What kind of asset types are affected by Regulation AB?
Listed are the most common affected asset types: residential mortgages, home equity, commercial mortgages, credit card receivables, automobile loans, automobile and equipment leases, along with student loans. Without question, a far-reaching scope that will certainly be felt for years to come in regards to Regulation AB compliance.
||The final ruling put forth by the SEC for Regulation AB is a very large and complex document; what specific items should servicers be concerned with?
Servicers should be concerned primarily with Regulation AB Item 1122 and Item 1123 along with disclosure provisions within Item 1108. Item 1122 contains information regarding assessments and assertions that need to made by servicers along with having a registered (PCAOB) CPA firm conduct an attestation on a servicers assertion. Item 1123 deals with servicers and is directly related to the transaction agreements. Information pertaining to Item 1108 can be found in Question #17 of this F.A.Q. section.
||What is Regulation AB Item 1122?
Regulation AB Item 1122, titled Report on Assessment of Compliance With Servicing Crtiteria [for asset-backed securities] and Accountant's Attestation, also simply called "section 1122 or Item 1122" , consists of a number of activities that must be undertaken by servicers for ensuring they meet compliance for Regulation AB. Item 1122 should not be regarded as a simple, stand alone process, rather a multi-faceted, collaborative effort by servicers that yields a number of deliverables throughout various stages of the 1122 roadmap to compliance.
||What are some of the most important elements of Regulation AB Item 1122 and 1123 that servicers should be concerned about?
There are two key areas that servicers should pay attention to. The first is the scope that Regulation AB encompasses for them and the second area is the servicing criteria that must be adhered to. Regarding scope, because the Securities and Exchange Commission (SEC) has adopted a principles based definition of asset-backed securities (ABS), it gives Regulation AB a broad scope over what asset types fall under the new SEC federal rules and regulations. Second, the new servicing criteria creates a much more in-depth requirement and examination of servicers than the antiquated USAP report did.
||What exactly is Regulation AB Item 1122 servicing criteria?
The servicing criteria are the new minimum servicing criteria as outlined in Regulation AB for Item 1122 which consists of four main categories: (1) General Servicing Considerations, (2) Cash Collection and Administration, (3) Investor Remittances and Reporting, and (4) Pool Asset Administration. These categories describe major components of the servicing function, with each category containing servicing criteria that have been designed to have general applicability to the servicing of all asset-backed securities.
||What is the definition of a servicer for purposes of Regulation AB?
A servicer is "any entity that is responsible for the management or collection of the pool assets or making allocations or distributions to holders". Additionally, it's important to note that the Securities and Exchange Commission's (SEC) interpretation of a servicer should not just be looked at in the context of traditional title of a servicer (i.e., servicer, master servicer), but rather in the responsibilities of a an entity that may be providing servicing functions. With that said, an entity providing lockbox services could be looked upon as a servicer, along with many other organizations that typically are not called or identified as servicers in the traditional thinking within the ABS market. This is yet again another example of how Regulation AB is forever changing the ABS market.
||I'm more familiar with the USAP, which we've had conducted for years, will it suffice for the new Regulation AB Item 1122 servicing criteria?
No. One of the primary reasons the SEC implemented the new servicing criteria was the concern of the USAP and its standards. The SEC has stated on many occasions throughout the Regulation AB rulings and regulations that the USAP is simply not adequately geared to handle or accommodate the new standards that servicers must adhere to. The USAP was developed years ago when the ABS market was a younger, simpler market. Times have changed dramatically for asset-backed securities and the USAP has not kept pace with these changes.
||Are servicers allowed to change or modify the servicing criteria of Regulation AB Item 1122?
No. The SEC's "Manual of Publicly Available Telephone Interpretations" (http://www.sec.gov/interps/telephone/cftelinterps_regab.pdf
) clearly states that servicers cannot modify the servicing criteria set forth in Item 1122(d). Moreover, even if a servicer's process differs from one or more criteria in Item 122(d), the servicer must disclose that it is not in compliance with those particular criteria. The servicer can, however, disclose why their process is different from the servicing criteria as set forth in Item 1122(d) Servicing Criteria.
||Does this mean that servicers should expect to spend a considerable amount of time in becoming compliant with the new Regulation AB Item 1122 servicing criteria standards?
Yes. Upon a detailed examination of Item 1122 servicing criteria vs. USAP, one can clearly see an exponential increase in time and investment for becoming compliant. Reliable estimates by industry professionals put this at seven (7) times the amount spent on becoming USAP compliant. And why? Simply because the scope and requirements put forth by the four primary areas of the new Regulation AB Item 1122 servicing criteria are that much more extensive than the USAP.
||What is the meaning of "platform level" assessment and why is this critical to Item 1122?
Initially, there was a notion that assessments of compliance for servicers would be done on a "transaction level", that is, requiring assessments for every transaction. However, the Securities and Exchange Commission (SEC) proposed to accept a "platform level" of assessment, which "?proposed to permit a single assessment and assertion regarding compliance for entities involved in multiple ABS transactions". For example, a servicer could be servicing five auto loan transactions and five mortgage loans transactions, and would therefore have a requirement for only two (2) Item 1122 assessments and assertions of compliance along with a requirement for two (2) Item 1122 accountant's attestation reports. However, there would be a requirement for ten (10) Item 1123 servicer compliance statements.
||What is the timeframe for Item 1122 compliance and what time periods does it cover?
