Senate Approves Rating Amendment to Rein in Conflicts of Interest

The Senate's financial reform package is getting thicker. A host of legislative amendments have made their way to the floor, and a good share of them have been directly related to mortgage underwriting and trading.
[IMAGE] On Thursday, senators approved a measure requiring the Securities and Exchange Commission (SEC) to set up a regulatory board that will decide which agencies will provide credit ratings on newly issued mortgage-backed securities (MBS). The regulatory board would consist of primarily of investors, as well as debt issuer, rating agency representatives, and at least one independent member.

The amendment, authored by Sen. Al Franken (D-Minnesota), passed by a 64-35 vote. According to Franken, the goal of the measure is to eliminate conflicts of interest in the debt-rating process by ensuring banks and other financial institutions can't shop around among the credit rating agencies. He says raters would be rewarded

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with projects by the board based on accuracy, and the arrangement would allow smaller agencies to get more business.

Currently, banks choose which credit rating agencies will rate the quality of their bonds and other financial products.

Securities issuers have been accused of pressuring raters to provide inflated assessments on sub-par mortgage bonds and other asset-backed securities. And the major ratings agencies themselves have been blamed for giving away underserved top ratings in order to win favor and attract business from banks, in the process losing sight of the integrity of their business and their obligation to investors.

Many are calling Franken's amendment one of the strongest reforms yet to rein in questionable business practices on Wall Street.

""Today is a major victory for Main Streets all over America,"" Sen. Franken said in a statement. ""We're cleaning up Wall Street's dishonest system and replacing it with one that rewards accuracy instead of fraud. My proposal wasn't conservative, or liberal, or even moderate. It was just plain common sense.""

""Earlier in the week"":http://dsnews.comarticles/senate-scales-back-risk-retention-requirements-for-mortgages-2010-05-13, the Senate also passed amendments that exempt “qualified mortgages” from the bill’s 5 percent risk retention requirement; require originators to verify a borrower’s ability to pay; ban yield spread premium payments to brokers and lenders based on loan terms; and requires Treasury to submit a plan to Congress for ending the GSEs’ conservatorship.