I 111th CONGRESS 2d Session H. R. 5823 IN THE HOUSE OF REPRESENTATIVES July 22, 2010 Mr. Garrett of New Jersey (for himself, Mr. Kanjorski, and Mr. Bachus) introduced the following bill; which was referred to the Committee on Financial Services A BILL To establish a covered bond regulatory oversight program, and for other purposes.

1.

Short title

This Act may be cited as the United States Covered Bond Act of 2010.

2.

Definitions

For purposes of this Act, the following definitions shall apply: (1)

Ancillary asset

The term ancillary asset means— (A)any interest rate or currency swap associated with an eligible asset, substitute asset, or other asset in a cover pool; (B)any credit enhancement or liquidity arrangement associated with an eligible asset, substitute asset, or other asset in a cover pool; (C)any guarantee, letter-of-credit right, or other secondary obligation that supports any payment or performance on an eligible asset, substitute asset, or other asset in a cover pool; and (D)any proceeds of, or other property incident to, an eligible asset, substitute asset, or other asset in a cover pool. (2)

Corporation

The term Corporation means the Federal Deposit Insurance Corporation. (3)

Cover pool

The term cover pool means a dynamic pool of assets that is comprised of— (A)eligible assets from a single eligible asset class; and (B)any substitute assets or ancillary assets. (4)

Covered bond

The term covered bond means any senior recourse debt obligation of an eligible issuer that— (A)has an original term to maturity of not less than 1 year; (B)is secured by a perfected security interest in a cover pool that is owned directly or indirectly by the issuer of the obligation; (C)is issued under a covered bond program that has been approved by the covered bond regulator and is identified in a register of covered bonds maintained by the covered bond regulator; and (D)is not a deposit. (5)

Covered bond program

The term covered bond program means any program of an eligible issuer under which 1 or more series or tranches of covered bonds may be issued. (6)

Covered bond regulator

The term covered bond regulator means the Comptroller of the Currency. (7)

Eligible asset

The term eligible asset means— (A)in the case of the residential mortgage asset class— (i)any first-lien mortgage loan that is secured by 1-to-4 family residential property and that is in compliance with any rule or supervisory guidance of a Federal agency that is applicable to the loan at the time of loan origination; (ii)any mortgage loan insured under the National Housing Act (12 U.S.C. 1701 et seq.), or any loan guaranteed, insured, or made under chapter 37 of title 38, United States Code; and (iii)rural housing loans; (B)in the case of the home equity asset class, any home equity loan that is secured by 1-to-4 family residential property and that is in compliance with any rule or supervisory guidance of a Federal agency that is applicable to the loan at the time of loan origination; (C)in the case of the commercial mortgage asset class, any commercial mortgage loan (including any multifamily mortgage loan) that is in compliance with any rule or supervisory guidance of a Federal agency that is applicable to the loan at the time of loan origination; (D)in the case of the public sector asset class— (i)any security issued by a State or municipality; (ii)any loan made to a State or municipality; and (iii)any loan, security, or other obligation that is insured or guaranteed, in full or substantially in full, by the full faith and credit of the United States Government (whether or not such loan, security, or other obligation is also part of another eligible asset class); (E)in the case of the auto asset class, any auto loan or lease that is in compliance with any rule or supervisory guidance of a Federal agency that is applicable to the loan or lease at the time of loan or lease origination; (F)in the case of the student loan asset class, any student loan (whether guaranteed or nonguaranteed) that is in compliance with any rule or supervisory guidance of a Federal agency that is applicable to the loan at the time of loan origination; (G)in the case of the credit or charge card asset class, any extension of credit to a person under an open-end credit plan that is in compliance with any rule or supervisory guidance of a Federal agency that is applicable to the extension of credit at the time the extension is made; (H)in the case of the small business asset class, any loan made or guaranteed under a program of the Small Business Administration; and (I)in the case of any other eligible asset class, any asset designated by the covered bond regulator, by rule and in consultation with the applicable primary financial regulatory agencies, as an eligible asset for purposes of such class. (8)

