Rating Agencies Agree To Reforms

New York Attorney General Andrew M. Cuomo has reached agreements with Standard & Poor's (S&P), Moody's Investors Service Inc. and Fitch Inc. designed to reform the residential mortgage-backed securities (RMBS) market.

According to the attorney general's office, these agreements will dramatically increase the independence of the ratings agencies, ensure that crucial loan data are provided to the agencies before they rate loan pools, and increase transparency in the RMBS market. The agencies agreed to the following measures:

  • Fee reforms – Credit rating agencies are typically compensated only if they are selected to rate an RMBS by an investment bank. Credit rating agencies will now establish a fee-for-service structure, where they will be compensated regardless of whether the investment bank ultimately selects them to rate a RMBS.

  • Disclosure reforms – Credit rating agencies will disclose information about all securitizations submitted for their initial review. Doing so will enable investors to determine whether issuers sought, but subsequently decided not to use, ratings from a credit rating agency.

  • Loan originator review – Credit rating agencies will establish criteria for reviewing individual originators, as well as the lender's origination processes. The credit rating agencies will review and evaluate these loan originators and disclose their originator evaluations on their Web sites.

  • Due diligence reforms – Credit rating agencies will develop criteria for the due diligence information that is collected by investment banks on the mortgages comprising an RMBS. The credit rating agencies will receive loan level results of due diligence and review those results prior to issuing ratings. The credit rating agencies will also disclose their due diligence criteria on their Web sites.

  • Credit agency independence – Credit rating agencies will perform an annual review of their RMBS businesses to identify practices that could compromise their independent ratings. The credit ratings agencies will remediate any practices that they find could compromise independence.

  • Representations and warranties – Credit rating agencies will require a series of representations and warranties from investment banks and other financially responsible parties about the loans underlying the RMBS.

The attorney general's office adds that its investigation into the mortgage industry, including an investigation into the secondary market, is continuing.

Source: Office of NY Attorney General Cuomo

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