In the wake of the financial crisis, the country’s largest credit ratings agencies all touted new ratings methodologies that were, in theory, designed to guard against the sorts of malfeasance that surrounded mortgage bond ratings in the run-up to the crisis.
But it looks like the new mortgage bond rating system at one of the nation’s largest credit ratings agencies was far from perfect.
Moody’s Investors Service will pay $15 million as part of a settlement with the Securities and Exchange Commission over the credit ratings agency’s mortgage bond ratings system from 2010 through 2013.
The fine is part of $16.25 settlement between Moody’s and the SEC, which also covers Moody’s “failing to clearly define and consistently apply credit rating symbols” on certain financial instruments.
The SEC states that this is first time that it has filed an enforcement action over rating symbol deficiencies.
As part of the settlement, Moody’s will pay $15 million to settle allegations of internal controls failures involving models it used in rating residential mortgage-backed securities during the time period referenced above.
According to the SEC’s order, Moody’s “failed to establish and document an effective internal control structure” on ratings models that the ratings agency outsourced from a corporate affiliate and used in rating mortgage bonds from 2010 through 2013.
Additionally, the SEC claimed that Moody’s “failed to maintain and enforce existing internal controls that should have been applied to the models.”
According to the SEC, the errors in Moody’s models led to incorrect ratings on more than 650 RMBS with a notional value of more than $49 billion. Eventually, Moody’s corrected the ratings on all of those mortgage bonds.
But the SEC notes that in 54 instances, Moody’s failed to document its rationale for issuing final ratings that “deviated materially” from the model-implied ratings.
As part of the settlement, Moody’s will also retain an independent consultant to assess and improve its internal controls surrounding its mortgage bond ratings.
This is not the first time that Moody’s has been fined for its mortgage bond ratings activities, although this fine pales in comparison to the fine Moody’s had to pay for its pre-crisis activities.
Back in January 2017, Moody’s reached a settlement with the Department of Justice, 21 states, and the District of Columbia that saw the company pay out nearly $864 million for its RMBS and collateralized loan obligations ratings that helped lead to the financial crisis.
Additionally, this new settlement stipulates that Moody’s will pay $1.25 million and to review its policies, procedures, and internal controls regarding rating symbols.
According to the SEC, for more than two dozen ratings of securities known as “combo notes,” which carried a total notional value of about $2 billion, Moody’s assigned ratings in a manner that was “inconsistent with other types of securities that used the same rating symbols.”
In a statement, Antonia Chion, associate director of the SEC’s Division of Enforcement noted the role that ratings agencies play and why it’s important that those agencies act with both integrity and proficiency.
“Rating agencies play a critical role in our capital markets and need to have effective controls over their rating processes,” Chion said. “As our order notes, the SEC put Moody’s on notice about its internal controls obligations yet it did not develop an effective process to ensure the accuracy of the models it relied upon when rating residential mortgage-backed securities.”
The SEC stated that Moody’s did not admit or deny the charges against it, but the credit ratings agency settled the charges nonetheless.
“We are pleased to have resolved these legacy matters, which reach back to 2010,” a Moody’s spokesperson said in a statement provided to HousingWire. “Moody’s Investors Service regularly reviews and refines its policies and procedures and is committed to maintaining strong controls around models used in the rating process.”