Eligible asset class

The term eligible asset class means— (A)a residential mortgage asset class; (B)a commercial mortgage asset class; (C)a public sector asset class; (D)a small business asset class; or (E)any other eligible asset class, as determined by the covered bond regulator by rule and in consultation with the applicable primary financial regulatory agencies. (9)

Eligible issuer

The term eligible issuer means— (A)any insured depository institution and any subsidiary of such institution; (B)any bank holding company and any savings and loan holding company; (C)any nonbank financial company that is approved as an eligible issuer by the primary financial regulatory agency for the nonbank financial company and the covered bond regulator; and (D)any issuer that is sponsored by 1 or more eligible issuers for the sole purpose of issuing covered bonds on a pooled basis. (10)

Nonbank financial company

The term nonbank financial company has the meaning given such term under section 102(a)(4) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. (11)

Oversight program

The term oversight program means the covered bond regulatory oversight program established under section 3(a). (12)

Primary financial regulatory agency

The term primary financial regulatory agency has the meaning give such term under section 2(12) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. (13)

Substitute asset

The term substitute asset means— (A)cash; (B)any direct obligation of the United States Government, and any security or other obligation, the full principal and interest of which are insured or guaranteed by the full faith and credit of the United States Government; (C)any direct obligation of a United States Government corporation or Government-sponsored enterprise of the highest credit quality, and any other security or other obligation of the highest credit quality whose full principal and interest are insured or guaranteed by any such corporation or enterprise, except that the outstanding principal amount of these obligations in any cover pool may not exceed an amount equal to 20 percent of the outstanding principal amount of all assets in the cover pool without the approval of the covered bond regulator; (D)any overnight investment in Federal funds; (E)any other substitute asset, as determined by the covered bond regulator by rule and in consultation with the applicable primary financial regulatory agencies; and (F)any deposit account or securities account into which only an asset described in subparagraphs (A), (B), (C), (D), or (E) may be deposited or credited.

3.

Regulatory oversight of covered bond programs established

(a)

Establishment

(1)

In general

Not later than 180 days after the date of the enactment of this Act, the covered bond regulator shall, by rule and in consultation with the applicable primary financial regulatory agencies, establish a covered bond regulatory oversight program that provides for— (A)covered bond programs to be evaluated according to reasonable and objective standards in order to be approved under paragraph (2), including eligibility standards for eligible assets; (B)covered bond programs to be maintained in a manner consistent with this Act and safe and sound financial practices; and (C)any estate created under section 4 to be administered in a manner that is consistent with maximizing the value and the proceeds of the related cover pool in a resolution under this Act. (2)

Approval of each covered bond program

(A)

In general

A covered bond shall be subject to this Act only if the covered bond is issued by an eligible issuer under a covered bond program that is approved by the covered bond regulator. (B)

Existing covered bond programs

The covered bond regulator may approve a covered bond program that is in existence on the date of enactment of this Act. Upon such approval, each covered bond under the covered bond program shall be subject to this Act, regardless of when the covered bonds were issued. (C)

Consultation with any primary regulator

Before approving any covered bond program of any eligible issuer, the covered bond regulator shall consult with the primary financial regulatory agency, if any, of the eligible issuer and shall confirm with such agency, if any, that the covered bond program is consistent with safe and sound financial practices. (D)

Multiple covered bond programs permitted

An eligible issuer may have more than 1 covered bond program. (3)

Registry

Under the oversight program, the covered bond regulator shall maintain a registry on a Web site available to the public that contains— (A)the name of each approved covered bond program; and (B)information on all outstanding covered bonds issued under each approved covered bond program, (including the reports described under paragraphs (3) and (4) of subsection (b). (4)

Fees

The covered bond regulator may levy fees on the issuers of covered bonds in an amount the covered bond regulator determines is necessary or appropriate to defray, in the aggregate, the costs of the covered bond regulator in carrying out the provisions of this Act. (b)

Minimum over-Collateralization requirements

(1)

