New Credit Rating Agency Rules Target Due Diligence Transparency

New regulations for credit rating agencies that took effect this week are expected to make mortgage and other asset-backed securities more transparent by requiring broader disclosure of certain due diligence reports.

Under the rules, which were mandated under the Dodd-Frank Act and issued by the Securities and Exchange Commission, reviews and reports that due diligence providers previously delivered to investment bankers and rating agencies must be shared directly with the public, said Jeff Taylor, co-founder and managing partner of Digital Risk.

"This doesn't change the... performance expectancies of the company, nor the cycle time to complete these reviews and subsequent issuance process. The true challenge is sharing the review information without disclosing personal information," he said in an email.

To avoid privacy law concerns, certain borrower information will have to be redacted before the reports can be shared, Scott McNulla, vice president or regulatory compliance at Clayton Holdings, said at an industry conference last month.

Issuers and due diligence providers have suggested different approaches to dividing up the responsibility for the new requirements, and how the first deal gets handled under the new rules may help set a precedent, McNulla said in an interview.

"There are going to be a lot of people watching," he said.