House Committee Casts Favorable Vote for U.S. Covered Bond Bill

The latest version of comprehensive U.S. covered bond legislation, H.R. 5823, was reported out of a markup session by a voice vote of the House Financial Services Committee (HFSC) Wednesday evening (July 28).

As noted by Dow Jones, the bill now includes (among other changes) "an amendment offered by Rep. Melissa Bean (D., Ill.) that would match the regulator to the type of institution dealing with the bonds."  Previous versions of proposed covered bond legislation have specified a single regulator — first the Treasury Department, then the Office of the Comptroller of the Currency (OCC).

Howard GoldwasserHoward M. Goldwasser, a partner at Curtis, Mallet-Prevost, Colt & Mosle LLP, who was involved in the structuring of some of the first US and Canadian covered bond programs, has been following these developments closely.  He provided this update to Covered Bond Investor™ (July 28):

The committee made it through the proposed amendments, all of which were passed, and also voted to bring the bill to the floor of the House of Representatives following the August recess.  I think we will have a clearer picture of the precise import of the amendments tomorrow [July 29], when the text of amendments will be made publicly available. 

However, according to the description of the amendments provided by members of the committee, they appeared focused around a few discrete issues:

A clarification of the definition of the term eligible assets so that it is limited to mortgages — both commercial and residential, public sector loans and small business loans, along with a provision that would allow the regulator, in the future, to expand the scope of the definition to include other asset classes;

A proposal that would supplant the bill's original plan to name the Treasury (and then, in later iterations, the OCC) as the exclusive covered bond regulator and, instead, to divvy that role up among the existing array of U.S. regulators — namely the Federal Reserve Bank, the FDIC, the OCC (and, for as long it remains standing, the OTC) and the SEC; and

Some clarification around the time frame within which the FDIC would be obligated to take action with respect to a cover pool in the context of an issuer insolvency.

However, in my mind, the most noteworthy item from the markup session was not an amendment, but rather a letter from FDIC Chairman Bair to the Committee, which [HFSC Chairman] Frank referred to toward the end of the session.  According to Rep. Frank, in his description of the letter, Chairman Bair, in the letter, repeated the FDIC's lingering concerns about the bill's proposal to "hand over" what she described as "excess collateral" — that is to say, the provisions of the bill that would preserve bondholders' rights to overcollateralization inherent in the cover pool following the FDIC's appointment as receiver.

It goes without saying that that is not a minor point, and will, no doubt, be at the center of debate on the bill as it moves forward.

After a bill has been reported out of committee (as occurred here), it becomes eligible for a vote by the full House of Representatives.  As noted by Congress.org, "the Speaker and majority leader largely determine if, when, and in what order bills come up" for a vote.  If and when the full House passes a bill, it is referred to the Senate for further action.

In the Senate, Sen. Bob Corker (R-TN) has urged Senate Banking Committee Chairman Christopher Dodd (D-CT) to hold a hearing on covered bonds.

Previously, covered bond provisions came very close to inclusion in the recently-enacted financial regulatory reform bill, failing by a single vote of the conference committee reconciling House and Senate versions of the bill.

Widely used as a real estate funding tool in Europe, covered bonds are debt obligations that have recourse to a pool of assets — the "cover pool" — that secures or "covers" the bond if the issuer becomes insolvent.  Bondholders can rely on recourse to the assets in the cover pool as well as to the direct obligation of the issuer.