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Due Diligence Firms as Experts

Should due diligence firms be viewed as experts on mortgage securitizations, in much the same way accounting firms are viewed as experts on audited financial statements?  Some in our industry say no.  I say yes.  Here's why.

Shortly after the Dodd-Frank Wall Street Reform and Consumer Protection Act became law in July 2010, the SEC announced a call for comments about proposed rules governing diligence and disclosures.  Among them was the suggestion that diligence firms be viewed as experts on securitizations.  Comments were due in mid-November.

Expert status in this sense doesn't just mean you're good at what you do.  It imposes additional burdens and obligations on firms deemed experts -- most notably, expert status on a securitization means you can be held liable by investors if the disclosures you are responsible for are wrong.

I don't seek liability for Allonhill; I believe it's something to be avoided in business.

Having said that, let me tell you what Allonhill stands for and why we are in business: we believe due diligence plays a critical role in providing investors and ratings agencies with verified, reliable information.  What formerly passed for due diligence did not in any way conform to my idea of what we are in place to do, and did not come close to the standards that we, at Allonhill, intend to bring to this market on every securitized transaction.

I fully expect the SEC to publish a rule in January that declares Allonhill to be held to expert status in its role as due diligence review firm on publically rated securitizations.  Although I believe our standards are the highest in our industry, we will push hard for time to phase in the training, quality control, definitions and standards that we would need to establish in order to perform our duties and meet expert requirements.  This is a big change.

I am unaware of any other firm in our industry that joins me in the position that we should be experts.  Expert status will make our services most costly, and that certainly is not my goal.  But providing this industry with much-needed credibility is my goal.  And credibility and the trust it will engender with investors has enormous value in helping to re-establish a healthy, sustainable mortgage industry.

I come from a public accounting firm background.  Maybe that's why I believe we should perform to a level that brings people confidence when they see our name on a securitization.  It is my sincere hope that when securitizations are back in the market, investors will see the Allonhill logo, and will know that it stands for integrity, in all regards.


Real Value Added

Not only is the expert status a needed step, I feel it adds more value to the services than many people give it credit for adding. As you said adding liability is not a goal of any company; however it shows commitment to your service and "puts your money where your mouth is" when it comes to your services. I applaud you for taking this step. Companies using AllonHill's services should have no problem paying a premium, knowing Allonhill has skin in the game as well.

Other services without the expert status have less at stake. Operating lean is one thing, cutting corners to be the cheapest on the market is totally different. For quite a while now, companies with little at risk have been in the cutting corners group to keep costs down. Expert status will mean doing it right, and doing things efficiently.

I hope your prediction is correct and expert status is just around the corner.

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I could not agree with you

I could not agree with you more, and I applaud you for taking a stand!!! I don't think I have ever heard anyone else who has worked in due diligence speak with such refreshing honesty. Moreover, your goal of embracing integrity and providing the level of expertise that is expected by your clients sets you worlds apart from your competitors. I can only hope that the federal government is as wise as you.