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Lending

Could new securitizations lead to identity theft?

That's the slippery slope of new regulation

April 10, 2014
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Securitization is already believed by many to be the big, bad tool Wall Street used to derail the global economy, seemingly and inexplicably on purpose.

So this blog probably isn't going to help assuage the rage in those believers.

Nonetheless, the securities trade group SIFMA and the Financial Services Roundtable recently submitted comments to the Securities and Exchange Commission sounding the warning that its proposed reporting requirements for asset-backed securities (Reg AB2) puts the personal data of Americans at extreme risk.

Basically, Reg AB2 will require issuers of mortgage, credit card, auto, student loan securitizations, etc., to disclose consumer financial information when wrapping those loans into bonds ­— securitization.

While the disclosure of loan-level data is nothing new, the argument for and against how this is performed has been debated for years. The latest SEC proposal only brings it front and center again.

“We are concerned that disclosures on websites of individual consumers’ credit scores, income and data amounts—rather than coded ranges—would make it easier to reverse engineer and misuse consumers’ personal financial information,” said Richard Foster, FSR vice president & senior counsel for regulatory and legal affairs. 

The statement continues:

Any breach in the security of consumers’ personal information, let alone any misuse of such information, could have severe consequences for consumers and issuers as we have seen recently. Such potentially sensitive information must be disseminated in a manner that is consistent with issuers’ legal and regulatory obligations, and subject to strict controls to prevent inappropriate use or disclosure.

So let me go ahead and translate this for everyone and say what people think about reg AB2 — if you disclose private financial information in a way potential investors can easily receive, it's only a matter of time before someone figures out a way to steal that info for their own fraudulent gains. Identity theft is not some obscure risk — a Javelin study found that 13.1 million people had their identity stolen in 2013 — and that was before the Target hack.

Could these new securitizations lead to identity theft? It appears so, if Reg AB2 gets through.

SIFMA is not just hinting at this risk to the SEC, but its members as well.

So what would be the result if Reg AB2 is passed as is?

Well, SIFMA members aren't going to be foolish enough to expose themselves to such a moral liability, for one.

“Securitization is a vital financing tool that drives economic growth by expanding the availability of credit for consumers across the country.  Issuers and sponsors, in particular, are concerned that the SEC’s proposed disclosure framework presents a host of unanswered - but critical - questions related to privacy laws and reputational risk, would discourage issuer participation in the ABS market, and would thereby curtail credit availability and hamper economic growth and job creation” said Chris Killian, managing director and head of SIFMA’s Securitization Group.

That means the loan mechanism will grind to a halt, leaving the average American more difficulty in accessing the credit markets.

Which is somewhat preferable to having your financial information widely available to those who would seek to use it to their own greedy ends.

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