06 June 2008

Attorney General Cuomo agreement with Credit Rating Agencies on RMBS market

The agreement will change how the three major CRAs are compensated for rating mortgage-backed securities and establishes a fee-for-service structure to reduce ‘ratings-shopping’ practices.

New York state Attorney General Andrew Cuomo reached an agreement that will change how the three major Credit Rating Agencies are compensated for rating mortgage-backed securities. They agreed to establish a fee-for-service structure, where they will be compensated regardless of whether the investment bank ultimately selects them to rate a RMBS.

 

The agencies also agreed to disclose information about all securitizations submitted for their initial review, which should reduce the practice of companies or investment banks ‘ratings-shopping’ among the agencies for the highest grade.

 

SEC chairman Cox welcomed the agreement and announced that the Commission will consider ‘comprehensive new rules for all nationally registered credit rating agencies’ next week.

 

Other agreed reforms include:

• Credit rating agencies will establish criteria for reviewing individual mortgage lenders (known as 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 websites.

• 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 websites.

• 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.

• 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.

 

Press release

Statement SEC Cox