May 05, 2010
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NCSHA continues to work on three major issues for state HFAs in the Senate financial reform legislation, S.3217:  the bill’s “risk retention” provisions that would make it more difficult for HFAs to issue tax-exempt housing bonds, provisions that could limit the ability of HFAs to use swaps and other derivative financial products, and an amendment offered by Barbara Boxer (D-CA) that would create a fiduciary duty for all financial services institutions that give individually tailored advice to public entities or pension funds.

On the risk retention provisions, NCSHA has received assurances from Banking Committee Chairman Dodd’s (D-CT) staff that the Chairman does not intend the bill’s risk retention provisions to apply to municipal bonds and plans to modify the bill to make that clear.  The 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.  The Chairman is currently considering an explicit exemption for municipal bonds, including Housing Bonds, from the definition of an “asset-backed security,” as proposed by NCSHA and other bond stakeholder groups.
 
On the derivatives concern, congressional staff have told NCSHA that Chairman Dodd remains reluctant to respond to industry calls to liberalize the derivatives provisions, as is Agriculture Committee Chairwoman Lincoln (D-AR), who authored some of the provisions in the unnumbered bill her Committee reported April 21, the Wall Street Transparency and Accountability Act, which is being combined on the Senate floor with S. 3217.
 
The combined bills 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; 
  • States and localities use independent financial advisors when executing swap transactions.  


NCSHA has asked its members to reach out to their senators and ask them to contact Dodd, Banking Committee Ranking Member Richard Shelby (R-AL), Lincoln, and Agriculture Committee Ranking Member Saxby Chambliss (R-GA) to ask them to modify the bill’s derivatives provisions to ensure that HFAs continue to have access to appropriate and workable derivatives, as these products are often critical to lowering the cost of funds and ensuring housing affordability. 

The legislation is expected to be on the Senate floor through next week.  Check ncsha.org for frequent updates.