[Congressional Record Volume 142, Number 102 (Thursday, July 11, 1996)]
[Extensions of Remarks]
[Pages E1254-E1255]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




         H.R. 3703, A BILL TO PROVIDE INSURANCE RESERVE EQUITY

                                 ______
                                 

                         HON. CHARLES B. RANGEL

                              of new york

                    in the house of representatives

                        Thursday, July 11, 1996

  Mr. RANGEL. Mr. Speaker, on June 24, 1996, I introduced legislation 
to amend section 832(e) of the Internal Revenue Code to extend the 
scope of its provisions to financial guaranty insurance generally. 
Senators D'Amato and Moynihan recently introduced a companion bill, S. 
1106, in the Senate.
  Financial guaranty insurance, commonly called bond insurance, is an 
insurance contract that guarantees timely payment of principal and 
interest when due on both tax exempt and non-tax exempt bonds. The bond 
insurance contract generally provides that, in the event of a default 
by an insured issuer, principal and interest will be paid to the 
bondholder as originally scheduled.
  Internal Revenue Code section 832(e) originally enacted in 1967, 
applied only to mortgage guaranty insurance. At that time, Congress 
permitted mortgage guaranty insurance companies to take a deduction for 
certain extremely high contingency loss reserve requirements imposed by 
State regulatory authorities, provided that they invested the income 
tax savings associated with such a deduction in non-interest-bearing 
tax and loss bonds issued by the Federal Government. Since such bonds 
are treated as an asset by the State regulatory authorities, this 
relieves the companies from the substantial cash-flow and impairment of 
capital problems that they would otherwise face if the deduction was 
not allowed. At the same time however, since bonds do not bear any 
interest, the economic position of the Federal Government remains the 
same had not the deduction been permitted first.
  When the State authorities applied the same reserve requirements to 
lease guaranty and municipal bond insurance, Congress amended Internal 
Revenue Code 832(e) in 1974 and applied it to such insurance as well.
  State authorities now apply such contingency reserve requirements to 
financial guaranty insurance generally, including non-tax-exempt debt, 
such as asset-backed securities, which are a growing segment of the 
bond insurance market. Therefore, consistent with the reasons why it 
was originally adopted in 1967, and amended in 1974, IRC section 832(e) 
should be amended again to apply to such insurance.
  The superintendent of insurance for the State of New York, Edward J. 
Muhl, has urged enactment of this legislation. A copy of his letter 
follows these remarks. I understand that the insurance commissioner of 
the State of California has written a similar letter to Members of the 
California delegation. I invite all concerned to join me in 
cosponsoring this legislation.
                                                 State of New York


                                         Insurance Department,

                                   New York, NY, November 9, 1995.
     Hon. Charles B. Rangel,
     U.S. House of Representatives, Rayburn House Office Building, 
         Washington, DC.
       Dear Congressman Rangel: I write to seek your support of S. 
     1106, a bill introduced

[[Page E1255]]

     by Senators D'Amato and Moynihan, to amend section 832(e) of 
     the Internal Revenue Code of 1986 to apply to financial 
     guaranty insurance generally. Under present law, the tax and 
     loss bonds provisions thereof are applicable to mortgage 
     guaranty, lease guaranty, and tax-exempt bond insurance but 
     are not applicable to insurance of other taxable debt 
     instruments, a growing segment of the financial guaranty 
     insurance business.
       Article 69 of the New York Insurance Law, which governs 
     financial guaranty insurance corporations, was enacted on May 
     14, 1989. Article 69 establishes contingency reserve 
     requirements in respect of all financial guaranty insurance 
     corporations where in the past these requirements only 
     applied to insurers of municipal obligations.
       In formulating this new legislation and establishing 
     contingency reserve requirements applicable to all financial 
     guaranty insurance corporations, there was no intention to 
     create a disparity between insurers of taxable and tax-exempt 
     obligations in respect of their ability to invest in tax and 
     loss bonds. Section 6903(a)(7) of Article 69 provides that 
     ``any insurer providing financial guaranty insurance may 
     invest the contingency reserve in tax and loss bonds 
     purchased pursuant to Section 832(e) of the Internal Revenue 
     Code (or any successor provision) only to the extent of the 
     tax savings resulting from the deduction for federal income 
     tax purposes of a sum equal to the annual contributions to 
     the contingency reserve.'' This provision of Article 69 
     expressly contemplates that all financial guaranty insurers 
     would be entitled to benefit from an investment in tax and 
     loss bonds within the limitations provided by the insurance 
     law.
       S. 1106 eliminates the disparate treatment of insured 
     mortgages, leases and tax exempt bonds, on the one hand, and 
     of other insured taxable bonds, on the other, which the 
     provisions of IRC section 832(e) now create. Your efforts to 
     secure enactment of the proposal will be most appreciated.
           Very truly yours,
                                                   Edward J. Muhl,
     Superintendent of Insurance.

                          ____________________