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[House Report 112-407]
[From the U.S. Government Printing Office]


112th Congress                                            Rept. 112-407
                        HOUSE OF REPRESENTATIVES
 2d Session                                                      Part 1

======================================================================



 
                 UNITED STATES COVERED BOND ACT OF 2011

                                _______
                                

                 March 5, 2012.--Ordered to be printed

                                _______
                                

         Mr. Bachus, from the Committee on Financial Services, 
                        submitted the following

                              R E P O R T

                             together with

                             MINORITY VIEWS

                        [To accompany H.R. 940]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 940) to establish standards for covered bond 
programs and a covered bond regulatory oversight program, and 
for other purposes, having considered the same, report 
favorably thereon with an amendment and recommend that the bill 
as amended do pass.
    The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``United States Covered Bond Act of 
2011''.

SEC. 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 1 or more eligible assets, substitute assets, or 
                other assets in a cover pool;
                  (B) any credit enhancement or liquidity arrangement 
                associated with 1 or more eligible assets, substitute 
                assets, or other assets in a cover pool;
                  (C) any guarantee, letter-of-credit right, or other 
                secondary obligation that supports any payment or 
                performance of 1 or more eligible assets, substitute 
                assets, or other assets in a cover pool; and
                  (D) any proceeds of, or other property incident to, 1 
                or more eligible assets, substitute assets, or other 
                assets 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) in the case of any eligible issuer described in 
                subparagraph (A), (B), or (C) of paragraph (9)--
                          (i) 1 or more eligible assets from a single 
                        eligible asset class; and
                          (ii) 1 or more substitute assets or ancillary 
                        assets; and
                  (B) in the case of any eligible issuer described in 
                paragraph (9)(D)--
                          (i) the covered bonds issued by each 
                        sponsoring eligible issuer; and
                          (ii) 1 or more substitute assets or ancillary 
                        assets.
          (4) Covered bond.--The term ``covered bond'' means any 
        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 or 
                other perfected lien on 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 applicable covered bond regulator;
                  (D) is identified in a register of covered bonds that 
                is maintained by the Secretary; and
                  (E) is not a deposit (as defined in section 3(l) of 
                the Federal Deposit Insurance Act (12 U.S.C. 1813(l))).
          (5) Covered bond program.--The term ``covered bond program'' 
        means any program of an eligible issuer under which, on the 
        security of a single cover pool, 1 or more series or tranches 
        of covered bonds may be issued.
          (6) Covered bond regulator.--The term ``covered bond 
        regulator'' means--
                  (A) for any eligible issuer that is subject to the 
                jurisdiction of an appropriate Federal banking agency 
                (as defined in section 3(q) of the Federal Deposit 
                Insurance Act (12 U.S.C. 1813(q))), the appropriate 
                Federal banking agency;
                  (B) for any eligible issuer that is described in 
                paragraph (9)(D), that is not subject to the 
                jurisdiction of an appropriate Federal banking agency, 
                and that is sponsored by only 1 eligible issuer, the 
                covered bond regulator for the sponsor;
                  (C) for any eligible issuer that is described in 
                paragraph (9)(D), that is not subject to the 
                jurisdiction of an appropriate Federal banking agency, 
                and that is sponsored by more than 1 eligible issuer, 
                the covered bond regulator for the sponsor whose 
                covered bonds constitute the largest share of the cover 
                pool of the issuer; and
                  (D) for any other eligible issuer that is not subject 
                to the jurisdiction of an appropriate Federal banking 
                agency, the Secretary.
          (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;
                          (ii) any mortgage loan that is insured under 
                        the National Housing Act (12 U.S.C. 1701 et 
                        seq.); and
                          (iii) any loan that is guaranteed, insured, 
                        or made under chapter 37 of title 38, United 
                        States Code;
                  (B) in the case of the commercial mortgage asset 
                class, any commercial mortgage loan (including any 
                multifamily mortgage loan);
                  (C) in the case of the public sector asset class--
                          (i) any security issued by a State, 
                        municipality, or other governmental authority;
                          (ii) any loan made to a State, municipality, 
                        or other governmental authority; 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);
                  (D) in the case of the auto asset class, any auto 
                loan or lease;
                  (E) in the case of the student loan asset class, any 
                student loan (whether guaranteed or nonguaranteed);
                  (F) in the case of the credit or charge card asset 
                class, any extension of credit to a person under an 
                open-end credit plan;
                  (G) in the case of the small business asset class, 
                any loan that is made or guaranteed under a program of 
                the Small Business Administration; and
                  (H) in the case of any other eligible asset class, 
                any asset designated by the Secretary, by rule and in 
                consultation with the covered bond regulators, 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) an auto asset class;
                  (E) a student loan asset class;
                  (F) a credit or charge card asset class;
                  (G) a small business asset class; and
                  (H) any other eligible asset class designated by the 
                Secretary, by rule and in consultation with the covered 
                bond regulators.
          (9) Eligible issuer.--The term ``eligible issuer'' means--
                  (A) any insured depository institution and any 
                subsidiary of such institution;
                  (B) any bank holding company, any savings and loan 
                holding company, and any subsidiary of any of such 
                companies;
                  (C) any nonbank financial company (as defined in 
                section 102(a)(4) of the Dodd-Frank Wall Street Reform 
                and Consumer Protection Act (12 U.S.C. 5311(a)(4))) 
                that is supervised by the Board of Governors of the 
                Federal Reserve System under section 113 of the Dodd-
                Frank Wall Street Reform and Consumer Protection Act 
                (12 U.S.C. 5323), including any intermediate holding 
                company supervised as a nonbank financial company, and 
                any subsidiary of such a nonbank financial company; 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) Oversight program.--The term ``oversight program'' means 
        the covered bond regulatory oversight program established under 
        section 3(a).
          (11) Secretary.--The term ``Secretary'' means the Secretary 
        of the Department of the Treasury.
          (12) Substitute asset.--The term ``substitute asset'' means--
                  (A) cash;
                  (B) any direct obligation of the United States 
                Government, and any security or other obligation whose 
                full principal and interest 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 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 applicable covered bond regulator;
                  (D) any overnight investment in Federal funds;
                  (E) any other substitute asset designated by the 
                Secretary, by rule and in consultation with the covered 
                bond regulators; and
                  (F) any deposit account or securities account into 
                which only an asset described in subparagraph (A), (B), 
                (C), (D), or (E) may be deposited or credited.

