Truce at Hand Between Underwriters, S&P

S&P has proposed new wording for the paperwork underwriters must sign when hiring it to rate mortgage bonds - a change that could help the agency resolve a standoff with those institutions.

The moves revolve around a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act that makes it easier for investors to sue rating agencies for fraud. Concerned about their potential liability, Moody's, S&P and Fitch took steps earlier this year to amend their "engagement letters" with language explicitly protecting them from the directive, known as Section 933.

When S&P began circulating its revised letter in June, however, some leading mortgage-bond underwriters reacted by threatening a boycott of the agency. While the banks felt that Moody's and Fitch were being reasonable in their demands, S&P was seen as taking a hard line.

The latest draft of S&P's proposed engagement letter, which began making the rounds this week, appears to have largely addressed the concerns of underwriters. The agency is now fielding feedback from the banks, including Bank of America, RBS and Wells Fargo, and the language could be finalized by next week.

"The letter is a lot more Moody's-esque," one source said.

The release of S&P's new letter was the culmination of about a month of negotiations with banks, with Sifma mediating some of the talks.

"We are aware of the concerns that some issuers have raised and we have been reviewing our terms and conditions accordingly," an S&P spokesman said.

Section 933 says rating agencies can be held liable for losses if investors can demonstrate that the firms failed to base their grades on reasonable investigations of underlying data. The Big Three rating organizations responded by inserting language in their engagement letters effectively indemnifying them against such actions.

But S&P apparently took a tougher stance than Moody's or Fitch, going so far as to claim the right to sue a bank if it furnishes incomplete or inaccurate information about a deal. The banks, in turn, put S&P on notice last month that they would no longer hire it to grade new mortgage bonds.

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