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Securitization, the process of pooling loans for re-sale on the secondary market, is an important part of mortgage financing. It creates more capital for mortgages and makes home pricing affordable, which is beneficial to borrowers. The subprime crisis exposed intrinsic structural flaws in the mortgage securitization process. Chief among them is the “issuer-pays” model of credit ratings. Issuers, who bundle loans for sale on the securities market, are required to have an independent analysis from a credit rating agency or a Nationally Recognized Statistical Rating Organization (NRSRO) prior to the sale of the securities to investors. This rating is not only a certification of the creditworthiness of the securities, but also a signal to investors that the securities will perform as predicted. Prior to the subprime crisis, the ratings provided for subprime loans were inflated, causing investors, who relied on the ratings, to leave the private-label mortgage market. Restoring confidence in this market is critical to having robust, sustainable mortgage financing. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) made significant changes in the financial services industry designed to protect borrowers and investors. Although the amended law required the Securities and Exchange Commission (SEC) to assume more authority over credit rating agencies, the SEC did not abandon the issuerpays model of credit ratings. This Article fills a void in credit rating agency reform. It proposes that credit rating agencies independently verify and substantiate the information provided by issuers to ensure the accuracy of the information inputted into the business models they use. Rules tightening loan quality standards are now in place, but independent review of the quality of loan manufacturing remains elusive. This Article also argues that borrowers, who have a vested interest in both a sustainable mortgage and an unbiased, fair, transparent rating, are indirect beneficiaries of the rating process. Regulating the market by requiring credit rating agencies to conduct due diligence incorporates quality standards into the ratings process and deters abuse. Given the failure of the credit rating agency reforms to address the inherent structural flaw in the current model, this Article argues the proposal will ensure the needed accountability, transparency, and oversight that can better protect borrowers and investors.

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