New York State Attorney General Andrew Cuomo today announced that he has reached landmark agreements with the three principal credit rating agencies.
The agreements with Standard & Poor’s, Moody’s Investors Service, Inc., and Fitch, Inc. are designed to increase the independence of the ratings agencies, ensure that crucial loan data is provided to the agencies before they rate loan pools, and increase transparency in the residential mortgage-backed securities (RMBS) market.
Under the agreements, the three agencies will fundamentally alter how they are compensated by investment banks for providing ratings on loan pools. In addition, the ratings firms will all now require for the first time that investment banks provide due diligence data on loan pools for review prior to the issuance of ratings. This will ensure that significant data, which was not previously disclosed to the rating agencies, will be received and reviewed by them before any bonds are rated.
All three rating agencies have agreed to implement the following reforms:
- establishing a fee-for-service structure, where they will be compensated regardless of whether the investment bank ultimately selects them to rate a RMBS;
- disclosing information about all securitizations submitted for their initial review;
- establishing criteria for reviewing individual mortgage lenders, as well as the lender’s origination processes, and disclose their evaluations on their Web sites;
- developing criteria for the due diligence information that is collected by investment banks on the mortgages comprising an RMBS, and disclose their criteria on their Web sites;
- performing an annual review of their RMBS businesses to identify practices that could compromise their independent ratings; and
- requiring a series of representations and warranties from investment banks and others about the loans underlying the RMBS.
“By increasing the independence of the rating agencies, ensuring they get adequate information to make their ratings, and increasing industry-wide transparency, these reforms will address one of the central causes of that collapse,” Cuomo said. “The reforms agreed to today by S&P, Moody’s, and Fitch should begin to restore investor confidence during what is a very troubling time for the mortgage industry, and I applaud the firms for their cooperation with our investigation.”
Securities and Exchange Commission chairman, Christopher Cox, said, “The attorney general’s actions, as well as the comprehensive new rules for all nationally registered credit rating agencies that the Commission will consider next week, are motivated by our mutual desire to promote ratings with integrity and curb the questionable practices that contributed to the credit market turmoil.”