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 News | August 21, 2008 |
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Rating agencies gain more detail, independence
ALL THREE of the major credit rating agencies will get access to more detailed information on loan pools backing up residential mortgage backed securities (RMBS) and change the way they are paid by clients in a deal brokered by the New York Attorney-General.
Attorney-General Andrew Cuomo said the agreement with Standard & Poor’s, Moody’s Investor Service and Fitch Inc, was aimed at improving the independence and accuracy of credit ratings.
Under the reforms, ratings agencies will have access to the banks’ “due diligence” data on “loan pools” prior to issuing ratings, which he said would provide significant further data to inform their decisions, and be paid regardless of whether they are hired.
“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 said that ratings agencies were paid by investment banks only when they were ultimately chosen to provide their rating. This meant all preliminary reviews by the agencies were provided free of charge and the banks could shop around for the best rating and then choose the most favourable.
They will now establish a fee-for-service structure, which will mean they get paid whether or not they are chosen to rate a RMBS.
The agencies will also disclose all securitisations submitted for their review by banks, which the Attorney-General said would ensure that it was publicly known which organisations sought but didn’t use a credit agency.
They will also set criteria for assessing the due diligence data on the mortgages that back a RMBS, and receive “loan level results” of due diligence and disclose their due diligence criteria on their websites.
An annual review of RMBS businesses will be conducted by each agency to identify any practices that could compromise their independence.
The New York Attorney-General’s office began its investigation of the mortgage industry more than a year ago, including lenders, securitisers, due diligence providers and credit ratings agencies.
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19 June 2008
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