Servicers Face Challenges Related to Reg AB Transition: 'We expect the scope of Reg AB to encompass and satisfy our minimum internal audit requirements.'.

NEW YORK -- With a key deadline for compliance with Regulation AB drawing near, rating agencies are stepping up efforts to monitor the compliance of loan servicers with the new reporting requirements.

Both Standard & Poor's and Fitch Ratings have recently issued guidance highlighting the role that Reg AB will play in servicer evaluation criteria. The new SEC rule is designed to increase transparency for publicly traded structured securities, including MBS.

S&P believes that Regulation AB, which takes effect early next year, will have more widespread implications for mortgage servicers than many in the industry realize.

S&P plans to factor Reg AB compliance into its 2007 servicer ratings. But S&P largely supports the new SEC reporting requirements, saying that the rule represents a turn toward "better internal audit validation."

Servicer analyst Mike Merriam said that the current Uniform Single Attestation Program, or USAP standards, is not sufficient. Reg AB's standards "significantly exceed those of USAP," Mr. Merriam said in an S&P announcement.

"We expect the scope of Reg AB to encompass and satisfy our minimum internal audit requirements, but we would like to review some completed attestations before making a final determination," Mr. Merriam said. In those attestations, servicers involved in structured finance transactions must file a servicer assessment report that verifies compliance with the new regulation.

He also noted that there is still some uncertainty about who is covered by Reg AB, which covers servicers involved with more than 5% of a transaction's pooled assets but doesn't specify whether that threshold is based on dollar volume or number of loans.