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SEC Proposed Rule to Require Underwriting Standards on MBS by Due Diligence Providers

May 19, 2011

The Securities & Exchange Commission (SEC) has voted unanimously to propose new rules and amendments intended to increase transparency and improve the integrity of credit ratings. The proposed rules would implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act and enhance the SEC’s existing rules governing credit ratings and Nationally Recognized Statistical Rating Organizations (NRSROs). “In passing the Dodd-Frank Act, Congress noted that credit ratings applied to structured financial products proved inaccurate and contributed significantly to the mismanagement of risks by financial institutions and investors,” said SEC Chairman Mary L. Schapiro. “Our proposed rules are intended to strengthen the integrity and improve the transparency of credit ratings.” Under the SEC’s proposal, NRSROs would be required to: ►Report on internal controls ►Protect against conflicts of interest ►Establish professional standards for credit analysts ►Publicly provide—along with the publication of the credit rating—disclosure about the credit rating and the methodology used to determine it. ►Enhance their public disclosures about the performance of their credit ratings. ►The SEC’s proposal also requires disclosure concerning third-party due diligence reports for asset-backed securities. The new rules, which were passed by Congress in 2010, would force the agencies to provide more details about how they determine each credit rating. The rules would bar salespeople of the credit agencies from participating in the ratings process. Agencies would be required to review and revise their ratings in cases where an employee was later hired by a company that they rated. "Leveraging third-party due diligence of asset-backed securities (ABS) or mortgage-backed securities (MBS) is a way to provide a report card of the portfolio," said Tommy A. Duncan, CMT, president of Quality Mortgage Services LLC. "However, the third-party due diligence firm should report directly to the NRSRO in order to prevent any unethical persuasive maneuver from the holder of the assets to the third-party due diligence firm. Quality Mortgage Services offers report cards that compare and contrast data and measure the volume of loan defects in portfolios." Public comments on the SEC’s Proposed Rule should be received within 60 days after it is published in the Federal Register.  
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May 19, 2011
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