WASHINGTON — Financial firms that sell securities backed by loans, like the kind that fueled the 2008 financial crisis, will have to give investors details on borrowers' credit record and income under action taken Wednesday by federal regulators.
The Securities and Exchange Commission adopted the rules for securities linked to mortgages and auto loans on a 5-0 vote.
The commissioners also imposed new conflict-of-interest rules on the agencies that rate the debt of companies, governments and issues of securities. That vote split 3-2 along party lines, with the two Republican commissioners opposing adoption of the rules.
Home mortgages bundled into securities and sold on Wall Street soured after the housing bubble burst in 2007, losing billions of dollars in value. The vast sales of risky securities ignited the crisis that plunged the economy into the deepest recession since the Great Depression and brought a taxpayer bailout of banks.
In requiring sellers of the securities to provide information on borrowers' credit and income, the aim is to enable investors to better assess the risks of the loans underlying the securities.
"These reforms will make a real difference to investors and to our financial markets," SEC Chairwoman Mary Jo White said.
A recent report by the Federal Reserve Bank of New York showed that U.S. auto loans jumped to the highest level in eight years this spring, fueled by a big increase in lending to risky borrowers. The rapid increase in subprime auto lending has raised concerns among federal regulators that it could set off a wave of defaults such as occurred in the mortgage market collapse. Because auto loans are packaged into securities, an increase in auto loan defaults could be amplified.
The new rules require credit rating agencies to report to the SEC on their financial safeguards to ensure their ratings are determined through a fair process.
The rating agencies — Moody's, Standard & Poor's and Fitch — are key financial gatekeepers. Their ratings can affect a company's ability to raise or borrow money and also can influence how much investors pay for securities.
Critics say the agencies have a built-in conflict of interest because they are paid by the same companies they rate. A key problem is that companies choose which firms rate them and then pay for those ratings, critics say, putting pressure on the agencies to award better ratings in order to secure repeat business.