Requirements established

(A)

In general

The covered bond regulator, from time to time, shall establish minimum over-collateralization requirements for covered bonds backed by each of the eligible asset classes, which are designed to ensure that sufficient assets exist in the cover pool to satisfy all principal and interest due on the covered bonds and which are based on the credit, collection, and interest rate risks (excluding the liquidity risks) associated with the eligible asset class. (B)

Reliance on other over-collateralization standards

In establishing requirements under subparagraph (A), the covered bond regulator may rely on over-collateralization levels required for the same or similar asset classes by— (i)any Federal reserve bank when extending credit to depository institutions under the Federal Reserve Act (12 U.S.C. 221 et seq.); (ii)any Federal home loan bank when extending credit to member institutions under the Federal Home Loan Bank Act (12 U.S.C. 1421 et seq.); or (iii)any other comparable lenders in substantially similar transactions. (2)

Asset coverage test

The eligible assets and the substitute assets in each cover pool that secures covered bonds shall, in the aggregate, at all times, meet the applicable minimum over-collateralization requirements established under paragraph (1). (3)

Monthly reporting

Every month, each issuer of covered bonds shall submit a report on whether the cover pool that secures the covered bonds meets the applicable minimum over-collateralization requirements established under paragraph (1) to— (A)the primary financial regulatory agency of the issuer, if any; (B)the covered bond regulator; and (C)the applicable covered bondholders. (4)

Independent asset monitor

(A)

Appointment of independent asset monitor

Each issuer of covered bonds shall appoint the indenture trustee for the covered bonds, or another unaffiliated entity, as an independent asset monitor for the applicable cover pool. (B)

Duties

The independent asset monitor appointed under subparagraph (A) shall, on a semiannual or other more frequent periodic basis determined by the covered bond regulator— (i)verify whether the cover pool that secures the covered bonds meets the applicable minimum over-collateralization requirements established under paragraph (1); and (ii)disclose to the primary financial regulatory agency of the issuer, if any, the covered bond regulator, and the applicable covered bond holders whether the cover pool that secures the covered bonds meets the applicable minimum over-col­lat­er­al­i­za­tion requirements established under paragraph (1). (5)

No loss of status

Covered bonds shall remain subject to this Act regardless of whether the applicable cover pool ceases to meet the applicable minimum over-collateralization requirements established under paragraph (1) at any time after the covered bonds are issued. (6)

Failure to meet requirements

If a cover pool securing covered bonds fails to meet the applicable minimum over-collateralization requirements established under paragraph (1), and if such failure is not cured within the time specified in the transaction documents related to the covered bonds— (A)such failure shall be deemed to be an uncured default for purposes of section 4(a); and (B)the issuer shall notify the covered bond regulator of such failure. (c)

Requirements for eligible assets

(1)

Loans

A loan shall not qualify as an eligible asset for so long as the loan is delinquent for more than 60 consecutive days. (2)

Securities

A security shall not qualify as an eligible asset for so long as the security does not meet any credit-quality requirement under this Act. (3)

No double pledge

An asset shall not qualify as an eligible asset for so long as the asset is subject to a prior perfected security interest that has been granted in an unrelated transaction. Nothing in this Act shall affect such a prior perfected security interest. (4)

Single eligible asset class

No cover pool may include eligible assets from more than 1 eligible asset class. (d)

Other requirements

(1)

Books and records of issuer

Each issuer of covered bonds shall clearly mark its books and records to identify the assets that comprise the cover pool that secures the covered bonds. (2)

Schedule of eligible assets and substitute assets

Each issuer of covered bonds shall deliver to the indenture trustee for the covered bonds, on at least a monthly basis, a schedule of all eligible assets and substitute assets in the cover pool that secures the covered bonds.

4.