SEC. 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 Secretary shall, by rule and in 
        consultation with the covered bond regulators, 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 any additional 
                eligibility standards for eligible assets and any other 
                criteria determined appropriate by the Secretary to 
                further the purposes of this Act;
                  (B) covered bond programs to be maintained in a 
                manner that is consistent with this Act and safe and 
                sound asset-liability management and other 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 applicable covered bond regulator.
                  (B) Approval process.--Each covered bond regulator 
                shall apply the standards established by the Secretary 
                under the oversight program to evaluate a covered bond 
                program that has been submitted by an eligible issuer 
                for approval. Each covered bond regulator also shall 
                take into account relevant supervisory factors, 
                including safety and soundness considerations, in 
                evaluating a covered bond program that has been 
                submitted for approval. Each covered bond regulator, 
                promptly after approving a covered bond program, shall 
                provide the Secretary with the name of the covered bond 
                program, the name of the eligible issuer, and all other 
                information reasonably requested by the Secretary in 
                order to update the registry under paragraph (3)(A). 
                Each eligible issuer, promptly after issuing a covered 
                bond under an approved covered bond program, shall 
                provide the Secretary with all information reasonably 
                requested by the Secretary in order to update the 
                registry under paragraph (3)(B).
                  (C) Existing covered bond programs.--A covered bond 
                regulator may approve a covered bond program that is in 
                existence on the date of the 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 bond was issued.
                  (D) Multiple covered bond programs permitted.--An 
                eligible issuer may have more than 1 covered bond 
                program.
                  (E) Cease and desist authority.--The applicable 
                covered bond regulator may direct an eligible issuer to 
                cease issuing covered bonds under an approved covered 
                bond program if the covered bond program is not 
                maintained in a manner that is consistent with this Act 
                and the oversight program and if, after notice that is 
                reasonable under the circumstances, the issuer does not 
                remedy all deficiencies identified by the applicable 
                covered bond regulator.
                  (F) Cap on the amount of outstanding covered bonds.--
                          (i) In general.--With respect to each 
                        eligible issuer that submits a covered bond 
                        program for approval, the applicable covered 
                        bond regulator shall set, consistent with 
                        safety and soundness considerations and the 
                        financial condition of the eligible issuer, the 
                        maximum amount, as a percentage of the eligible 
                        issuer's total assets, of outstanding covered 
                        bonds that the eligible issuer may issue.
                          (ii) Review of cap.--The applicable covered 
                        bond regulator may, not more frequently than 
                        quarterly, review the percentage set under 
                        clause (i) and, if safety and soundness 
                        considerations or the financial condition of 
                        the eligible issuer has changed, increase or 
                        decrease such percentage. Any decrease made 
                        pursuant to this clause shall have no effect on 
                        existing covered bonds issued by the eligible 
                        issuer.
          (3) Registry.--Under the oversight program, the Secretary 
        shall maintain a registry that is published on a Web site 
        available to the public and that, for each covered bond program 
        approved by a covered bond regulator, contains--
                  (A) the name of the covered bond program, the name of 
                the eligible issuer, and all other information that the 
                Secretary considers necessary to adequately identify 
                the covered bond program and the eligible issuer; and
                  (B) all information that the Secretary considers 
                necessary to adequately identify all outstanding 
                covered bonds issued under the covered bond program 
                (including the reports described in paragraphs (3) and 
                (4) of subsection (b)).
          (4) Fees.--Each covered bond regulator may levy, on the 
        issuers of covered bonds under the primary supervision of such 
        covered bond regulator, reasonably apportioned fees that such 
        covered bond regulator considers necessary, in the aggregate, 
        to defray the costs of such covered bond regulator carrying out 
        the provisions of this Act. Such funds shall not be construed 
        to be Government funds or appropriated monies and shall not be 
        subject to apportionment for purposes of chapter 15 of title 
        31, United States Code, or any other provision of law.
  (b) Minimum Over-Collateralization Requirements.--
          (1) Requirements established.--The Secretary, by rule and in 
        consultation with the covered bond regulators, shall establish 
        minimum over-collateralization requirements for covered bonds 
        backed by each of the eligible asset classes. The minimum over-
        collateralization requirements shall be designed to ensure that 
        sufficient eligible assets and substitute assets are maintained 
        in the cover pool to satisfy all principal and interest 
        payments on the covered bonds when due through maturity and 
        shall be based on the credit, collection, and interest rate 
        risks (excluding the liquidity risks) associated with the 
        eligible asset class.
          (2) Asset coverage test.--The eligible assets and the 
        substitute assets in any cover pool shall be required, in the 
        aggregate, to meet at all times the applicable minimum over-
        collateralization requirements.
          (3) Monthly reporting.--On a monthly basis, 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 to--
                  (A) the Secretary;
                  (B) the applicable covered bond regulator;
                  (C) the applicable indenture trustee;
                  (D) the applicable covered bondholders; and
                  (E) the applicable independent asset monitor.
          (4) Independent asset monitor.--
                  (A) Appointment.--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.--An independent asset monitor appointed 
                under subparagraph (A) shall, on an annual or other 
                more frequent periodic basis determined by the 
                Secretary under the oversight program--
                          (i) verify whether the cover pool meets the 
                        applicable minimum over-collateralization 
                        requirements; and
                          (ii) report to the Secretary, the applicable 
                        covered bond regulator, the applicable 
                        indenture trustee, and the applicable covered 
                        bondholders on whether the cover pool meets the 
                        applicable minimum over-collateralization 
                        requirements.
          (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.
          (6) Failure to meet requirements.--
                  (A) In general.--If a cover pool fails to meet the 
                applicable minimum over-collateralization requirements, 
                and if the failure is not cured within the time 
                specified in the related transaction documents, the 
                failure shall be an uncured default for purposes of 
                section 4(a).
                  (B) Notice required.--An issuer of covered bonds 
                shall promptly give the Secretary and the applicable 
                covered bond regulator written notice if the cover pool 
                securing the covered bonds fails to meet the applicable 
                minimum over-collateralization requirements, if the 
                failure is cured within the time specified in the 
                related transaction documents, or if the failure is not 
                so cured.
  (c) Requirements for Eligible Assets.--
          (1) Requirements.--
                  (A) Loans.--A loan shall not qualify as an eligible 
                asset for so long as the loan is delinquent for more 
                than 60 consecutive days.
                  (B) 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.
                  (C) Origination.--An asset shall not qualify as an 
                eligible asset if the asset was not originated in 
                compliance with any rule or supervisory guidance of a 
                Federal agency applicable to the asset at the time of 
                origination.
                  (D) 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 or other prior 
                perfected lien that has been granted in an unrelated 
                transaction. Nothing in this Act shall affect such a 
                prior perfected security interest or other prior 
                perfected lien, and the rights of such lien holders.
          (2) Failure to meet requirements.--Subject to paragraph 
        (1)(D), if an asset in a cover pool does not satisfy any 
        applicable requirement described in paragraph (1) or any other 
        applicable standard or criterion described in this Act, the 
        oversight program, or the related transaction documents, the 
        asset shall not qualify as an eligible asset for purposes of 
        the asset coverage test described in subsection (b)(2). A 
        disqualified asset shall remain in the cover pool unless and 
        until removed by the issuer in compliance with the provisions 
        of this Act, the oversight program, and the related transaction 
        documents. No disqualified asset may be removed from the cover 
        pool after an estate has been created for the related covered 
        bond program under section 4(b)(1) or 4(c)(2), except in 
        connection with the management of the cover pool under section 
        4(d)(1)(E).
  (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 securing the covered bonds.
          (2) Schedule of eligible assets and substitute assets.--Each 
        issuer of covered bonds shall deliver to the applicable 
        indenture trustee and the applicable independent asset monitor, 
        on at least a monthly basis, a schedule that identifies all 
        eligible assets and substitute assets in the cover pool 
        securing the covered bonds.
          (3) Single eligible asset class.--No cover pool described in 
        section 2(3)(A) may include eligible assets from more than 1 
        eligible asset class. No cover poll described in section 
        2(3)(B) may include covered bonds backed by more than 1 
        eligible asset class.

SEC. 4. RESOLUTION UPON DEFAULT OR INSOLVENCY.

