HARTFORD, Conn. (Legal Newsline) - Applauding his colleague in New York, Connecticut Attorney General Richard Blumenthal on Thursday said he hopes the strong start to reform in the credit rating industry continues.

Blumenthal said his investigation has revealed a need for change. New York Attorney General Andrew Cuomo helped initiate just that Thursday, reaching an agreement with the three main credit rating agencies that will change certain practices relating to residential mortgage-backed securities.

"The credit rating agencies have agreed to different fee structures with investment banks in an early effort to diminish conflicts of interest," Blumenthal said. "Other aspects of the New York agreement formalize policies the rating agencies voluntarily agreed to implement earlier this year, such as improving the integrity of the data and loan origination information the agencies use to review these structured securities.

"My broad and ongoing intensive investigation into the credit rating agencies has uncovered conflicts that demand immediate and sweeping reforms in all structured securities markets and most particularly in the way municipal and corporate debt is rated."

Standard & Poor's, Moody's Investors Service and Fitch will have six months to implement the terms of Cuomo's agreement, which will run for 42 months. Among other things, they will establish modified rating fee standards for non-prime Residential Mortgage-Backed Securities issuance.

Cuomo said the agencies will alter how they are compensated by investment banks for providing ratings on loan pools and will be required to provide due diligence data on loan pools for review prior to the issuance of ratings.

"The mortgage crisis currently facing this nation was caused in part by misrepresentations and misunderstanding of the true value of mortgage securities," Cuomo said.

"By increasing the independence of the rating agencies, ensuring they get adequate information to make their ratings and increasing industry-wide transparency, these reforms will address one of the central causes of that collapse."

Cuomo's inquiry of the rating agencies began in Aug. 2007.

"The rating industry is highly concentrated, with three private, for-profit companies effectively controlling large swaths of our credit markets," Blumenthal said.

"As I recently urged Congress and the SEC, this fatally flawed system must be fixed. I proposed several specific reforms -- reasonable, relatively simple steps that will go a long way toward making credit ratings more accurate and trustworthy. My investigation continues and may result in legal action."

From Legal Newsline: Reach John O'Brien via e-mail at john@legalnewsline.com.