May 21, 2010
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On May 20, the Senate passed its financial reform legislation, S. 3217, by a vote of 59 to 39.  Republican Senators Scott Brown (MA), Susan Collins (ME), and Olympia Snowe (ME) voted with a majority of Democrats for the bill.  Democratic Senators Maria Cantwell (WA) and Russ Feingold (WI) voted against the bill. 

Feingold voted against passage because he believes the bill does not go far enough to curb Wall Street excesses.  Cantwell voted against the bill because she does not believe it closes loopholes in derivatives regulations.  Cantwell offered an amendment during debate to require all derivatives trades to be cleared through a neutral third party, but it was not allowed to be brought up for a vote.
 
Senate Banking Committee Chairman Christopher Dodd (D-CT) did not offer an expected manager’s amendment to the bill.  NCSHA received assurances from his staff that Dodd did not intend the bill’s risk retention provisions to apply to municipal bonds, which we expected he would make that clear in the manager’s amendment.  NCSHA will now seek this clarification in the House-Senate conference. 
 
The Senate bill’s risk retention provisions authorize federal regulators to require entities securitizing asset-backed securities (including mortgage-backed securities) to retain not less than 5 percent of the credit risk for any asset that is transferred, sold, or conveyed through the issuance of an asset-backed security.  NCSHA, along with other bond stakeholder groups, advocated for an explicit exemption for municipal bonds, including Housing Bonds, from the definition of “asset-backed security.”
 
The Senate adopted a Landrieu (D-LA)-Isakson (R-GA) amendment, which requires the federal banking agencies, HUD, and the Federal Housing Finance Agency to jointly issue regulations exempting qualified residential mortgages with certain underwriting standards, such as high down payments and no prepayment penalties, from falling under the bill’s 5 percent risk retention requirements.
 
In defining “qualified residential mortgage,” the agencies must consider underwriting and product features that historical loan performance data indicate result in a lower risk of default, such as: documentation and verification of financial resources used to qualify the borrower; product features and underwriting standards that mitigate the potential for shock on adjustable rate mortgages; standards regarding residual income of the borrower after all monthly obligations and the ratio of housing payments to monthly income; mortgage guarantee insurance obtained at the time of origination for loans with combined loan-to-value (LTV) ratios of greater than 80 percent; and the prohibition or restriction of balloon payments, negative amortization, prepayment penalties, interest-only payments, and other features that have been demonstrated to exhibit a higher risk of borrower default.
 
Attempts to scale-back derivatives language authored by Agriculture Committee Chairwoman Blanche Lincoln (D-AR) were unsuccessful.  The bill’s derivatives provisions require that:
 
  • Swap dealers have a fiduciary duty towards state and local governments and others with whom they execute swap contracts;
  • Swap contracts be standardized and cleared through a derivatives clearing organization (DCO), preventing HFAs from entering into customized transactions tailored to meet their specific needs; 
  • Swap participants post collateral or margin against their positions; 
  • Swaps users have at least $50 million in discretionary investments in order to qualify for over-the-counter derivatives;  and
  • States and localities use independent financial advisors when executing swap transactions.  
 
While both the House-passed financial reform legislation, H.R. 4173, and the Senate-passed version require most derivatives to be traded through third parties, the Senate bill makes it harder for companies to receive exemptions. 
 
Another amendment on housing government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac was defeated during debate.  Senator Mike Crapo (R-ID) offered an amendment to limit the bailouts of Fannie Mae and Freddie Mac and to enhance their oversight and regulation.  The amendment failed by a vote of 47 to 46, as it required 60 votes to waive a budget point of order.
 
The amendment would have re-established the bailout cap of $200 billion per agency and would have required Fannie Mae and Freddie Mac to reduce their assets by at least 10 percent per year until they each owned no more than $250 billion in mortgage assets.  The amendment also would have required that Fannie Mae’s and Freddie Mac’s new income and disbursements be counted on the federal budget, that the federal debt limit be increased by the amount of obligations issued by Fannie Mae and Freddie Mac as of April 15, 2010, and that the GSEs be included in the public debt limit calculations.
 
The House and Senate will soon start to reconcile their respective versions of the legislation through a formal conference.  Congressional leaders hope to send the final version of financial reform legislation to the President by the July 4 recess.