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Intro -- CREDIT RATING AGENCY REFORM -- CREDIT RATING AGENCY REFORM -- CONTENTS -- PREFACE -- Chapter 1 CREDIT RATING AGENCY BACKGROUND -- I. BACKGROUND -- A. Introduction -- B. The Credit Rating Agency Reform Act of 2006 -- C. The Role of Credit Ratings in the Credit Market Turmoil -- 1. THE CREATION OF SUBPRIME RMBS AND CDOS -- 2. DETERMINING CREDIT RATINGS FOR SUBPRIME RMBS AND CDOS -- 3. THE DOWNGRADES IN CREDIT RATINGS OF SUBPRIME RMBS AND CDOS -- II. PROPOSED AMENDMENTS -- A. Amendments to Rule 17g-5 -- 1. ADDRESSING THE PARTICULAR CONFLICT ARISING FROM RATING STRUCTURED FINANCE PRODUCTS BY ENHANCING THE DISCLOSURE OF INFORMATION USED IN THE RATING PROCESS -- a. The Proposed Amendment -- b. Proposed Guidance for Compliance with Provisions of the Securities Act of 1933 -- I. Public Offerings -- II. Private Offerings -- III. Offshore Offerings -- 2. RULE 17G-5 PROHIBITION ON CONFLICT OF INTEREST RELATED TO RATING AN OBLIGOR OR DEBT SECURITY WHERE OBLIGOR OR ISSUER RECEIVED RATINGS RECOMMENDATIONS FROM THE NRSRO OR PERSON ASSOCIATED WITH THE NRSRO -- 3.RULE 17G-5 PROHIBITION ON CONFLICT OF INTEREST RELATED TO THE PARTICIPATION OF CERTAIN PERSONNEL IN FEE DISCUSSIONS -- 4. RULE 17G-5 PROHIBITION OF CONFLICT OF INTEREST RELATED TO RECEIPT OF GIFTS -- B. Amendments to Rule 17g-2 -- 1. A Record of Rating Actions and the Requirement that they be made Publicly Available -- 2. A Record of Material Deviation from Model Output -- 3. Records Concerning Third-Party Analyst Complaints -- Clarifying Amendment to Rule 17g-2(b)(7) -- C. Amendments to the Instructions for Form NRSRO -- 1. Enhanced Ratings Performance Measurement Statistics on Form NRSRO -- 2. Enhanced Disclosure of Ratings Methodologies -- D. Amendment to Rule 17g-3 (Report of Credit Rating Actions).
III. PROPOSED NEW RULE 17G-7 (SPECIAL REPORTING OR USE OF SYMBOLS TO DIFFERENTIATE CREDIT RATINGS FOR STRUCTURED FINANCE PRODUCTS) -- IV. PAPERWORK REDUCTION ACT -- A. Collections of Information under the Proposed Amendments -- B. Proposed Use of Information -- C. Respondents -- D. Total Annual Recordkeeping and Reporting Burden -- 1. Amendments to Form NRSRO -- 2. Amendments to Rule 17g-2 -- 3. Proposed Amendment to Rule 17g-3 -- 4. Amendments to Rule 17g-5 -- 5. Proposed Rule 17g-7 -- E. Collection of Information Is Mandatory -- F. Confidentiality -- G. Record Retention Period -- H. Request for Comment -- V. COSTS AND BENEFITS OF THE PROPOSED RULES -- A. Benefits -- B. Costs -- 1. Proposed Amendments to Form NRSRO -- 2. Proposed Amendments to Rule 17g-2 -- 3. Proposed Amendment to Rule 17g-3 -- 4. Proposed Amendments to Rule 17g-5 -- 5. Proposed Rule 17g-7 -- C. Total Estimated Costs and Benefits of this Rulemaking -- VI. CONSIDERATION OF BURDEN ON COMPETITION AND PROMOTION OF EFFICIENCY, COMPETITION, AND CAPITAL FORMATION -- VII. CONSIDERATION OF IMPACT ON THE ECONOMY -- VIII. INITIAL REGULATORY FLEXIBILITY ANALYSIS -- A. Reasons for the Proposed Action -- B. Objectives -- C. Legal Basis -- D. Small Entities Subject to the Rule -- E. Reporting, Recordkeeping, and Other Compliance Requirements -- F. Duplicative, Overlapping, or Conflicting Federal Rules -- G. Significant Alternatives -- H. Request for Comments -- IX. STATUTORY AUTHORITY -- Text of Proposed Rules -- List of Subjects in 17 CFR Parts 240 and 249b -- Part 240-General Rules and Regulations, Securities Exchange Act of 1934 -- Exhibit 1 -- Exhibit 2 -- REFERENCES -- Chapter 2 SUMMARY REPORT OF ISSUES IDENTIFIED IN THE COMMISSION STAFF'S EXAMINATIONS OF SELECT CREDIT RATING AGENCIES -- I. SUMMARY -- II. BACKGROUND -- A. The Examinations.
