The world's second-largest credit ratings agency has agreed to pay nearly $864m to settle US government and state claims that it gave inflated assessments to risky mortgage investments in the years leading up to the financial crisis.
The deal was struck by New York-based Moody's with the US Justice Department and the attorneys general for 21 states and the District of Columbia on Friday.
It calls for $437.5m to go to the Justice Department and $426.3m to be divided among the states and the District of Columbia.
Moody's, along with the other two major rating agencies - Standard & Poor's and Fitch - were widely criticised for giving low-risk ratings to the risky mortgage securities being sold ahead of the crisis, while they reaped lucrative fees.
In the settlement, Moody's admitted that it did not follow its own standards in rating the risk of securities backed by home mortgages and the collateralised debt obligations that relied on their health.
The system spread the risk of mortgage defaults to banks around the world and led to a string of financial collapses in 2008 when people began defaulting on risky sub-prime loans.
That caused the housing market to implode in many areas and sparked the worst US recession since the Depression.
Moody's acknowledged that it used a more lenient standard for certain financial products and did not make public the differences from its published standards.
"Moody's failed to adhere to its own credit rating standards and fell short on its pledge of transparency in the run-up to the Great Recession," principal deputy associate attorney general Bill Baer said.
Under the settlement, Moody's agreed to a number of reforms designed to make sure its credit ratings are objective, including separating commercial and credit rating functions; ensuring changes to its rating methods are independently reviewed and that some employees are not compensated based on Moody's own financial performance.
"The agreement acknowledges the considerable measures Moody's has put in place to strengthen and promote the integrity, independence and quality of its credit ratings," Moody's said in a statement.
"As part of the resolution, Moody's has agreed to maintain, for the next five years, a number of existing compliance measures and to implement and maintain certain additional measures over the same period."
The agreement comes two years after Standard & Poor's, the world's biggest ratings agency, agreed to pay nearly $1.4bn to settle similar allegations by the Justice Department, 19 states and the District of Columbia.
With the District of Columbia, the states involved in Friday's settlement are Arizona; California; Connecticut; Delaware; Idaho; Illinois; Indiana; Iowa; Kansas; Maine; Maryland; Massachusetts; Mississippi; Missouri; New Hampshire; New Jersey; North Carolina; Oregon; Pennsylvania; South Carolina; and Washington.