Resolution upon default or insolvency

(a)

Uncured default

In this section, the term uncured default, when used with respect to a covered bond, means a default on the covered bond that has not been cured within the time, if any, required by the transaction documents related to the covered bond. (b)

Default on covered bonds prior to conservatorship, receivership, liquidation, or bankruptcy

(1)

Creation of separate estate

If an uncured default occurs with respect to a covered bond before the issuer of such covered bond enters conservatorship, receivership, liquidation, or bankruptcy, an estate shall be automatically created by operation of law and shall exist and be administered separate and apart from the issuer or any subsequent conservatorship, receivership, liquidating agency, or estate in bankruptcy for the issuer or any other assets of the issuer. A separate estate shall be created for each affected covered bond program. (2)

Assets and liabilities of estate

Any estate created under paragraph (1) shall be comprised of the cover pool that secures the covered bond, which shall be automatically released to and held by the estate free and clear of any right, title, interest, or claim of the issuer or any conservator, receiver, liquidating agent, or trustee in bankruptcy for the issuer or any other assets of the issuer. The estate created under paragraph (1) shall be fully liable on the covered bond and all other covered bonds and related obligations of the issuer (including obligations under related derivative transactions) that are secured by the cover pool. The estate shall not be liable on any obligation of the issuer that is not secured by the cover pool. (3)

Retention of claims

Any holder of a covered bond or related obligation secured by a cover pool for which an estate has been created under paragraph (1) shall retain a claim against the issuer for any deficiency with respect to the covered bond or related obligation. (4)

Residual interest

(A)

Issuance of residual interest

Upon the creation of an estate under paragraph (1), a residual interest in the estate shall be automatically issued by operation of law to the issuer. (B)

Nature of residual interest

The residual interest under subparagraph (A) shall— (i)be an exempted security as described in section 5; (ii)represent the right to any surplus from the cover pool after the covered bonds and all other liabilities of the estate have been paid in full; and (iii)be evidenced by a certificate executed by the trustee of the estate. (5)

Obligation of issuer

After the creation of an estate under paragraph (1), the issuer shall— (A)transfer to the covered bond regulator, or a designee of the covered bond regulator, all tangible or electronic books, records, files, and other documents or materials relating to the assets and liabilities of the estate; and (B)at the election of the covered bond regulator, continue servicing the cover pool for 120 days after the creation of the estate in return for a fair-market-value fee, as determined by the covered bond regulator, that shall be payable from the estate as an administrative expense. (c)

Default on covered bonds upon conservatorship, receivership, liquidation, or bankruptcy

(1)

Corporation conservatorship or receivership

(A)

In general

If the Corporation is appointed as conservator or receiver for an issuer of covered bonds before an uncured default results in the creation of an estate under subsection (b), the Corporation as conservator or receiver shall have an exclusive right, during the 180-day period beginning on the date of the appointment, to transfer any cover pool owned by the issuer in its entirety, together with all covered bonds and related obligations secured by the cover pool, to another eligible issuer that meets all conditions and requirements specified in the transaction documents related to the covered bonds. (B)

Obligations during 180-day period

During the 180-day period described in subparagraph (A), the Corporation as conservator or receiver shall satisfy all monetary and nonmonetary obligations of the issuer under the covered bonds and the related transaction documents until the earlier of— (i)the transfer of the covered bond program to another eligible issuer; (ii)the repudiation of further performance by the Corporation as conservator or receiver under the covered bond program; or (iii)the failure of the Corporation as conservator or receiver to timely cure a default (other than the issuer’s conservatorship or receivership) under the covered bond program. (C)

Assumption by transferee

If the Corporation as conservator or receiver effects a transfer described in subparagraph (A) within the 180-day period described in subparagraph (A), the transferee shall take ownership of the cover pool and shall become fully liable on all covered bonds and related obligations of the issuer that are secured by the cover pool. (2)

