Credit rating agencies, Cuomo come to understanding

By John O'Brien | Jun 5, 2008


NEW YORK (Legal Newsline) - New York Attorney General Andrew Cuomo said Thursday that changes are coming in the non-prime residential mortgage market because of his agreements with the nation's principal credit rating agencies.

Standard & Poor's, Moody's Investors Service and Fitch will have six months to implement the terms of the agreement, which will run for 42 months, with Cuomo. Among other things, they will establish modified rating fee standards for non-prime Residential Mortgage-Backed Securities issuance.

"Fitch has been fully responsive to Attorney General Cuomo and his office on these important matters," said Stephen Joynt, President and CEO of Fitch. "We believe this agreement contains a number of specific and constructive steps that Fitch and all rating agencies can take to improve the independence and transparency of credit ratings in the mortgage securitization markets."

"These measures can contribute to restoring investor confidence and stabilizing the mortgage markets."

Cuomo said the agencies will alter how they are compensated by investment banks for providing ratings on loan pools and will be required to provide due diligence data on loan pools for review prior to the issuance of ratings.

"The mortgage crisis currently facing this nation was caused in part by misrepresentations and misunderstanding of the true value of mortgage securities," Cuomo said.

"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's inquiry of the rating agencies began in Aug. 2007.

All three rating agencies have agreed to implement the following reforms (from a release from Cuomo's office):

-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. This 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 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;

-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 websites;

-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; and

-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.

From Legal Newsline: Reach John O"Brien via e-mail at john@legalnewsline.com.

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