The SEC has ABS Servicers on their Radar.

Charles Denyer is a senior manager with DuPont & Morgan LLP, a national provider for attestation and compliances service for the real estate finance industry. Firmwide services include SAS 70 attestation, Regulation AB compliance, real estate consulting, tax consulting, IT consulting and compliance, along with other specialty areas. To learn more, visit the firm at www.dupontmorgan.com.

Regulation AB is a comprehensive set of new rules and amendments which address the registration, disclosure and reporting requirements for asset-backed securities under the Securities Act of 1933 and the Securities Exchange Act of 1934. With the asset-backed security sector being a relatively new and fast-growing component of the U.S. capital markets, regulators and industry professionals alike sought to bring about transparency and clarity regarding registration, disclosure and reporting requirements for asset backed securities.

Understanding Item 1122

One of the most contentious issues currently facing the ABS industry is Regulation AB Item 1122 compliance for servicers. Considered costly, time-consuming and laborious by many, Item 1122, titled "Report on Assessment of Compliance with Servicing Criteria for ABS and Accountant's Attestation," also commonly called "Section 1122 or Item 1122" by many in the industry, 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, standalone process; rather it is a multifaceted, collaborative effort by servicers that yields a number of deliverables throughout various stages of the 1122 roadmap to compliance. Because of the sheer growth of asset-backed securities, the Securities and Exchange Commission clearly recognized the important role servicer's play, stating that "... one of the most important elements affecting an investor's assessment of a particular asset-backed security is the performance of the servicer ..."

Item 1122 puts forth a number of requirements that must be undertaken and achieved, culminating with two deliverables that are to be included with Form 10-K filings. These two deliverables, one a collection of statements and a brief assessment, the other, an actual attestation report, are collectively known as Form 10-K Reports on Assessments of Compliance with Servicing Criteria and Accountant's Attestation. These two reports should be looked upon as the final deliverables in the overall Item 1122 roadmap to compliance for servicers.

So What's the Problem?

Many servicers have pushed back on Regulation AB Item 1122 compliance, either out of not having a clear understanding of its requirements along with the supposedly high costs of becoming compliant. The problem is that if the current water-cooler talk holds true and a vast number of servicers in the ABS market are not Item 1122 compliant, there ...