Other circumstances

An estate shall be automatically created by operation of law and shall exist and be administered separate and apart from an issuer of covered bonds and the conservatorship, receivership, liquidating agency, or estate in bankruptcy for the issuer or any other assets of the issuer, if— (A)a conservator, receiver, liquidating agent, or trustee in bankruptcy, other than the Corporation, is appointed for the issuer before an uncured default results in the creation of an estate under subsection (b); or (B)in the case of the appointment of the Corporation as conservator or receiver as described in paragraph (1)(A), the Corporation as conservator or receiver— (i)does not complete the transfer of the related covered bond program to another eligible issuer within the 180-period described in paragraph (1)(A); (ii)repudiates the Corporation’s further performance under the related covered bond program; or (iii)fails to timely cure a default (other than the issuer’s conservatorship or receivership) under the related covered bond program. A separate estate shall be created for each affected covered bond program.(3)

Assets and liabilities of estate

Any estate created under paragraph (2) shall be comprised of the cover pool that secures the covered bonds, which shall be automatically released to and held by the estate free and clear of any right, title, interest, or claim of the issuer or any conservator, receiver, liquidating agent, or trustee in bankruptcy for the issuer or any other assets of the issuer. The estate created under paragraph (2) shall be fully liable on the covered bonds and all other covered bonds and related obligations of the issuer (including obligations under related derivative transactions) that are secured by the cover pool. The estate shall not be liable on any obligation of the issuer that is not secured by the cover pool. (4)

Contingent claim

Any contingent claim for a deficiency with respect to a covered bond or related obligation for which an estate has been created under paragraph (2) shall be estimated by the conservator, receiver, liquidating agent, or bankruptcy court for purposes of allowing the claim as a provable claim if awaiting the fixing of that contingent claim would unduly delay the resolution of the conservatorship, receivership, liquidating agency, or bankruptcy case. (5)

Residual interest

(A)

Issuance of residual interest

Upon the creation of an estate under paragraph (2), and regardless of whether any contingent claim described in paragraph (4) becomes fixed or is estimated, a residual interest in the estate shall be automatically issued by operation of law to the conservator, receiver, liquidating agent, or trustee in bankruptcy for the issuer. (B)

Nature of residual interest

The residual interest under subparagraph (A) shall— (i)be an exempted security as described in section 5; (ii)represent the right to any surplus from the cover pool after the covered bonds and all other liabilities of the estate have been paid in full; and (iii)be evidenced by a certificate executed by the trustee of the estate. (6)

Obligation of issuer

After the creation of an estate under paragraph (2), the issuer and its conservator, receiver, liquidating agent, or trustee in bankruptcy shall— (A)transfer to the covered bond regulator, or a designee of the covered bond regulator, all tangible or electronic books, records, files, and other documents or materials relating to the assets and liabilities of the estate; and (B)at the election of the covered bond regulator (but subject to and not withstanding any right of repudiation or rejection held by the conservator, receiver, liquidating agent, or trustee in bankruptcy), continue servicing the cover pool for 120 days after the creation of the estate in return for a fair-market-value fee, as determined by the covered bond regulator, that shall be payable from the estate as an administrative expense. (d)

Administration and resolution of estates

(1)

Trustee, servicer, and administrator

(A)

In general

The covered bond regulator shall— (i)act as or appoint the trustee of any estate created under subsection (b)(1) or (c)(2); and (ii)appoint 1 or more servicers or administrators for the cover pool held by the estate. (B)

Powers and duties of servicer or administrator

Any servicer or administrator appointed for an estate— (i)shall— (I)collect, realize on (by liquidation or other means), and otherwise manage the cover pool held by the estate; and (II)invest and use the proceeds and funds received to make all remaining interest and principal payments on the applicable covered bonds according to their terms (or, if an acceleration or similar event occurs under the related transaction documents, at the times specified in the transaction documents) and to satisfy any other liabilities of the estate; and (ii)may borrow or otherwise procure funds for the benefit of the estate on a secured or unsecured basis and on a priority, pari passu, or subordinated basis. (C)

Supervision of servicer or administrator by the covered bond regulator

(i)

In general

The covered bond regulator shall supervise any servicer or administrator that is appointed for an estate created under subsection (b)(1) or (c)(2). (ii)

Removal and replacement

If the covered bond regulator determines that it is in the best interests of an estate, the covered bond regulator may remove or replace any servicer or administrator for the estate. (iii)