Compliance was slated to commence on January 1, 2006. Regulation AB states that the assessment period will be for a full fiscal period, rather than just a point in time. Thus, both the assessment of compliance and the accountant's attestation report are required for a full fiscal period. This approach is also consistent with that of the USAP.
||What will happen to the USAP?
As the ABS industry continues to grow and become more complex, the USAP will gradually fade away and become more of an adjunct tool, rather than the core assessment device that it once was known for in conducting servicer compliance. Currently, there is a push to replace the USAP altogether with the new Regulation AB Item 1122 servicing criteria. If servicers currently have a USAP, it will simply serve as a springboard into the more complex and demanding requirements set forth by Item 1122 servicing criteria. Investors will more than likely to begin requesting Regulation AB Item 1122 servicing criteria over the USAP, so be prepared.
||What are the requirements for servicers that service 5% or less of the pool assets?
For servicers that serve 5% or less of the pool assets, the Securities and Exchange Commission (SEC) has decided that reports will not be necessary. The SEC even gives a specific example in the final Regulation AB ruling, stating that, "For example, if a party is servicing individual pool assets that compromise only 4% of the pool, a report from that party" is not necessary.
||For servicers that service 5% or less of the pool assets, should we expect to become Regulation AB Item 1122 compliant?
Currently, as stated, there is no requirement to become Item 122 compliant, but many in the ABS market will feel compelled to require all servicers to be compliant, regardless of the percentage they service. This gives servicers a way to distinguish themselves and prove they have a strong system of controls in their organization, should they desire to become Item 1122 compliant.
||As a servicer, we do not perform the entire servicing function. How does this impact Item 1122 requirements for us and other servicers involved in the servicing function?
This again comes back to the 5% rule, stated within Regulation AB that "...any party participating in the servicing function...and performing activities that address the servicing criteria..." greater than 5%, reports will be required.
||What is Regulation AB Item 1123?
Known as the Servicer Compliance Statement, Item 1123 requires servicers to provide as an exhibit a statement of compliance, signed by an authorized officer of such servicer, to the effect that: (1) A review of the servicers activities during the reporting period and of its performance under the applicable servicing agreement has been made under such officer's supervision; and, (2) To the best of such officer's knowledge, based on such review, the servicer has fulfilled all of its obligations under the agreement in all material respects throughout the reporting period or, if there has been a failure to fulfill any such obligation in any material respect, specifying each such failure known to such officer and the nature and status thereof.
Furthermore, if multiple servicers are involved in servicing the pool assets, a separate servicer compliance statement is required from each servicer that meets the criteria in Item 1108(a)(2)(i) through (iii) of Regulation AB.
||What is Regulation AB Item 1108?
Item 1108 consists of requirements for disclosing information for servicers. The following disclosure must be made regarding: (a) multiple servicers-(1) their roles, responsibilities, and oversight requirements. (2) Identifying each master servicer, affiliated servicer, each unaffiliated servicer that services 10% or more of the pool assets, and any other material servicer responsible for calculations or making distributions. Note: There are additional provisions and requirements for Item 1108, which can can be found by downloading the final Regulation AB ruling at http://www.sec.gov/rules/final/33-8518.pdf
||As a servicer, are there any provisions or penalties for not being Item 1122 compliant?
While Regulation AB does not state specific penalties for non-compliance, it must be reported. Thus, if instances of non-compliance are identified in the Form 10-K Report(s) on Assessments of Compliance with Servicing Criteria and/or in the Accountant's Attestation, then these material or significant instances of non-compliance must be disclosed in the report(s) on Form 10-K.
||Much has been written regarding Regulation AB Items 1122 and 1123. What exactly are servicers required to produce and submit for Form 10-K filings?
The following are to be included as an exhibit in each Form 10-K filing from servicers:
(1) Item 1122: Report on Assessments of Compliance with Servicing Criteria [for asset-backed securities]
(2) Item 1122: Registered Public Accounting Firm Attestation Reports
(3) Item 1123: Servicer Compliance Statements
||Is there a sequential order to begin these activities that will ultimately ensure the above three mentioned (3) deliverables are produced in a manner that meets the demands of Regulation AB?
Yes. Starting with a NDB Regulation AB Readiness Assessment should be considered the first step. Following this, a discussion regarding the additional activities will be held.
||What are the requirements for private securitizations with regards to Regulation AB?
Regulation AB has no requirements for private securitizations. Only asset-backed securities issued through Forms S-1 and S-3 must comply with Regulation AB.
||What type of CPA firm will provide these consulting and attest functions for servicers?
Only a "registered" CPA firm, which is defined as a PCAOB Certified Public Accounting firm by the Securities and Exchange Commission (SEC), can provide the attest services for Regulation AB Item 1122. Additionally, servicers need to choose a CPA firm that is not only a member of the PCAOB, but also a firm with ABS experience. These two attributes are essential for ensuring a timely, quality approach to Regulation AB compliance.
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