House Negotiators: Add Covered Bonds to Financial Reform Bill

Just when it seemed relegated to the sidelines, proposed comprehensive U.S. covered bond legislation may be back in the game.

House members of the Conference Committee working toward a compromise with their Senate counterparts on the financial services reform bill voted (June 22) to attach covered bond language to the House's offer.

The Senate side has also "appeared supportive" of the House move to include covered bonds in the compromise bill.  Reporters for Dow Jones Newswires went so far as to write (June 22) that "the conference committee appeared likely to approve language establishing rules to foster a covered bond market in the U.S."

However, the Senate conferees reportedly voted late Tuesday to reject the covered bond amendment to the reform bill without prejudice (meaning it can be taken up again later) — perhaps in order to gain time for the Senate to consider it more closely.  Some observers point to the possibility that Senate conferees may propose some modifications.

Covered bond provisions did not make their way either into the version of financial services reform passed by the House of Representatives or its counterpart in the Senate. But before the financial reform measure can become law, a compromise version must be hammered out in a House-Senate conference committee as part of the reconciliation process.

The covered bond language urged by House conferees was developed by Rep. Scott Garrett (R-NJ), who earlier introduced a proposed statutory framework governing covered bonds as a standalone bill (The United States Covered Bond Act of 2010). Rep. Garrett stated to Covered Bond Investor™:

"As our nation continues to recover from the recent financial crisis and certain credit markets remain locked, Congress must examine new and innovative ways to encourage private capital and investment to return to our capital markets.  We must also consider creative means to enable the private sector to provide additional consumer, commercial, public sector and other types of credit.  Establishing a U.S. covered bond market, which this amendment would do, would further these shared policy goals. 

"The reason I am pushing to attach it to the regulatory reform bill is that there are a variety of problems in our credit markets that covered bonds could help alleviate today.  Everyone is aware of the problems within the commercial real estate market and small business sector, how there is a tightening of liquidity and I believe covered bonds could help ease this liquidity strain."  

Republican House appointees to the conference committee include Rep. Garrett, as well as Rep. Spencer Bachus (R-AL), who cosponsored the United States Covered Bond Act.  Democrats include Paul Kanjorski (D-PA), who cosponsored an earlier covered bond bill with Rep. Garrett, and House Financial Services Committee Chairman Barney Frank (D-MA), who in a hearing last November called covered bonds "a very good idea."

There is no requirement that a specific provision in a conference committee compromise must have been present in the version originally passed by either the House or Senate.  The late President Ronald Reagan reportedly once quipped: "If an orange and an apple went into conference consultations, it might come out a pear."

By the same token, the decision by House members of the conference committee to push for covered bond provisions — even with indications of some Senate support — does not guarantee that such provisions will actually be included in the final House-Senate compromise.