  (a) Uncured Default Defined.--For purposes of this section, the term 
``uncured default'' means a default on a covered bond that has not been 
cured within the time, if any, specified in the related transaction 
documents.
  (b) Default on Covered Bonds Prior to Conservatorship, Receivership, 
Liquidation, or Bankruptcy.--
          (1) Creation of separate estate.--If an uncured default 
        occurs on a covered bond before the issuer of the covered bond 
        enters conservatorship, receivership, liquidation, or 
        bankruptcy, an estate shall be immediately and 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 
        (including over-collateralization in the cover pool) that 
        secures the covered bond. The cover pool shall be immediately 
        and 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 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 a perfected security interest in or other 
        perfected lien on the cover pool when the estate is created. 
        The estate shall not be liable on any obligation of the issuer 
        that is not secured by a perfected security interest in or 
        other perfected lien on the cover pool when the estate is 
        created. No conservator, receiver, liquidating agent, or 
        trustee in bankruptcy for the issuer may charge or assess the 
        estate for any claim of the conservator, receiver, liquidating 
        agent, or trustee in bankruptcy or the conservatorship, 
        receivership, liquidating agency, or estate in bankruptcy and 
        may not obtain or perfect a security interest in or other lien 
        on the cover pool to secure such a claim.
          (3) Retention of claims.--Any holder of a covered bond or 
        related obligation for which an estate has become liable under 
        paragraph (2) shall retain a claim against the issuer for any 
        deficiency with respect to the covered bond or related 
        obligation. If the issuer enters conservatorship, receivership, 
        liquidation, or bankruptcy, any contingent claim for such a 
        deficiency shall be allowed as a provable claim in the 
        conservatorship, receivership, liquidating agency, or 
        bankruptcy case. The contingent claim 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 the contingent claim would unduly delay 
        the resolution of the conservatorship, receivership, 
        liquidating agency, or bankruptcy case.
          (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 immediately and 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 fully 
                        and irrevocably paid; and
                          (iii) be evidenced by a certificate executed 
                        by the trustee of the estate.
          (5) Obligations of issuer.--
                  (A) In general.--After the creation of an estate 
                under paragraph (1), the issuer shall--
                          (i) transfer to or at the direction of the 
                        trustee for the estate all property of the 
                        estate that is in the possession or under the 
                        control of the issuer, including all tangible 
                        or electronic books, records, files, and other 
                        documents or materials relating to the assets 
                        and liabilities of the estate; and
                          (ii) at the election of the trustee or a 
                        servicer or administrator for the estate, 
                        continue servicing the applicable cover pool 
                        for 120 days after the creation of the estate 
                        in return for a fair-market-value fee, as 
                        determined by the trustee in consultation with 
                        the applicable covered bond regulator, that 
                        shall be payable from the estate as an 
                        administrative expense.
                  (B) Obligations absolute.--Neither the issuer, 
                whether acting as debtor in possession or in any other 
                capacity, nor any conservator, receiver, liquidating 
                agent, or trustee in bankruptcy for the issuer or any 
                other assets of the issuer may disaffirm, repudiate, or 
                reject the obligation to turn over property or to 
                continue servicing the cover pool as provided in 
                subparagraph (A).
  (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 1-year 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 that are secured by a perfected 
                security interest in or other perfected lien on the 
                cover pool, to another eligible issuer that meets all 
                conditions and requirements specified in the related 
                transaction documents. The Corporation as conservator 
                or receiver may not remove any asset from the cover 
                pool, except to the extent otherwise agreed by a 
                transferee that has assumed the covered bond program 
                pursuant to subparagraph (C).
                  (B) Obligations during 1-year period.--During the 1-
                year period described in subparagraph (A), the 
                Corporation as conservator or receiver shall fully and 
                timely satisfy all monetary and nonmonetary obligations 
                of the issuer under all covered bonds and the related 
                transaction documents and shall fully and timely cure 
                all defaults by the issuer (other than its 
                conservatorship or receivership) under the applicable 
                covered bond program, in each case, until the earlier 
                of--
                          (i) the transfer of the applicable covered 
                        bond program to another eligible issuer as 
                        provided in subparagraph (A); or
                          (ii) the delivery to the Secretary, the 
                        applicable covered bond regulator, the 
                        applicable indenture trustee, and the 
                        applicable covered bondholders of a written 
                        notice from the Corporation as conservator or 
                        receiver electing to cease further performance 
                        under the applicable covered bond program.
                  (C) Assumption by transferee.--If the Corporation as 
                conservator or receiver transfers a covered bond 
                program to another eligible issuer within the 1-year 
                period as provided in subparagraph (A), the transferee 
                shall take ownership of the applicable cover pool and 
                shall become fully liable on all covered bonds and 
                related obligations of the issuer that are secured by a 
                perfected security interest in or other perfected lien 
                on the cover pool.
          (2) Other circumstances.--An estate shall be immediately and 
        automatically created by operation of law and shall exist and 
        be administered separate and apart from an issuer of covered 
        bonds and any 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 
                        applicable covered bond program to another 
                        eligible issuer within the 1-year period as 
                        provided in paragraph (1)(A);
                          (ii) delivers to the Secretary, the 
                        applicable covered bond regulator, the 
                        applicable indenture trustee, and the 
                        applicable covered bondholders a written notice 
                        electing to cease further performance under the 
                        applicable covered bond program; or
                          (iii) fails to fully and timely satisfy all 
                        monetary and nonmonetary obligations of the 
                        issuer under the covered bonds and the related 
                        transaction documents or to fully and timely 
                        cure all defaults by the issuer (other than its 
                        conservatorship or receivership) under the 
                        applicable 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 
        (including over-collateralization in the cover pool) that 
        secures the covered bonds. The cover pool shall be immediately 
        and 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 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 a perfected security interest in or other 
        perfected lien on the cover pool when the estate is created. 
        The estate shall not be liable on any obligation of the issuer 
        that is not secured by a perfected security interest in or 
        other perfected lien on the cover pool when the estate is 
        created. No conservator, receiver, liquidating agent, or 
        trustee in bankruptcy for the issuer may charge or assess the 
        estate for any claim of the conservator, receiver, liquidating 
        agent, or trustee in bankruptcy or the conservatorship, 
        receivership, liquidating agency, or estate in bankruptcy and 
        may not obtain or perfect a security interest in or other lien 
        on the cover pool to secure such a claim.
          (4) Contingent claim.--Any contingent claim against an issuer 
        for a deficiency with respect to a covered bond or related 
        obligation for which an estate has become liable under 
        paragraph (3) shall be allowed as a provable claim in the 
        conservatorship, receivership, liquidating agency, or 
        bankruptcy case for the issuer. The contingent claim 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 the 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 immediately and 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 fully 
                        and irrevocably paid; and
                          (iii) be evidenced by a certificate executed 
                        by the trustee of the estate.
          (6) Obligations of issuer.--
                  (A) In general.--After the creation of an estate 
                under paragraph (2), the issuer and its conservator, 
                receiver, liquidating agent, or trustee in bankruptcy 
                shall--
                          (i) transfer to or at the direction of the 
                        trustee for the estate all property of the 
                        estate that is in the possession or under the 
                        control of the issuer or its conservator, 
                        receiver, liquidating agent, or trustee in 
                        bankruptcy, including all tangible or 
                        electronic books, records, files, and other 
                        documents or materials relating to the assets 
                        and liabilities of the estate; and
                          (ii) at the election of the trustee or a 
                        servicer or administrator for the estate, 
                        continue servicing the applicable cover pool 
                        for 120 days after the creation of the estate 
                        in return for a fair-market-value fee, as 
                        determined by the trustee in consultation with 
                        the applicable covered bond regulator, that 
                        shall be payable from the estate as an 
                        administrative expense.
                  (B) Obligations absolute.--Neither the issuer, 
                whether acting as debtor in possession or in any other 
                capacity, nor any conservator, receiver, liquidating 
                agent, or trustee in bankruptcy for the issuer or any 
                other assets of the issuer may disaffirm, repudiate, or 
                reject the obligation to turn over property or to 
                continue servicing the cover pool as provided in 
                subparagraph (A).
  (d) Administration and Resolution of Estates.--
          (1) Trustee, servicer, and administrator.--
                  (A) In general.--Upon the creation of any estate 
                under subsection (b)(1) or (c)(2), the applicable 
                covered bond regulator shall--
                          (i) appoint the trustee for the estate;
                          (ii) appoint 1 or more servicers or 
                        administrators for the cover pool held by the 
                        estate; and
                          (iii) give the Secretary, the applicable 
                        indenture trustee, the applicable covered 
                        bondholders, and the owner of the residual 
                        interest written notice of the creation of the 
                        estate.
                  (B) Terms and conditions of appointment.--All terms 
                and conditions of any appointment under paragraph (1), 
                including the terms and conditions relating to 
                compensation, shall conform to the requirements of this 
                Act and the oversight program and otherwise shall be 
                determined by the applicable covered bond regulator.
                  (C) Qualification.--The applicable covered bond 
                regulator may require the trustee or any servicer or 
                administrator for an estate to post in favor of the 
                United States, for the benefit of the estate, a bond 
                that is conditioned on the faithful performance of the 
                duties of the trustee or the servicer or administrator. 
                The covered bond regulator shall determine the amount 
                of any bond required under this subparagraph and the 
                sufficiency of the surety on the bond. A proceeding on 
                a bond required under this subparagraph may not be 
                commenced after two years after the date on which the 
                trustee or the servicer or administrator was 
                discharged.
                  (D) Powers and duties of trustee.--The trustee for an 
                estate is the representative of the estate and, subject 
                to the provisions of this Act, has capacity to sue and 
                be sued. The trustee shall--
                          (i) administer the estate in compliance with 
                        this Act, the oversight program, and the 
                        related transaction documents;
                          (ii) be accountable for all property of the 
                        estate that is received by the trustee;
                          (iii) make a final report and file a final 
                        account of the administration of the estate 
                        with the applicable covered bond regulator; and
                          (iv) after the estate has been fully 
                        administered, close the estate.
                  (E) Powers and duties of servicer or administrator.--
                Any servicer or administrator for an estate--
                          (i) shall--
                                  (I) collect, realize on (by 
