The Securities and Exchange Commission approved new regulations on Thursday aimed at curbing the risks of asset-backed securities. During the financial crisis, securities backed by toxic mortgages and other assets blew up, costing investors billions of dollars. Investors, who are still shying away from the market, have complained that the banks didn’t disclose the risks, including the dubious quality of the underlying loans.
Now, the S.E.C. is hoping to bring more clarity to the market. One rule, which will take effect early next year, will require banks and other financial firms that issue asset-backed securities to review the quality of the underlying assets, which includes mortgages, credit card debt and student loans. The banks would then have to disclose their findings to investors.
The rule, which the S.E.C. first proposed in October, passed in a 3-to-2 vote.
A related regulation, which the agency’s commissioners approved unanimously, would force banks to provide more information about mortgage repurchases — an especially thorny issue right now. Big investors have demanded that big banks repurchase loans they packaged together and sold at the height of the mortgage bubble. Investors claim banks’ were lax in their underwriting standards.
Bank of America announced this month that it paid more than $2.5 billion to buy back troubled mortgages it sold to Fannie Mae and Freddie Mac, the government-controlled housing finance companies. JPMorgan Chase also recently reported that it put aside an additional $1.5 billion last quarter to cover potential legal claims stemming from repurchase requests.
Under the S.E.C.’s new rules, banks and other issuers will have to disclose in filings the numbers of requests they’ve gotten to repurchase troubled assets. Starting in February 2012, the issuers will also have to report how many buybacks they have made, dating back three years.
“All of these are rational measures aimed at providing investors with the information that they need, without unreasonable cost,” Mary Schapiro, chairman of the S.E.C., said in a statement.