to Standard & Poor’s Ratings Services, investors didn’t lose any money on asset-backed securities backed by auto loans.
Even so, some recent press reports, including stories and an editorial in The New York Times, have suggested the ongoing comeback in asset-backed securities backed by subprime auto loans echoes the boom in asset-backed securities backed by subprime mortgages that preceded the Great Recession.
The SEC said in its statement: “The crisis revealed that many investors in the securitization market were not fully aware of the risks underlying the securitized assets and over-relied on ratings assigned by credit rating agencies, which in many cases did not appropriately evaluate the credit risk of the securities.
‘Enhance investor protection’
“The crisis also exposed a lack of transparency and oversight by the principal officers in the securitization transactions. The revised rules are designed to address these problems and to enhance investor protection.”
A spokesman for Standard & Poor’s said last week it’s too soon to tell what practical effect, if any, the changes will have with regard to asset-backed securities backed by auto loans.
Meanwhile, the U.S. Department of Justice also is looking into the underwriting and securitization of subprime auto loans. The Justice Department recently issued subpoenas to auto lenders GM Financial and Santander Consumer USA in connection with the sale of asset-backed securities.