                                liquidation or other means), and 
                                otherwise manage the cover pool held by 
                                the estate in compliance with this Act, 
                                the oversight program, and the related 
                                transaction documents and in a manner 
                                consistent with maximizing the value 
                                and the proceeds of the cover pool;
                                  (II) deposit or invest all proceeds 
                                and funds received in compliance with 
                                this Act, the oversight program, and 
                                the related transaction documents and 
                                in a manner consistent with maximizing 
                                the net return to the estate, taking 
                                into account the safety of the deposit 
                                or investment; and
                                  (III) apply, or direct the trustee 
                                for the estate to apply, all proceeds 
                                and funds received and the net return 
                                on any deposit or investment to make 
                                distributions in compliance with 
                                paragraphs (3) and (4);
                          (ii) may borrow funds or otherwise obtain 
                        credit, for the benefit of the estate, in 
                        compliance with paragraph (2) on a secured or 
                        unsecured basis and on a priority, pari passu, 
                        or subordinated basis;
                          (iii) shall, at the times and in the manner 
                        required by the applicable covered bond 
                        regulator, submit to the covered bond 
                        regulator, the Secretary, the applicable 
                        indenture trustee, the applicable covered 
                        bondholders, 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, the 
                        performance of the cover pool held by the 
                        estate, and distributions made by the estate; 
                        and
                          (iv) shall assist the trustee in preparing 
                        the final report and the final account of the 
                        administration of the estate.
                  (F) Supervision of trustee, servicer, and 
                administrator.--The applicable covered bond regulator 
                shall supervise the trustee and any servicer or 
                administrator for an estate. The covered bond regulator 
                shall require that all reports submitted under 
                subparagraph (E)(iii) do not contain any untrue 
                statement of a material fact and do not omit to state a 
                material fact necessary in order to make the statements 
                made, in light of the circumstances under which they 
                are made, not misleading.
                  (G) Removal and replacement of trustee, servicer, and 
                administrator.--If the covered bond regulator 
                determines that it is in the best interests of an 
                estate, the covered bond regulator may remove or 
                replace the trustee or any servicer or administrator 
                for the estate. The removal of the trustee or any 
                servicer or administrator does not abate any pending 
                action or proceeding involving the estate, and any 
                successor or other trustee, servicer, or administrator 
                shall be substituted as a party in the action or 
                proceeding.
                  (H) Professionals.--The trustee or any servicer or 
                administrator for an estate may employ 1 or more 
                attorneys, accountants, appraisers, auctioneers, or 
                other professional persons to represent or assist the 
                trustee or the servicer or administrator in carrying 
                out its duties. The employment of any professional 
                person and all terms and conditions of employment, 
                including the terms and conditions relating to 
                compensation, shall conform to the requirements of this 
                Act and the oversight program and otherwise shall be 
                subject to the approval of the applicable covered bond 
                regulator.
                  (I) Approved fees and expenses.--Unless otherwise 
                provided in the applicable terms and conditions of 
                appointment or employment, all approved fees and 
                expenses of the trustee, any servicer or administrator, 
                or any professional person employed by the trustee or 
                any servicer or administrator shall be payable from the 
                estate as administrative expenses.
                  (J) Actions by or on behalf of estate.--The trustee 
                or any servicer or administrator for an estate may 
                commence or continue judicial, administrative, or other 
                actions, in the name of the estate or 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.
                  (K) Actions against estate.--No court may issue an 
                attachment or execution on any property of an estate. 
                Except at the request of the applicable covered bond 
                regulator or as otherwise provided in this subparagraph 
                or subparagraph (J), no court may take any action to 
                restrain or affect the resolution of an estate under 
                this Act. No person (including the applicable indenture 
                trustee and any applicable covered bondholder) may 
                commence or continue any judicial, administrative, or 
                other action against the estate, the trustee, or any 
                servicer or administrator or take any other act to 
                affect the estate, the trustee, or any servicer or 
                administrator that is not expressly permitted by this 
                Act, the oversight program, and the related transaction 
                documents, except for a judicial or administrative 
                action to compel the release of funds that--
                          (i) are available to the estate;
                          (ii) are permitted to be distributed under 
                        this Act and the oversight program; and
                          (iii) are permitted and required to be 
                        distributed under the related transaction 
                        documents and any contracts executed by or on 
                        behalf of the estate.
                  (L) Sovereign immunity.--Except in connection with a 
                guarantee provided under paragraph (4) or any other 
                contract executed by the applicable covered bond 
                regulator under this section 4, the Secretary and the 
                covered bond regulator shall be entitled to sovereign 
                immunity in carrying out the provisions of this Act.
          (2) Borrowings and credit.--
                  (A) In general.--Any servicer or administrator for an 
                estate created under subsection (b)(1) or (c)(2) may 
                borrow funds or otherwise obtain credit, on behalf of 
                and for the benefit of the estate, from any person in 
                compliance with this paragraph (2) solely for the 
                purpose of providing liquidity in the case of timing 
                mismatches among the assets and the liabilities of the 
                estate. Except with respect to an underwriter, section 
                5 of the Securities Act of 1933, the Trust Indenture 
                Act of 1939, and any State or local law requiring 
                registration for an offer or sale of a security or 
                registration or licensing of an issuer of, underwriter 
                of, or broker or dealer in a security does not apply to 
                the offer or sale under this paragraph (2) of a 
                security that is not an equity security.
                  (B) Conditions.--A servicer or administrator may 
                borrow funds or otherwise obtain credit under 
                subparagraph (A)--
                          (i) on terms affording the lender only claims 
                        or liens that are fully subordinated to the 
                        claims and interests of the applicable 
                        indenture trustee and the applicable covered 
                        bondholders and all other claims against and 
                        interests in the estate, except for the 
                        residual interest, if the servicer or 
                        administrator certifies to the applicable 
                        covered bond regulator that, in the business 
                        judgment of the servicer or administrator, the 
                        borrowing or credit is in the best interests of 
                        the estate and is expected to maximize the 
                        value and the proceeds of the cover pool held 
                        by the estate; or
                          (ii) on terms affording the lender claims or 
                        liens that have priority over or are pari passu 
                        with the claims or interests of the applicable 
                        indenture trustee or the applicable covered 
                        bondholders or other claims against or 
                        interests in the estate, if--
                                  (I) the servicer or administrator 
                                certifies to the applicable covered 
                                bond regulator that, in the business 
                                judgment of the servicer or 
                                administrator, the borrowing or credit 
                                is in the best interests of the estate 
                                and is expected to maximize the value 
                                and the proceeds of the cover pool held 
                                by the estate; and
                                  (II) the applicable covered bond 
                                regulator authorizes the borrowing or 
                                credit.
                  (C) Limited liability.--A servicer or administrator 
                shall not be liable for any error in business judgment 
                when borrowing funds or otherwise obtaining credit 
                under this paragraph (2) unless the servicer or 
                administrator acted in bad faith or in willful 
                disregard of its duties.
                  (D) Study on borrowings and credit.--The Comptroller 
                General of the United States shall conduct a study on 
                whether the Federal reserve banks should be authorized 
                to lend funds or otherwise extend credit to an estate 
                under this paragraph (2) and, if so, what conditions 
                and limits should be established to mitigate any risk 
                that the United States Government could absorb credit 
                losses on the cover pool held by the estate. The 
                Comptroller General 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 the study 
                not later than 6 months after the date of enactment of 
                this Act.
          (3) Distributions by estate.--All payments or other 
        distributions by an estate shall be made at the times, in the 
        amounts, and in the manner set forth in the covered bonds, the 
        related transaction documents, and any contracts executed by or 
        on behalf of the estate in compliance with this Act and the 
        oversight program. To the extent that the relative priority of 
        the liabilities of the estate are not specified in or otherwise 
        ascertainable from their terms, distributions shall be made on 
        each distribution date under the covered bonds, the related 
        transaction documents, or any contracts executed by or on 
        behalf of the estate--
                  (A) first, to pay accrued and unpaid superpriority 
                claims under paragraph (2)(B)(ii);
                  (B) second, to pay accrued and unpaid administrative 
                expense claims under paragraph (1)(I), paragraph 
                (2)(B)(ii), section 4(b)(5)(A), or section 4(c)(6)(A);
                  (C) third, to pay--
                          (i) accrued and unpaid claims under the 
                        covered bonds and the related transaction 
                        documents according to their terms; and
                          (ii) accrued and unpaid pari passu claims 
                        under paragraph (2)(B)(ii); and
                  (D) fourth, to pay accrued and unpaid subordinated 
                claims under paragraph (2)(B)(i).
          (4) Distributions on residual interest.--After all other 
        claims against and interests in an estate have been fully and 
        irrevocably paid or defeased, the trustee shall or shall cause 
        a servicer or administrator to distribute the remainder of the 
        estate to or at the direction of the owner of the residual 
        interest. No interim distribution on the residual interest may 
        be made before that time, unless the applicable covered bond 
        regulator--
                  (A) approves the distribution after determining that 
                all other claims against and interests in the estate 
                will be fully, timely, and irrevocably paid according 
                to their terms; and
                  (B) provides an indemnity, for the benefit of the 
                estate, assuring that all other claims against and 
                interests in the estate will be fully, timely, and 
                irrevocably paid according to their terms.
          (5) Closing of estate.--After an estate has been fully 
        administered, the trustee shall close the estate and, except as 
        otherwise directed by the applicable covered bond regulator, 
        shall destroy all records of the estate.
          (6) No loss to taxpayers.--Taxpayers shall bear no losses 
        from the resolution of an estate under this Act. To the extent 
        that the Secretary and the Corporation jointly determine that 
        the Deposit Insurance Fund incurred actual losses that are 
        higher because the covered bond program of an insured 
        depository institution was subject to resolution under this Act 
        rather than as part of the receivership of the institution 
        under the Federal Deposit Insurance Act (12 U.S.C. 1811 et 
        seq.), the Corporation may exercise the powers available under 
        section 7(b) of the Federal Deposit Insurance Act (12 U.S.C. 
        1817(b)) to recover an amount equal to those losses after 
        consulting with the Secretary.

