Claiming the rating agencies played a key role in the subprime mortgage crisis and its cascading effects in the housing and credit markets, the National Community Reinvestment Coalition is urging the Securities and Exchange Commission to thoroughly investigate them for securities law violations and determine whether they should be fined or lose their registration.
The NCRC, which represents more than 600 community-based organizations that promote banking services to create affordable housing and jobs, made the request in a five-page letter sent to SEC chairman Christopher Cox on Monday, warning it will consider civil litigation if the commission does not address the issues it has raised.
Fitch Ratings, Moody's Investors Service, and Standard & Poor's "knowingly issued false and inflated ratings for securities backed by problematic high-cost loans that have created a financial nightmare for millions of families across the country whose homes have been lost to foreclosure or are now in jeopardy of foreclosure," John Taylor, president and chief executive office of the NCRC, said yesterday.
The rating agencies suffer from "inherent conflict[s]" of interest because they are paid by the companies whose bonds they rate and that these conflicts have "created one of the worse financial crises this country has ever faced," he said.
A spokesman for Fitch said, "Fitch has seen the complaint letter and it has no merit. It's not Fitch's responsibility to verify the information provided by borrowers to mortgage brokers and mortgage bankers."
A spokesman for Standard & Poor's said, "We will continue to work with regulators and other market participants to help build investor confidence in credit ratings and support the efficient operation of credit markets around the world."
Moody's had not commented at press time.
An SEC spokesman would not comment on the letter, but noted that the commission only received rule-writing and inspection authority over the rating agencies last fall. "The commission is vigorously exercising its new authority from Congress over credit rating agencies," he said. Cox has said the SEC is examining the rating agencies and the role they played in the subprime mortgage crisis.
In its letter, the NCRC said the rating agencies "substantially contributed to the housing and foreclosure crisis by making public misrepresentations about the soundness and reliability of [residential mortgage-based securities] ratings."
Their inflated ratings "fueled imprudent mortgage lending and irresponsible secondary market purchases of RMBS, which, in turn, contributed to high default and foreclosure rates" and eventually severely restricted access to credit in communities.
The NCRC claims that each of the rating agencies, in reports they issued over the past five months, acknowledged that they "did not consider information that was crucial to ensure the accuracy and integrity of ratings, which they had represented to the public, were reliable."
Further, both Cox and the President's Working Group on the Financial Markets acknowledged flaws in the agencies' ratings process, the group said. Cox told the Senate Banking Committee in September that the nationally recognized statistical ratings organizations had both underestimated the incidence of mortgage delinquencies in 2006 and had identified flaws in their ratings. The PWG issued a policy statement in March concluding that one of the principal underlying causes of market turmoil was flaws in the rating agency assessments of subprime residential mortgage-backed securities and other complex credit products.
The NCRC asked the SEC to determine whether the rating agencies materially diverted from their standards or committed a fraud on the market, either by misrepresenting they had proper procedures in place to accurately rate residential mortgage-backed securities or by failing to consider that mortgage fraud had occurred and that underwriting standards had been lowered. The SEC also should determine whether the rating agencies were unduly influenced by issuers and/or underwriters to give higher ratings than were unwarranted, the group wrote.
"The SEC should use its authority [under the Credit Rating Agency Reform Act of 2006] to censure, deny, or suspend the registration of any NRSRO that has not complied with the act" or any other securities law, the group said.
The SEC registers the three major and certain other rating agencies as NRSROs so their ratings can be used by market participants to comply with certain commission rules. The NCRC said the SEC also should impose civil penalties and seek other relief where appropriate for such violations, it said. In addition, it urged the commission to write rules that clearly define NRSRO practices that are unfair, coercive, or abusive.
