The Office of the Comptroller of the Currency (OCC) issued a proposal this week that would scrub references to credit ratings from its regulations, as required by the Dodd-Frank Act. In effect, the rule would end the practice of banks relying on credit ratings to determine the risk of default for underlying loans before issuing “investment grade” securities. Instead, banks will have to makes those determinations on their own.

The agency proposed that issuers of securities backed by mortgages, student loans, and other debt,  must have an “adequate capacity to meet the financial commitments under the security for the projected life of the asset or exposure.”  

To ensure they do, large banks must be able to determine that the risk of default on those securities is low. They can use information from credit raters to inform their views, but if the proposal is finalized they will also have to conduct their own due diligence.

In the proposed guidance, the OCC clarifies steps that will be required for national banks to show that they have verified their investments to meet the newly established credit quality standards. It also includes explanation for federal savings associations and smaller banks to meet due diligence requirements when buying and conducting ongoing reviews of investment securities in their portfolios. In addition, the proposal calls for new requirements for federal savings associations when purchasing corporate debt securities. These requirements will be established by the Federal Deposit Insurance Corporation.

The Dodd-Frank Act has outlined the requirement for federal agencies to review their regulations that require credit assessments of a security or money market instruments. It also requires agencies replaced any reliance on credit ratings in their regulations with new standards determined as appropriate by each agencies.  

The agency is currently accepting comments on the proposed rule from now untill December 29.