Large platforms and institutional investors looking to strike deals were the main theme this week. The deal activity is not surprising. Many platforms have tightened credit criteria, increased coupons, and offer securitization friendly reps and warranties. ABS performance is healthy in both the primary and secondary market.
This week we explore ABS-15G SEC filings. ABS-15G SEC fillings improve transparency and independence with respect to reps and warranties related to the collateral pool in a securitization.
We argue that ABS-15G provides for only “skin-deep” transparency and that technology-enabled solutions are required to build investor trust.
Post-Crisis Reforms Aim to Improve Transparency
In the wake of the Great Recession of 2008-2009, the $2 trillion non-agency RMBS market was plagued with misrepresentations of asset quality and documentation. The Dodd-Frank Act required, amongst many other rules, Rule ABS-15G for securitization which the SEC enacted to revitalize the ABS market. The details of ABS-15G are beyond the scope of the newsletter and can be found on the SEC website.
To briefly summarize, Rule 15Ga-1 requires securitizers to file Form ABS-15G periodically to disclose, on an aggregated basis, a third party report on the accuracy of the information or data about the assets pooled in an ABS. Third party will report any material non-conformity found in the Agreed-Upon Procedures.
ABS-15G Agreed-Upon Procedures (AUP)
In 2016, with the exception of two CHAI deals issued by Citibank, all MPL ABS deals have submitted Form ABS 15-G. Deloitte and PWC were the third party on nearly all deals as shown in Exhibit 1.
We briefly summarize the AUP for a typical new issuance deal.
- The securitizer provides Agreed-Upon Procedures (AUP) to a third-party auditor.
- The securitizer provides a collateral tape to the third party auditor.
- The third party, then, randomly selects a small sample set, which is normally less than 1% of total collateral pool.
- The third party auditor checks a set of pre-defined loan and borrower level characteristics. The auditor compares the sample characteristics on the MPL loan tape to those in “Loan Agreement”, “Borrower Details Form”, “Original Credit Report”, and other hard-copy documents in a loan file.
- The securitizer reports findings of the third-party auditor in Form ABS-15G SEC filling.
Exhibit 1 Reported Differences in Loan Characteristics
Important Loan and Borrower Attributes Are Missing
We note that other important loan and borrower information are not included in AUP, such as existing debt or mortgage information. Exhibit 1 summarizes all filed ABS-15G for year to date. The reporting errors are not always in favor of the borrower and appear to be random. For example, incomes may be understated or overstated.
The ABS 15-G process lacks true independence in data collection, is limited in sample size, limited in the number of loan and borrower attributes checked, and lacks accountability.
Maintaining data integrity from origination to securitization is challenging:
- Insufficient Sample Size. The usual sample size represents less than 1% of total collateral loan pool; we consider this insufficient.
- Conflict-prone. The process carries conflict of interest. As noted in AUP, the securitizer provides the initial loan tape as well as underlying loan documentation. The securitizer is incentivized to execute the securitization. The sponsor interest may not align with the interest of MPL ABS investors.
- Limited attributes. The characteristics that are reconciled are set forth on the data file and controlled by the securitizer.
The challenges are pronounced in MPL securitizations, where collateral loan pools are comprised of smaller balances and a large number of loans.
The auditors engaged in ABS 15-G filings confirm our impression. From a recent ABS-15G SEC filing, the auditors make no representations as to:
- “The actual characteristics or existence of the underlying documents or data comprising the unsecured consumer loans underlying any of the data files or the conformity of their characteristics with those assumed for purposes of the procedures described herein”
- “existence or ownership of the unsecured consumer loans” or
- “reasonableness of any of the aforementioned assumptions, information or methodologies.”
We re-affirm the need for greater transparency and independence in MPL lending – for whole loans and for ABS bonds.
Technology Enables Independence and Scale
In a MPL ABS securitization, the sheer volume of loans, given their small balance, makes data aggregation, reconciliation, and risk representation challenging for conventional systems employed for RMBS, CLO, CMBS and other asset classes. Manual, costly, incomplete, conflict-laden processes need to be replaced with technology solutions, such as those offered by PeerIQ.
We are working with industry leaders to build trust in all parts of the ecosystem. We encourage readers to review the PeerIQ US Treasury RFI response on other recommendations for creating transparency and independence.
- PeerIQ will attend and speak at IMN’s ABS East Conference in Miami on September 18-20.
- PeerIQ will attend and speak at the American Banker Marketplace Lending and Investing Conference on September 27-28 in New York.
- PeerIQ will attend and speak at the Context Summits 2016 Alternative Lending Summit on September 28 in Dana Point, CA.
- Warburg Pincus Leads $220 Million Round for Solar Lender Mosaic (WSJ, 8/4/16) Startup providing the financing solution for solar installation to homeowners received equity investment.
- LendingClub Said in Talks With Western Asset on Loan Buying (Bloomberg, 8/4/16) Western Asset might announce a deal in coming weeks to set up a fund to buy $1.5BN of LendingClub loans over time.
- Online Lender Prosper in Talks on $5 Billion Loan-Buying Deal (WSJ, 8/4/16) Investment group including Jefferies, Fortress and Soros in talks to buy $5BN of Prosper loans in next two years.
- Financing the Economy 2016 (Aima.org, 7/25/15) Comprehensive paper published by ACC and Deloitte on the role of alternative asset managers in non-bank lending environment.
- National Charter May Be the Devil Marketplace Lenders Don’t Know (BNA, 8/2/16) Debate is on, if the national charter would be a better way forward for marketplace lenders.
- VPC Specialty Lending Investments Q2 Letter (VPC, 8/16) VPC re-purchases shares and shifts portfolio weights to balance-sheet investment.
- Colorado Inquiry Prompts Avant to Rejig Bonds, Kroll Says (Bloomberg, 8/3/16) Possible expansion of “Madden-Midland risk” to CO.
- The Online Lending Obstacle Course (Bloomberg, 8/3/16) Securitization investment dollars are up, and VC investments in platforms are down.
- Major Citi Bike Expansion Starts Today (Streetsblog.org, 8/1/16) NYC rides on bikes.