Reports

Each servicer or administrator for an estate shall, at such times and in such manner as the covered bond regulator shall require, submit to the covered bond regulator, the owner of the residual interest, and any other person designated by the covered bond regulator, reports that describe the activities of the servicer or administrator on behalf of the estate and the performance of the cover pool held by the estate. (iv)

Fees and expenses

All fees and expenses of a servicer or administrator for an estate shall be approved by the covered bond regulator and shall be paid from the estate as an administrative expense. (D)

Judicial or administrative actions

Any servicer or administrator appointed for an estate may commence or continue judicial or administrative actions, in its own name on behalf of the estate, for the purpose of collecting, realizing on, or otherwise managing the cover pool held by the estate or exercising its other powers or duties on behalf of the estate. No covered bondholder, indenture trustee, or other person to whom an estate is or is alleged to be liable may commence or continue any judicial or administrative action against the estate, the trustee, or any servicer or administrator, except for an action to compel the release of funds that are available to the estate, that are permitted to be distributed under this Act and regulations promulgated by the covered bond regulator, and that are permitted and required to be distributed under the related transaction documents and any contracts executed by or on behalf of the estate after its creation under this Act. No court may issue an attachment or execution on the assets of an estate. Except at the request of the covered bond regulator or as otherwise provided in this subparagraph, no court may take any action to restrain or affect the resolution of an estate under this Act. The covered bond regulator shall be entitled to sovereign immunity in carrying out the provisions of this Act. (E)

Closing of estate

After an estate has been fully administered, the covered bond regulator shall close the estate and, to the extent determined appropriate by the covered bond regulator, may retain or destroy records of the estate. (2)

Study on liquidity advances

The Board of Governors shall conduct a study on whether Federal reserve banks should be empowered to make advances to an estate created under subsection (b)(1) or (c)(2) solely for the purpose of providing liquidity in the case of timing mismatches among the assets and the liabilities of the estate. The Board of Governors shall submit a report to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives on the results of such study not later than 180 days after the date of enactment of this Act.

5.

Securities law provisions

(a)

Covered bonds issued or guaranteed by banks

Any covered bond issued or guaranteed by a bank is a security issued or guaranteed by a bank under Section 3(a)(2) of the Securities Act of 1933, Section 3(c)(3) of the Investment Company Act of 1940, and Section 304(a)(4)(A) of the Trust Indenture Act of 1939. No covered bond issued or guaranteed by a bank is an asset-backed security, as defined in section 3 of the Securities and Exchange Act of 1934 (15 U.S.C. 78c). (b)

Exemptions for estates and residual interests

Any estate that is or may be created under subsection (b) or (c) of section 4 shall be exempt from all securities laws but shall be subject to the reporting requirements established by the covered bond regulator under subsection (d)(1)(C)(iii) of section 4 and shall succeed to any requirement of the issuer to file such periodic information, documents, and reports in respect of the covered bonds as specified in section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)) and any other rule established by Federal Government banking agencies. Any residual interest in an estate that is or may be created under subsection (b) or (c) of section 4 shall be exempt from all securities laws.

6.

Miscellaneous provisions

(a)

Domestic securities

Section 106(a)(1) of the Secondary Mortgage Market Enhancement Act of 1984 (15 U.S.C. 77r–1(a)(1)) is amended— (1)in subparagraph (C), by striking or at the end; (2)in subparagraph (D), by adding or at the end; and (3)by inserting after subparagraph (D) the following: (E)covered bonds (as defined under section 2(3) of the United States Covered Bond Act of 2010), . (b)

No conflict

The provisions of this Act shall apply, notwithstanding any provision of the Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.), title 11, United States Code, or any other provision of Federal law with respect to conservatorship, receivership, liquidation, or bankruptcy. No provision of the Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.), title 11, United States Code, or any other provision of Federal law with respect to conservatorship, receivership, liquidation, or bankruptcy may be construed or applied in a manner that defeats or interferes with the purpose or operation of this Act.