SEC. 5. SECURITIES LAW PROVISIONS.

  (a) Existing Exemptions Applicable to Covered Bonds.--
          (1) Treatment of certain banks and other entities.--Any 
        covered bond issued or guaranteed by a bank or by an eligible 
        issuer described in section 2(9)(D) and sponsored solely by 1 
        or more banks for the sole purpose of issuing covered bonds is 
        and shall be treated as a security issued or guaranteed by a 
        bank under section 3(a)(2) of the Securities Act of 1933 (15 
        U.S.C. 77c(a)(2)), section 3(c)(3) of the Investment Company 
        Act of 1940 (15 U.S.C. 80a-3(c)(3)), and section 304(a)(4)(A) 
        of the Trust Indenture Act of 1939 (15 U.S.C. 77ddd(a)(4)(A)). 
        No covered bond issued or guaranteed by a bank or by an 
        eligible issuer described in section 2(9)(D) and sponsored 
        solely by 1 or more banks for the sole purpose of issuing 
        covered bonds shall be treated as an asset-backed security (as 
        defined in section 3 of the Securities and Exchange Act of 1934 
        (15 U.S.C. 78c)). Each covered bond regulator for 1 or more 
        banks shall adopt disclosure and reporting regulations for 
        offers or sales of covered bonds by a bank or an eligible 
        issuer described in this paragraph. Such regulations shall 
        provide for uniform and consistent standards for such covered 
        bond issuers, to the extent possible, and shall be consistent 
        with existing regulations governing offers or sales of 
        nonconvertible debt.
          (2) Treatment of certain associations and cooperative 
        banks.--Any covered bond issued by an entity described in 
        section 3(a)(5)(A) of the Securities Act of 1933 (15 U.S.C. 
        77c(a)(5)(A)) or by an eligible issuer described in section 
        2(9)(D) and sponsored solely by 1 or more such entities for the 
        sole purpose of issuing covered bonds is and shall be treated 
        as a security issued by such an entity under section 3(a)(5)(A) 
        of the Securities Act of 1933 (15 U.S.C. 77c(a)(5)(A)), section 
        3(c)(3) of the Investment Company Act of 1940 (15 U.S.C. 80a-
        3(c)(3)), and section 304(a)(4)(A) of the Trust Indenture Act 
        of 1939 (15 U.S.C. 77ddd(a)(4)(A)). No covered bond issued by 
        an entity described in section 3(a)(5)(A) of the Securities Act 
        of 1933 (15 U.S.C. 77c(a)(5)(A)) or by an eligible issuer 
        described in section 2(9)(D) and sponsored solely by 1 or more 
        such entities for the sole purpose of issuing covered bonds 
        shall be treated as an asset-backed security (as defined in 
        section 3 of the Securities and Exchange Act of 1934 (15 U.S.C. 
        78c)). Each covered bond regulator for 1 or more entities 
        described in section 3(a)(5)(A) of the Securities Act of 1933 
        (15 U.S.C. 77c(a)(5)(A)) shall adopt, as part of the securities 
        regulations of the covered bond regulator, a separate scheme of 
        registration, disclosure, and reporting obligations and 
        exemptions for offers or sales of covered bonds that are 
        described in this paragraph. Such regulations shall provide for 
        uniform and consistent standards for such covered bond issuers, 
        to the extent possible, and shall be consistent with 
        regulations governing offers or sales of similar securities.
          (3) Construction.--No provision of this Act, including 
        paragraph (1) or (2), may be construed or applied in a manner 
        that impairs or limits any other exemption that is available 
        under applicable securities laws.
  (b) Exemptions for Estates.--Any estate that is or may be created 
under section 4(b)(1) or 4(c)(2) shall be exempt from all securities 
laws but--
          (1) shall be subject to the reporting requirements 
        established by the applicable covered bond regulator under 
        section 4(d)(1)(E)(iii); and
          (2) 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 and Exchange Act of 1934 (15 U.S.C. 78m(a)) or rules 
        established by an appropriate Federal banking agency.
  (c) Exemptions for Residual Interests.--Any residual interest in an 
estate that is or may be created under section 4(b)(1) or 4(c)(2) shall 
be exempt from all securities laws.

SEC. 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 in section 2 of the United 
        States Covered Bond Act of 2011),''.
  (b) No Tax Implications.--Any estate created under section 4(b)(1) or 
4(c)(2) shall not be treated as an entity subject to taxation separate 
from the owner of the residual interest for purposes of the Internal 
Revenue Code of 1986 (26 U.S.C. 1 et seq.), including by reason of the 
taxable mortgage pool provisions of section 7701(i) of the Internal 
Revenue Code of 1986 (26 U.S.C. 7701(i)), but instead shall be treated 
as a disregarded entity that is owned by the owner of the residual 
interest for such purposes as described in applicable regulations of 
the Secretary, as in effect on the date of the enactment of this Act. 
No transfer or assumption of any asset or liability to or by an estate 
or an eligible issuer under section 4(b) or 4(c) shall cause or 
constitute an event in which gain or loss shall be recognized under 
section 1001 of the Internal Revenue Code of 1986 (26 U.S.C. 1001).
  (c) Real Estate Mortgage Investment Conduits.--Section 860G(a)(3) of 
the Internal Revenue Code of 1986 (26 U.S.C. 860G(a)(3)) is amended--
          (1) in subparagraph (B), by striking ``and'' at the end;
          (2) in subparagraph (C), by striking the period and inserting 
        ``, and''; and
          (3) by inserting after subparagraph (C) the following:
                  ``(D) covered bonds that are secured by eligible 
                assets from the residential mortgage asset class or the 
                commercial mortgage asset class, as such terms are 
                defined in section 2 of the United States Covered Bond 
                Act of 2011.''.
  (d) Real Estate Investment Trusts.--To the extent provided by 
regulations that may be promulgated by the Secretary, a covered bond 
described in section 860G(a)(3)(D) of the Internal Revenue Code of 1986 
shall be treated as a real estate asset in the same manner as a regular 
interest in a REMIC for purposes of section 856(c)(5)(E) of such Code.
  (e) Investment Treatment for Tax Purposes.--The acquisition of any 
covered bond shall be treated as an acquisition of an investment 
security, and not as an acquisition of an interest in a loan or 
otherwise as a lending transaction, for purposes of determining the 
character of any related trade or business activity of the acquirer or 
any asset held by the acquirer under the Internal Revenue Code of 1986 
(26 U.S.C. 1 et seq.).
  (f) State and Local Taxes.--The Secretary may promulgate regulations 
under this Act that are similar to the provisions of section 346 of 
title 11, United States Code, including regulations to provide that--
          (1) if an estate created under section 4(b)(1) or 4(c)(2) is 
        not treated as an entity subject to taxation separate from the 
        owner of the residual interest for purposes of the Internal 
        Revenue Code of 1986 (26 U.S.C. 1 et seq.), no separate taxable 
        entity shall be created with respect to the estate for purposes 
        of any State or local law imposing a tax on or measured by 
        income; and
          (2) if a transfer or assumption of an asset or liability to 
        or by an estate or an eligible issuer under section 4(b) or 
        4(c) does not cause or constitute an event in which gain or 
        loss is recognized under section 1001 of the Internal Revenue 
        Code of 1986 (26 U.S.C. 1001), the transfer or assumption shall 
        not cause or constitute a disposition for purposes of any 
        provision assigning tax consequences to a disposition in 
        connection with any State or local law imposing a tax on or 
        measured by income.
  (g) 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, title II of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 
5381 et seq.), 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, title II of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (12 U.S.C. 5381 et seq.), 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.
  (h) Annual Report to Congress.--The covered bond regulators shall, 
annually--
          (1) submit a joint report to the Congress describing the 
        current state of the covered bond market in the United States; 
        and
          (2) testify on the current state of the covered bond market 
        in the United States before the Committee on Financial Services 
        of the House of Representatives and the Committee on Banking, 
        Housing, and Urban Affairs of the Senate.

                          Purpose and Summary

    H.R. 940, the United States Covered Bond Act of 2011, 
establishes a comprehensive regulatory framework for the 
covered bond market in the United States. The legislation 
directs the Department of the Treasury, in consultation with 
the federal banking regulators, to establish rules governing 
the market and requires the prudential federal regulator for 
each issuer of a covered bond to serve as the ``covered bond 
regulator'' for that issuer. The legislation also creates legal 
certainty for investors by detailing what will happen if an 
issuer becomes insolvent or defaults on the covered bond.
    A U.S. covered bond market would provide additional funding 
at lower costs for financial institutions, which in turn would 
provide more stable and longer term liquidity in the credit 
markets. Consumers would benefit from greater availability of 
credit and lower costs. In addition to providing liquidity, 
covered bonds would also allow financial institutions to better 
match the duration of their assets with their liabilities, 
which would help protect them against liability mismatches that 
led to runs on financial institutions in 2008. Because issuers 
of covered bonds retain ownership of the loans in the cover 
pools, covered bonds would strengthen the incentives of issuers 
to improve their loan underwriting and monitor loan 
performance. Retained ownership of the loans in the cover pools 
also makes it easier for issuers to modify troubled loans when 
appropriate. The benefits that covered bonds have to offer will 
not be realized until a legislative framework is in place that 
provides certainty to issuers and investors about how a covered 
bond market would work.
    The covered bond framework set forth in H.R. 940 would help 
credit flow more readily from capital markets to households, 
small businesses, and state and local governments to enhance 
economic growth and the stability of the financial system. 
Additionally, covered bonds are an alternative to mortgage-
backed securities issued and guaranteed by the government 
sponsored enterprises, Fannie Mae and Freddie Mac.

