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MBA Against Proposed Credit Rating Disclosure Rule

By Sally Maison
Published: Monday, December 28th, 2009

Mortgage Bankers Association (MBA), an industry group comprised of 2,400 companies all over the United States, recently sent a letter to the Securities and Exchange Commission expressing its opposition to the credit rating disclosure rule. The propose rule would require credit rating agencies to disclose the initial ratings of mortgage-backed securities.

MBA Against Proposed Credit Rating Disclosure RuleMBA president and CEO John Courson led the MBA’s opposition to the credit rating disclosure rule, fearing that the change will mislead investors and cause them to invest in the wrong securities.

Industry specialists said if the proposal is passed, it will alter the registration statement made under the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940. SEC representatives explained that there is a need to change the current rules in order to help investors understand credit ratings better. SEC officials add that this will also help entrepreneurs understand the nature and limitation of credit ratings.

SEC expresses concern over the fact that credit ratings are very important in helping investors make a decision but their accessibility is quite limited. The agency says investors will be able to better price and market securities once they are allowed to access preliminary ratings. SEC further believes that investors will be able to more appropriate decisions if they know the context in which a credit rating is given.

The agency announced that is focused on four principal areas of concern upon making their proposal. First, officials say the lack of disclosure will make it difficult to understand the real condition of a given security. Secondly, officials are concerned that investors do not have sufficient access to information which would help them fully understand the interests of credit rating agencies, which greatly affects how a security is assessed.

Additionally, SEC aims to prevent credit ratings from inflating, which happens when a registrants picks the highest score available from different scoring agencies. Finally, commission officials say investors may not even have basic information which would greatly affect their investments since the disclosure is not yet mandatory.

Despite the seemingly good intentions of the commission, MBA fears that a mandatory disclosure could mislead a lot of investors since credit ratings are subject to change significantly over the assessment process. They explained that the initial and the final credit ratings could vary largely, especially when it comes to commercial mortgage-backed securities. Courson adds that there are very complex analyses during the scoring process, which could inevitably cause preliminary and final scores to vary greatly. Instead of a mandatory disclosure, MBA supports SEC’s proposal to require more transparency and reliability from credit rating agencies, especially during their assessment of securities.

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