WASHINGTON U.S. securities regulators proposed that issuers of mortgage-backed securities and similar instruments disclose more about the underlying loans and keep 5 percent of the credit risk in some circumstances, an effort to avoid a repeat of the financial crisis.
The Securities and Exchange Commission rule responds to the debacle involving securities packed with subprime mortgages that plunged in value with the downturn in the U.S. housing market.
"Changes are both necessary and critical components of restoring investor confidence," SEC Chairman Mary Schapiro said at a meeting of the SEC.
Securitization of debt and its sale to investors has become an important part of modern finance that allows lenders to quickly lend again to consumers for everything from houses and cars to credit cards.
But the financial crisis exposed flaws in the practice when market participants, including debt-rating agencies, either downplay or ignore the potential for default on the underlying loans.
Mortgage-backed securities caused billions of dollars of losses and panicked lenders who sharply curtailed credit, which in turn worsened the recession.
Under the proposed SEC rule, sponsors of asset-backed securities would only be required to retain a portion of the credit risk if they want to issue the security quickly through a so-called shelf offering.
The proposal would replace a rule that requires the asset-back products be highly rated by credit rating agencies such as Standard & Poor's MHP.N.
Restarting securitization is seen at the heart of economic growth since the $9 trillion market relies on investors to take the risk away from issuers.
It is particularly vital in the U.S. housing sector where regulators are hoping private investors such as pension funds will provide support strong enough for the government to be able to reduce its role.
The SEC proposal would allow investors to analyze the pools of securitized assets and give them at least five days to decide whether they want to buy the asset-backed securities.
The information required from issuers would include details on loan underwriting standards.
Issuers of asset-backed securities backed by credit card receivables would not have to provide the same level of detail because of the sheer size of the pool.
The Federal Deposit Insurance Corp is also trying to spark the securitization market by bringing higher standards to the industry, aiming to calm concerns that securitized products are too risky.
The bank regulator has rolled out a preliminary proposal that protects securitized assets in the event that a bank fails and is seized by regulators, but only if those assets meet certain conditions.
FDIC Chairman Sheila Bair praised the SEC proposal and said it would help plug regulatory holes and reform the securitization market.
The SEC proposal will be open for a 90-day comment period. The SEC's commissioners must vote on a final rule before the new standards go into effect.
(Reporting by Rachelle Younglai; Editing by Dave Zimmerman and Tim Dobbyn)