                  Background and Need for Legislation

    A covered bond is a debt instrument issued by a financial 
institution for which a group of high quality assets--typically 
loans--is set aside in a ``cover pool'' for the benefit of the 
bondholders. The value of the assets in the cover pool is 
greater than the amount of the covered bond, which means that 
the covered bond is ``overcollateralized.'' Unlike the 
``originate to distribute'' model, in which the issuer packages 
the underlying assets into an instrument that is sold into the 
market, the underlying assets in the cover pool remain on the 
issuer's books. A covered bond is a ``dual-recourse'' debt 
instrument, which means that if the issuer becomes insolvent, 
bondholders have not only a secured interest in the cover 
pool's assets but also an unsecured claim against the issuer, 
if the cover pool is insufficient to repay the bondholders.
    In 2008, both the Department of the Treasury and the 
Federal Deposit Insurance Corporation (FDIC) issued policy 
statements on covered bonds. Although these regulatory 
initiatives were an initial step towards establishing a 
regulatory framework for covered bonds in the United States, 
they did not succeed in creating a robust U.S. covered bond 
market. To address the legal and regulatory uncertainty that 
has thus far prevented the establishment of a covered bond 
market in the United States, H.R. 940 was introduced by 
Representatives Garrett and Maloney to establish a legislative 
framework for the covered bond market in the United States.
    The Subcommittee on Capital Markets and Government 
Sponsored Enterprises held a legislative hearing on H.R. 940 on 
March 11, 2011. During that hearing, the Subcommittee received 
testimony from a variety of financial market participants. A 
majority of witnesses expressed the view that covered bonds are 
an untapped but proven means of creating cost-effective funding 
from the private sector capital markets. The witnesses also 
testified that legal certainty concerning creditor claims and 
the collateral securing the covered bond is necessary for a 
covered bond market to exist in the United States, and that 
such certainty cannot be created by regulatory action alone. 
Accordingly, the witnesses strongly supported H.R. 940, which 
would create the certainty needed to establish a vibrant 
covered bond market. The FDIC submitted written testimony for 
the record at the March 11, 2011 hearing, which expressed 
support for establishing a covered bond market in the United 
States, but also highlighted certain concerns about the bill as 
introduced.

                                Hearings

    On March 11, 2011, the Subcommittee on Capital Markets and 
Government Sponsored Enterprises held a hearing on 
``Legislative Proposals to Create a Covered Bond Regime in the 
United States.'' The following witnesses testified:
     Mr. Scott Stengel, Partner, King & Spalding LLP, 
on behalf of the U.S. Covered Bond Council
     Mr. Bert Ely, Ely & Company, Inc.
     Mr. Tim Skeet, Amias Berman & Co., on behalf of 
the International Capital Market Association
     Mr. Ralph Daloisio, Managing Director, Natixis, on 
behalf of the American Securitization Forum
     Mr. Stephen G. Andrews, President and Chief 
Executive Officer, Bank of Alameda

                        Committee Consideration

    The Subcommittee on Capital Markets and Government 
Sponsored Enterprises met in open session on May 3 and 4, 2011, 
and ordered H.R. 940, as amended, favorably reported to the 
full Committee by voice vote.
    The Committee on Financial Services met in open session on 
June 22, 2011, and ordered H.R. 940, as amended, favorably 
reported to the House by a record vote of 44 yeas, 7 nays, and 
3 present (Record vote no. FC-49).

                            Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto.
    On June 22, 2011, the Committee on Financial Services met 
in open session and ordered H.R. 940, as amended, favorably 
reported to the House by a record vote of 44 yeas, 7 nays, and 
3 present (Record vote no. FC-49). The names of the Members 
voting for, against, and present follow:

                                              RECORD VOTE NO. FC-49
----------------------------------------------------------------------------------------------------------------
         Representative             Aye       Nay     Present     Representative      Aye       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Bachus.....................        X   ........  .........  Mr. Frank (MA)...  ........  ........         X
Mr. Hensarling.................        X   ........  .........  Ms. Waters.......  ........  ........         X
Mr. King (NY)..................  ........  ........  .........  Mrs. Maloney.....        X   ........  .........
Mr. Royce......................        X   ........  .........  Mr. Gutierrez....  ........  ........  .........
Mr. Lucas......................        X   ........  .........  Ms. Velazquez....  ........  ........         X
Mr. Paul.......................  ........  ........  .........  Mr. Watt.........        X   ........  .........
Mr. Manzullo...................        X   ........  .........  Mr. Ackerman.....        X   ........  .........
Mr. Jones......................        X   ........  .........  Mr. Sherman......        X   ........  .........
Mrs. Biggert...................        X   ........  .........  Mr. Meeks........        X   ........  .........
Mr. Gary G. Miller (CA)........        X   ........  .........  Mr. Capuano......  ........        X   .........
Mrs. Capito....................        X   ........  .........  Mr. Hinojosa.....        X   ........  .........
Mr. Garrett....................        X   ........  .........  Mr. Clay.........  ........        X   .........
Mr. Neugebauer.................        X   ........  .........  Mrs. McCarthy            X   ........  .........
                                                                 (NY).
Mr. McHenry....................        X   ........  .........  Mr. Baca.........  ........  ........  .........
Mr. Campbell...................        X   ........  .........  Mr. Lynch........  ........        X   .........
Mrs. Bachmann..................        X   ........  .........  Mr. Miller (NC)..  ........        X   .........
Mr. McCotter...................        X   ........  .........  Mr. David Scott          X   ........  .........
                                                                 (GA).
Mr. McCarthy (CA)..............  ........  ........  .........  Mr. Al Green (TX)        X   ........  .........
Mr. Pearce.....................        X   ........  .........  Mr. Cleaver......        X   ........  .........
Mr. Posey......................        X   ........  .........  Ms. Moore........  ........        X   .........
Mr. Fitzpatrick................        X   ........  .........  Mr. Ellison......  ........        X   .........
Mr. Westmoreland...............  ........  ........  .........  Mr. Perlmutter...        X   ........  .........
Mr. Luetkemeyer................        X   ........  .........  Mr. Donnelly.....        X   ........  .........
Mr. Huizenga...................        X   ........  .........  Mr. Carson.......  ........        X   .........
Mr. Duffy......................        X   ........  .........  Mr. Himes........        X   ........  .........
Ms. Hayworth...................        X   ........  .........  Mr. Peters.......        X   ........  .........
Mr. Renacci....................        X   ........  .........  Mr. Carney.......        X   ........  .........
Mr. Hurt.......................        X   ........  .........
Mr. Dold.......................        X   ........  .........
Mr. Schweikert.................        X   ........  .........
Mr. Grimm......................        X   ........  .........
Mr. Canseco....................        X   ........  .........
Mr. Stivers....................  ........  ........  .........
Mr. Fincher....................        X   ........  .........
----------------------------------------------------------------------------------------------------------------

    During consideration of H.R. 940, the following amendments 
were considered:
    1. An amendment offered by Mr. Frank, no. 3, to allow the 
FDIC to repudiate the contractual rights of covered bond 
investors, was not agreed to by a record vote of 26 yeas and 28 
nays (Record vote no. FC-47).

                                              RECORD VOTE NO. FC-47
----------------------------------------------------------------------------------------------------------------
         Representative             Aye       Nay     Present     Representative      Aye       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Bachus.....................  ........        X   .........  Mr. Frank (MA)...        X   ........  .........
Mr. Hensarling.................  ........        X   .........  Ms. Waters.......        X   ........  .........
Mr. King (NY)..................  ........  ........  .........  Mrs. Maloney.....        X   ........  .........
Mr. Royce......................  ........        X   .........  Mr. Gutierrez....  ........  ........  .........
Mr. Lucas......................  ........        X   .........  Ms. Velazquez....        X   ........  .........
Mr. Paul.......................  ........  ........  .........  Mr. Watt.........        X   ........  .........
Mr. Manzullo...................  ........        X   .........  Mr. Ackerman.....        X   ........  .........
Mr. Jones......................  ........        X   .........  Mr. Sherman......        X   ........  .........
Mrs. Biggert...................  ........        X   .........  Mr. Meeks........        X   ........  .........
Mr. Gary G. Miller (CA)........  ........        X   .........  Mr. Capuano......        X   ........  .........
Mrs. Capito....................  ........        X   .........  Mr. Hinojosa.....        X   ........  .........
Mr. Garrett....................  ........        X   .........  Mr. Clay.........        X   ........  .........
Mr. Neugebauer.................  ........        X   .........  Mrs. McCarthy            X   ........  .........
                                                                 (NY).
Mr. McHenry....................  ........        X   .........  Mr. Baca.........  ........  ........  .........
Mr. Campbell...................        X   ........  .........  Mr. Lynch........        X   ........  .........
Mrs. Bachmann..................  ........        X   .........  Mr. Miller (NC)..        X   ........  .........
Mr. McCotter...................  ........        X   .........  Mr. David Scott          X   ........  .........
                                                                 (GA).
Mr. McCarthy (CA)..............  ........  ........  .........  Mr. Al Green (TX)        X   ........  .........
Mr. Pearce.....................  ........        X   .........  Mr. Cleaver......        X   ........  .........
Mr. Posey......................  ........        X   .........  Ms. Moore........        X   ........  .........
Mr. Fitzpatrick................  ........        X   .........  Mr. Ellison......        X   ........  .........
Mr. Westmoreland...............  ........  ........  .........  Mr. Perlmutter...        X   ........  .........
Mr. Luetkemeyer................  ........        X   .........  Mr. Donnelly.....        X   ........  .........
Mr. Huizenga...................  ........        X   .........  Mr. Carson.......        X   ........  .........
Mr. Duffy......................  ........        X   .........  Mr. Himes........        X   ........  .........
Ms. Hayworth...................  ........        X   .........  Mr. Peters.......        X   ........  .........
Mr. Renacci....................  ........        X   .........  Mr. Carney.......        X   ........  .........
Mr. Hurt.......................  ........        X   .........
Mr. Dold.......................  ........        X   .........
Mr. Schweikert.................  ........        X   .........
Mr. Grimm......................  ........        X   .........
Mr. Canseco....................  ........        X   .........
Mr. Stivers....................  ........  ........  .........
Mr. Fincher....................  ........        X   .........
----------------------------------------------------------------------------------------------------------------

    2. An amendment offered by Mr. Frank, no. 4, to give the 
FDIC concurrent authority with an issuer's covered bond 
regulator to approve a covered bond program, was not agreed to 
by a record vote of 26 yeas and 28 nays (Record vote no. FC-
48).

