Today, Congressman Patrick McHenry (R-NC-10) introduced the Credit Rating Agency Transparency and Disclosure Act.

“The housing market meltdown exposed dangerous weaknesses in the credit rating industry, demonstrating a clear need for reform," said Congressman McHenry.  "By bringing greater transparency to the market, this bill will give investors crucial information they need to make sound financial decisions.”

As mortgage products were packaged and sold as securities during the boom in the housing market, the credit rating industry consistently gave undeservedly high ratings to many of these securities.

In the aftermath of the housing market collapse, it is clear that these imprudent ratings exacerbated the severity of the crash.  

Now, there is wide agreement that the credit rating agencies need to institute reforms to their business practices.  Last week, the three major credit-rating agencies - Moody’s, S&P, and Fitch - announced their intentions to reform their security-selling practices.   In the coming days, the Securities and Exchange Commission (SEC) will propose rules aimed at creating greater transparency in the credit rating industry.

To strengthen that effort, Congressman McHenry introduced the Credit Rating Agency Transparency and Disclosure Act.  The Congressman’s plan requires nationally recognized credit rating agencies to provide additional disclosures with respect to the rating of structured securities.  Specifically the bill will do the following:

•    Ensure that issuers and originators are providing credit rating agencies with adequate information on the assets underlying a structured security.
•    Require credit rating agencies to institute procedures for getting data from issuers and originators concerning the procedures employed to attest to the data’s veracity and the fraud detection capabilities surrounding the process.
•    Require credit rating agencies to disclose in a central database the historical default rates of all classes of financial products they have rated.

With the enactment of this legislation, investors would have greater confidence in the quality of structured security ratings, resulting in a healthier market for consumers.