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US regulators consider new rules in bid to protect debt security investors

City A.M. Reporter
US REGULATORS are considering a plan that would prevent banks and other sponsors from selling asset-backed securities without assuming any of the risks themselves, sources familiar with the Securities and Exchange Commission’s approach said.

The SEC is mulling a proposal that would require asset-backed security sponsors to retain five per cent of the credit risk of the security, said the sources.

The SEC proposal under consideration would also require banks and other ABS issuers to disclose in-depth information on every loan in a mortgage-backed security, sources said.

The proposal being considered by the SEC is in line with the Obama administration’s plans to try to prevent financial players from selling shoddy financial products.

Asset-backed securities, repackaged loans whose popularity was at the heart of the financial crisis, were often poorly understood by investors, who suffered when the underlying debt quickly soured.

The SEC is considering requiring banks and issuers to disclose information on whether a home loan was underwritten with full documentation, for example, and where the home is located, the sources said.

Asset-backed securities linked to credit cards would not require information on every single credit card loan because of the size of the pool.