New Rules Coming for Credit Rating Agencies

The Securities and Exchange Commission is proposing new rules for credit rating agencies.

You might be asking, “What are credit agencies and what does this have to do with my mortgage problems?” I’m not talking about consumer credit reports but rather agencies that rate securities.

There are three major credit rating agencies that dominate the markets: Moody’s, Fitch Ratings and Standard & Poor’s.

Credit agencies issue ratings on the creditworthiness of public companies and securities. Their ratings can influence a company’s ability to raise capital, borrow money from banks, and the price of securities being purchased by banks, mutual funds, pensions and government.

The credit rating agencies are blamed by many for contributing directly to the financial collapse. Millions of people, businesses and governments relied upon these rating agencies’ ratings and lost a lot of money as a result. In addition, the rating agencies have been heavily criticized for their failures to identify risks in mortgage backed securities, particularly subprime mortgages.

In July, the California Public Employees’ Retirement System sued the agencies for more than $1 billion dollars in investment losses because they relied on the ratings to purchase securities to be held in their system.

Last year, the credit rating agencies were forced to downgrade thousands of securities as home loan delinquencies soared and the value of those investments dropped, causing hundreds of billions in losses and write downs at big banks and investment firms.

Regulators want to make room for more competition in the rating industry by adding new entrants to the seven existing agencies.

One of the SEC’s proposals is intended to bar companies from “shopping” for favorable ratings of their securities by requiring companies to disclose whether they had received preliminary ratings from other agencies.