B. Current Regulatory Requirements and Proposed New Rules and Rule Amendments with Respect to Credit Rating Agencies -- III. THE RATINGS PROCESS -- A. The Creation of RMBS and CDOs -- B. Determining Credit Ratings for RMBS and CDOs -- IV. THE STAFF'S EXAMINATIONS: SUMMARY OF FACTUAL FINDINGS, OBSERVATIONS AND RECOMMENDATIONS -- A. There was a Substantial Increase in the Number and in the Complexity of RMBS and CDO Deals Since 2002, and Some Rating Agencies Appeared to Struggle with the Growth -- Remedial Action -- B. Significant Aspects of the Ratings Process Were Not Always Disclosed -- Current Regulatory Requirements -- Remedial Action -- Proposed Rules and Rule Amendments that Would Address These Issues -- C. Policies and Procedures for Rating RMBS and CDOs Can be Better Documented -- Current Regulatory Requirements -- Remedial Action -- D. Rating Agencies are Implementing New Practices with Respect to the Information Provided to Them -- Proposed Rules and Rule Amendments that Would Address Verification -- E. Rating Agencies Did Not Always Document Significant Steps in the Ratings Process -- Including the Rationale for Deviations from Their Models and for Rating Committee Actions and Decisions -- and They Did Not Always Document Significant Participants in the Ratings Process -- Current Regulatory Requirements -- Remedial Action -- Proposed Rules and Rule Amendments that Would Address These Issues -- F. The Surveillance Processes Used by the Rating Agencies Appear to Have Been Less Robust than Their Initial Ratings Processes -- Current Regulatory Requirements -- Remedial Action -- Proposed Rules and Rule Amendments that Would Address These Issues -- G. Issues Were Identified in the Management of Conflicts of Interest and Improvements Can be Made -- 1. The "Issuer Pays" Conflict.
Proposed Rules and Rule Amendments that Would Address These Issues -- Current Regulatory Requirements -- Remedial Action -- Proposed Rules and Rule Amendments that Would Address These Issues -- 2. Analysts' Compensation -- 3. Securities Transactions by Employees of Credit Rating Agencies -- Current Regulatory Requirements -- Remedial Action -- H. Internal Audit Processes -- Current Regulatory Requirements -- Remedial Action -- V. OBSERVATIONS BY THE OFFICE OF ECONOMIC ANALYSIS -- A. Conflicts of Interest -- B. Factual Summary of the Ratings Process for RMBS -- Risk Variables -- 2. Use of Historical Data -- 3. Surveillance of Ratings -- C. Factual Summary of the Ratings Process for CDOs -- VI. CONCLUSION -- REFERENCES -- Chapter 3 FEDERAL RESERVE BANK OF NEW YORK STAFF REPORTS: UNDERSTANDING THE SECURITIZATION OF SUBPRIME MORTGAGE CREDIT* -- ABSTRACT -- EXECUTIVE SUMMARY -- 1. INTRODUCTION -- 2. OVERVIEW OF SUBPRIME MORTGAGE CREDIT SECURITIZATION -- 2.1. The Seven Key Frictions -- 2.1.1. Frictions between the Mortgagor and Originator: Predatory Lending -- 2.1.2. Frictions between the Originator and the Arranger: Predatory Lending and Borrowing -- 2.1.3. Frictions between the Arranger and Third-Parties: Adverse Selection -- Adverse Selection and the Warehouse Lender -- Adverse Selection and the Asset Manager -- Adverse Selection and Credit Rating Agencies -- 2.1.4. Frictions between the Servicer and the Mortgagor: Moral Hazard -- 2.1.5. Frictions between the Servicer and Third-Parties: Moral Hazard -- Moral Hazard between the Servicer and the Asset Manager4 -- Moral Hazard between the Servicer and the Credit Rating Agency -- 2.1.6. Frictions between the Asset Manager and Investor: Principal-Agent -- 2.1.7. Frictions between the Investor and the Credit Rating Agencies: Model Error -- 2.2. Five Frictions that Caused the Subprime Crisis.
3. AN OVERVIEW OF SUBPRIME MORTGAGE CREDIT -- The Motivating Example -- 3.1. Who Is the Subprime Mortgagor? -- The Motivating Example -- Industry Trends -- 3.2. What Is a Subprime Loan? -- The Motivating Example -- Industry Trends -- The Impact of Payment Reset on Foreclosure -- 3.3. How Have Subprime Loans Performed? -- Motivating Example -- Industry -- 3.4. How Are Subprime Loans Valued? -- 4. OVERVIEW OF SUBPRIME MBS -- 4.1. Subordination -- 4.2. Excess Spread -- 4.3. Shifting Interest -- 4.4. Performance Triggers -- 4.5. Interest Rate Swap -- 4.6. Remittance Reports -- 5. AN OVERVIEW OF SUBPRIME MBS RATINGS -- 5.1. What Is a Credit Rating? -- 5.2. How Does One Become a Rating Agency?17 -- 5.3. When Is a Credit Rating Wrong? How Could We Tell? -- 5.4. The Subprime Credit Rating Process -- 5.4.1. Credit Enhancement -- 5.5. Conceptual Differences between Corporate and ABS Credit Ratings -- 5.6. How through-the-Cycle Rating Could Amplify the Housing Cycle -- 5.7. Cash Flow Analytics for Excess Spread -- The Timing of Losses -- Prepayment Risk -- Interest Rate Risk -- Other Details -- Motivating Example -- 5.8. Performance Monitoring -- 5.9. Home Equity ABS Rating Performance -- 6. THE RELIANCE OF INVESTORS ON CREDIT RATINGS: A CASE STUDY -- 6.1. Overview of the Fund -- Fund Adequacy -- Portfolio Composition -- 6.2. Fixed-Income Asset Management -- Mandates (from ORC Sec 742.11) -- Asset Management -- 7. CONCLUSIONS -- REFERENCES -- APPENDIX 1: PREDATORY LENDING -- The Role of the Rating Agencies -- APPENDIX 2: PREDATORY BORROWING -- Fraud for Housing -- Fraud for Profit -- The Role of the Rating Agencies -- APPENDIX 3: SOME ESTIMATES OF PD BY RATING -- INDEX -- Blank Page.
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Credit rating agency reform [[electronic resource] /] / John De Luca and Paul Russo, editors
