The SEC says that the ratings agency failed to establish adequate controls when rating RMBS – leading to hundreds of corrections
One of the nation’s largest credit rating agencies will pay a $15 million penalty for failures in its ratings of mortgage-backed securities.
The Securities and Exchange Commission announced Tuesday that Moody’s Investors Service would pay the penalty to settle charges that there were control failures in models it used to rate residential mortgage-backed securities between 2010 and 2013. Moody’s will also retain an independent consultant to assess and improve its internal controls. The company also agreed to pay an additional $1.25 million for failing to clearly define and consistently apply credit rating symbols.
According to the SEC, the credit rating agency failed to establish an effective control structure for models it outsourced from a corporate affiliate and used to rate RMBS. The company also failed to maintain and enforce existing internal controls that should have been applied to the models, the SEC said.
“Ultimately, Moody’s corrected more than 650 RMBS ratings with a notional value exceeding $49 billion, due, in part, to errors in the models,” the SEC said.
“Ratings agencies play a critical role in our capital markets and need to have effective controls over their rating processes,” said Antonia Chion, associate director of the SEC’s Division of Enforcement. “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.”