                                              RECORD VOTE NO. FC-48
----------------------------------------------------------------------------------------------------------------
         Representative             Aye       Nay     Present     Representative      Aye       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Bachus.....................  ........        X   .........  Mr. Frank (MA)...        X   ........  .........
Mr. Hensarling.................  ........        X   .........  Ms. Waters.......        X   ........  .........
Mr. King (NY)..................  ........  ........  .........  Mrs. Maloney.....        X   ........  .........
Mr. Royce......................  ........        X   .........  Mr. Gutierrez....  ........  ........  .........
Mr. Lucas......................  ........        X   .........  Ms. Velazquez....        X   ........  .........
Mr. Paul.......................  ........  ........  .........  Mr. Watt.........        X   ........  .........
Mr. Manzullo...................  ........        X   .........  Mr. Ackerman.....        X   ........  .........
Mr. Jones......................  ........        X   .........  Mr. Sherman......        X   ........  .........
Mrs. Biggert...................  ........        X   .........  Mr. Meeks........        X   ........  .........
Mr. Gary G. Miller (CA)........  ........        X   .........  Mr. Capuano......        X   ........  .........
Mrs. Capito....................  ........        X   .........  Mr. Hinojosa.....        X   ........  .........
Mr. Garrett....................  ........        X   .........  Mr. Clay.........        X   ........  .........
Mr. Neugebauer.................  ........        X   .........  Mrs. McCarthy            X   ........  .........
                                                                 (NY).
Mr. McHenry....................  ........        X   .........  Mr. Baca.........  ........  ........  .........
Mr. Campbell...................        X   ........  .........  Mr. Lynch........        X   ........  .........
Mrs. Bachmann..................  ........        X   .........  Mr. Miller (NC)..        X   ........  .........
Mr. McCotter...................  ........        X   .........  Mr. David Scott          X   ........  .........
                                                                 (GA).
Mr. McCarthy (CA)..............  ........  ........  .........  Mr. Al Green (TX)        X   ........  .........
Mr. Pearce.....................  ........        X   .........  Mr. Cleaver......        X   ........  .........
Mr. Posey......................  ........        X   .........  Ms. Moore........        X   ........  .........
Mr. Fitzpatrick................  ........        X   .........  Mr. Ellison......        X   ........  .........
Mr. Westmoreland...............  ........  ........  .........  Mr. Perlmutter...        X   ........  .........
Mr. Luetkemeyer................  ........        X   .........  Mr. Donnelly.....        X   ........  .........
Mr. Huizenga...................  ........        X   .........  Mr. Carson.......        X   ........  .........
Mr. Duffy......................  ........        X   .........  Mr. Himes........        X   ........  .........
Ms. Hayworth...................  ........        X   .........  Mr. Peters.......        X   ........  .........
Mr. Renacci....................  ........        X   .........  Mr. Carney.......        X   ........  .........
Mr. Hurt.......................  ........        X   .........
Mr. Dold.......................  ........        X   .........
Mr. Schweikert.................  ........        X   .........
Mr. Grimm......................  ........        X   .........
Mr. Canseco....................  ........        X   .........
Mr. Stivers....................  ........  ........  .........
Mr. Fincher....................  ........        X   .........
----------------------------------------------------------------------------------------------------------------

    The following amendments and motion were also considered by 
the Committee:
    1. An amendment offered by Mrs. Maloney, no. 1, to increase 
the time the FDIC has to market a covered bond in order to sell 
it to another issuer before creating a separate estate, was 
agreed to by voice vote.
    2. An amendment offered by Mr. Campbell, no. 2, to direct 
the appropriate covered bond regulator to set an asset 
encumbrance cap for covered bond issuers, was agreed to by 
voice vote.
    3. An amendment offered by Mr. Garrett, no. 5, to remove 
the ability of the covered bond regulator to serve as trustee; 
to amend what type of non-bank financial company issuer can 
qualify as an eligible issuer under the bill; to require 
covered bond issuers to make certain disclosures to investors 
about the quality of loans that are eligible for the pool; to 
clarify the legal rights of lienholders to assets within the 
issuing institutions; and to ensure that no collateral may be 
double pledged to different creditors, was agreed to by voice 
vote.
    4. A motion offered by Mr. Garrett to move the previous 
question on H.R. 940 was agreed to by voice vote.

                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee has held hearings and 
made findings that are reflected in this report.

                    Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee establishes the 
following performance related goals and objectives for this 
legislation:
    The purpose of H.R. 940 is to establish a comprehensive 
regulatory framework for a U.S. covered bond market, which in 
turn would help credit flow more readily from capital markets 
to households, small businesses, and state and local 
governments to enhance economic growth and the stability of the 
financial system. H.R. 940 provides a legislative framework to 
address the legal and regulatory uncertainty that has thus far 
prevented the establishment of a covered bond market in the 
United States.

           New Budget Authority, Entitlement Authority, and 
                            Tax Expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.

                        Committee Cost Estimate

    The Committee adopts as its own the cost estimate prepared 
by the Director of the Congressional Budget Office pursuant to 
section 402 of the Congressional Budget Act of 1974.

                 Congressional Budget Office Estimates

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                                 February 21, 2012.
Hon. Spencer Bachus,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 940, the United 
States Covered Bond Act of 2011.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Daniel 
Hoople.
            Sincerely,
                                              Douglas W. Elmendorf.
    Enclosure.

H.R. 940--United States Covered Bond Act of 2011

    Summary: H.R. 940 would establish a framework for 
regulating financial instruments known as covered bonds. 
Covered bonds are full-recourse debt obligations, secured by a 
pool of performing assets. Under the bill, investors in covered 
bonds would receive greater compensation in some cases if the 
issuer were placed into the receivership or conservatorship of 
the Federal Deposit Insurance Corporation (FDIC). CBO expects 
that implementing the bill would lead to an increase in the use 
of covered bonds in the United States. CBO estimates that this 
increase would add to the cost of financial resolution 
programs, although any gross additional costs to the FDIC over 
the next 10 years would be offset by amounts assessed on 
depository institutions and other large financial institutions 
over many years.
    CBO reviewed the nontax provisions of H.R. 940. Enacting 
those provisions of the legislation would increase net direct 
spending by $50 million, and would increase net revenues by $15 
million over the 2012-2022 period, resulting in a net increase 
in the deficit of $35 million over the next 10 years, CBO 
estimates. The Joint Committee on Taxation (JCT) reviewed the 
tax provisions of H.R. 940 and expects that enacting those 
provisions would probably decrease revenues to the federal 
government; however, the legislative language requires further 
specification before the revenue effect can be estimated. Pay-
as-you-go procedures apply because enacting the legislation 
would affect direct spending and revenues.
    In addition, CBO estimates that implementing the bill would 
cost $10 million over the 2012-2017 period for activities of 
the Securities and Exchange Commission (SEC), assuming 
appropriation of the necessary amounts.
    H.R. 940 contains no intergovernmental mandates as defined 
in the Unfunded Mandates Reform Act (UMRA) and would not affect 
the budgets of state, local, or tribal governments.
    H.R. 940 contains a private-sector mandate, as defined in 
UMRA, on financial institutions because they would be required 
to pay additional fees or deposit insurance premiums to offset 
the costs to the FDIC associated with the covered bond program 
under the bill. Based on the expected use of covered bonds 
under the bill, CBO estimates that the cost of the mandate 
would fall well below the annual threshold for private-sector 
mandates ($146 million in 2012, adjusted annually for 
inflation).
    Estimated cost to the Federal Government: The estimated 
budgetary impact of H.R. 940 is shown in the following table. 
The costs of this legislation fall within budget function 370 
(commerce and housing credit).

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                    By fiscal year, in millions of dollars--
                                                      --------------------------------------------------------------------------------------------------
                                                        2012   2013   2014   2015   2016   2017   2018   2019   2020   2021   2022  2012-2017  2012-2022
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               CHANGES IN DIRECT SPENDING

Estimated Budget Authority...........................      0      *      1      3      4      6      6      7      7      8      8        14         50
Estimated Outlays....................................      0      *      1      3      4      6      6      7      7      8      8        14         50

                                                                  CHANGES IN REVENUESa

Estimated Revenues...................................      0      0      0      *      1      2      2      2      2      3      3         3         15

                                        NET INCREASE IN THE DEFICIT FROM CHANGES IN DIRECT SPENDING AND RECEIPTS

Impact on Deficit....................................      0      *      1      3      3      4      4      5      5      5      5        11         35

                                                      CHANGES IN SPENDING SUBJECT TO APPROPRIATION

Estimated Authorization Level........................      *      2      2      2      2      2      2      2      2      2      2        10         20
Estimated Outlays....................................      *      2      2      2      2      2      2      2      2      2      2        10        20
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: * = between $0 and $500,000.
aAmounts included under this heading only include changes in revenues associated with the nontax provisions of H.R. 940. The staff of the Joint
  Committee on Taxation expects that the tax provisions of H.R. 940 would probably decrease revenues; however, the legislative language requires further
  specification before the revenue effect can be estimated.

    Basis of estimate: CBO estimates that enacting H.R. 940 
would increase federal deficits by $35 million over the 2012-
2022 period. Most of those estimated net costs would result 
from the legislation's effect on the Orderly Liquidation Fund 
(OLF) of the FDIC, which was established by the Congress in 
2010 to liquidate certain large financial institutions. CBO 
also estimates that the SEC would spend an additional $10 
million over the 2012-2017 period and $20 million over the 
2012-2022 period, assuming appropriation of the necessary 
amounts.
    For this estimate, CBO assumes that H.R. 940 will be 
enacted during fiscal year 2012, that fees will be levied on 
issuers of covered bonds to cover the administrative expenses 
of federal regulatory agencies and to pay for establishing a 
covered bond registry (as authorized by the bill), and that 
amounts estimated to be necessary for discretionary expenses of 
the SEC will be provided for each year.

Background

    Covered bonds share some similarities with other means of 
financing, such as unsecured debt and asset-backed securities. 
Each allow the issuer to raise funds for lending or other 
purposes and to repay investors from general cash flows. 
However, covered bonds have some unique features:
           The securing collateral (that is, the asset 
        pool) must be continually refreshed if an asset becomes 
        delinquent or does not otherwise meet qualifying 
        criteria (unlike other asset-backed securities that are 
        secured by a fixed group of assets that does not 
        change); and,
           If the issuer of a covered bond were to 
        default, investors would have dual recourse against 
        both a fixed pool of assets that would be unavailable 
        to other creditors and other assets of the issuer. 
        (This is unlike unsecured debt and asset-backed 
        securities where investors have recourse against the 
        general assets of the issuer or a fixed pool of assets, 
        respectively, but not both.)

Effect of H.R. 940 on the issuance of covered bonds

    CBO expects that enacting H.R. 940 would lead to an 
increase in the issuance of covered bonds because the bill 
would mitigate investor uncertainty in the case of default. 
Under current law, if a covered bond issuer is placed into 
receivership or conservatorship of the FDIC, the agency has the 
option to terminate future payments and instead pay investors 
up to the par value of the bond plus accrued interest. This 
option is available even if cash flows of the underlying 
collateral are sufficient to sustain continued payments to 
investors. Even in cases where full par value plus accrued 
interest is paid, this treatment increases the risk to 
investors that future returns may not be as great as if bond 
payments were continued. H.R. 940 would mitigate this 
reinvestment risk by requiring that the entire collateral pool 
of a covered bond be transferred to a separate estate in the 
event that an issuer is placed into receivership or 
conservatorship. This would prevent the FDIC from terminating 
bond payments early, thus making covered bonds more attractive 
to investors.
    While CBO expects that enacting H.R. 940 would increase the 
use of covered bonds by financial institutions, the additional 
volume over the next 10 years would probably be small for 
several reasons. First, increases in deposits, slow economic 
growth, and low demand for lending have reduced the need for 
bank borrowing in the near term. Second, given the higher level 
of risk retained by issuers of covered bonds compared to other 
forms of financing (for example, securitization), additional 
regulatory capital would need to be maintained. Third, 
alternative sources of secured financing (most notably, 
advances from Federal Home Loan Banks) would continue to have 
advantages over covered bonds, particularly for small banks. 
Fourth, banks and investors in the United States would likely 
take a cautious approach until they have become more familiar 
with the product. Finally, H.R. 940 would allow the federal 
regulatory agencies to place a cap on outstanding issuances 
(which CBO assumes would be at or near 4 percent of an 
institution's liabilities based on current policy).
    Considering those factors as well as historical data on the 
funding sources used by banks, CBO estimates that issuances of 
covered bonds would increase to between 1 percent to 2 percent 
of the projected liabilities of insured depository 
institutions. However, given the variety of factors that 
influence the financing decisions of institutions, the precise 
impact of this legislation on the use of covered bonds is 
uncertain.

Direct spending and revenues

    H.R. 940 would lead to an increase in the net costs of the 
FDIC by reducing the value of assets the agency could sell as 
receiver or conservator of a financial institution. Under 
current law, the FDIC may sell or transfer the assets of a 
failed or insolvent institution to offset agency costs 
(including payments made to insured depositors if necessary). 
In some cases, the asset pool securing a covered bond would 
carry a higher value than the par value of the bond plus 
accrued interest. By requiring that the entire collateral pool 
of a covered bond (including its excess value) be transferred 
to a separate estate in the event of a receivership or 
conservatorship, the legislation would prevent the FDIC from 
exercising the option of terminating future bond payments (and 
paying investors par value plus accrued interest) and retaining 
the excess value. The loss of this excess value would represent 
an additional cost to the FDIC (mostly in the OLF--although the 
Deposit Insurance Fund or DIF would also suffer additional 
losses). CBO estimates that loss at about $50 million over the 
2012-2022 period. By comparison, CBO estimates that spending 
from the OLF, net of recoveries, will total roughly $30 billion 
over the same period under current law.
    Under current law, the FDIC has the authority to recoup 
losses by increasing premiums on insured depository 
institutions and levying assessments on large financial 
institutions. In the case of the DIF, once empirical data 
became available, the FDIC would probably adjust premiums paid 
by insured institutions to offset any additional losses 
attributable to covered bonds, similar to current policy for 
brokered deposits. Thus, by the end of the 10-year period, the 
net effect of this legislation on the DIF would probably be 
minimal or zero on an annualized basis. In the case of the OLF, 
however, assessments would occur for multiple years beyond any 
additional spending and, in some cases, would not be collected 
until well outside of the 10-year period covered by this 
estimate. Because of this timing lag, CBO estimates that 
enacting H.R.940 would increase federal deficits over the next 
10 years.
    In addition to timing effects, assessments that would be 
levied to offset additional losses to the OLF under the bill 
would become an additional business expense for companies 
required to pay them. Those additional expenses would result in 
decreases in taxable income elsewhere in the economy, which 
would produce a loss of government revenue from payroll and 
income taxes (estimated to be about 25 percent) that would 
partially offset the revenues collected from the assessment 
itself.
    Relative to CBO's baseline projections for the FDIC, H.R. 
940 would increase federal deficits by $35 million over the 
2012-2022 period. This estimate of additional outlays and 
revenues stemming from the bill was done on a probabilistic 
basis. Following the default of some covered bonds, additional 
outlays and revenues probably would be much higher under the 
bill (particularly, if the issuer was a systemically important 
financial institution); however, in other periods where such an 
event does not occur, the effect on the federal deficit would 
be zero. We estimate that provisions affecting other banking 
agencies, such as the Office of the Comptroller of the Currency 
and the Federal Reserve, would have a negligible effect on net 
direct spending and revenues.

Spending subject to appropriation

    Based on information from the SEC, CBO estimates that 
implementing this legislation would increase SEC costs by about 
$2 million a year, adjusted annually for inflation. Thus, we 
estimate that implementing H.R. 940 would increase 
discretionary spending by about $10 million over the 2012-2017 
period, assuming appropriation of the necessary amounts.
    Pay-As-You-Go considerations: The Statutory Pay-As-You-Go 
Act of 2010 establishes budget-reporting and enforcement 
procedures for legislation affecting direct spending or 
revenues. The net changes in outlays and revenues that are 
subject to those pay-as-you-go procedures are shown in the 
following table.

          CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 940 AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON FINANCIAL SERVICES ON JUNE 22, 2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              By fiscal year, in millions of dollars--
                                           -------------------------------------------------------------------------------------------------------------
                                             2012    2013    2014    2015    2016     017    2018    2019    2020    2021    2022   2012-2017  2012-2022
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               NET INCREASE IN THE DEFICIT
Statutory Pay-As-You-Go Impact............       0       0       1       3       3       4       4       5       5       5       5        11         35
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Estimated impact on state, local, and tribal governments: 
H.R. 940 contains no intergovernmental mandates as defined UMRA 
and would not affect the budgets of state, local, or tribal 
governments.
    Estimated impact on the private sector: The bill contains a 
private-sector mandate, as defined in UMRA, on financial 
institutions because they would be required to pay additional 
fees or deposit insurance premiums to offset the costs to the 
FDIC associated with the covered bond program under the bill. 
The incremental increase in fees or insurance premiums would 
depend on the number and value of covered bonds issued. CBO 
estimates that, under this bill, the use of covered bonds would 
cause the FDIC to increase fees or insurance premiums by a 
total of about $5 million over the first five years that the 
mandate would be in effect. Thus, the cost of the mandate would 
fall well below the annual threshold for private-sector 
mandates ($146 million in 2012, adjusted annually for 
inflation).
    Estimate prepared by: Federal costs: Daniel Hoople (banking 
agencies), Barbara Edwards (Federal Reserve), and Susan Willie 
(Securities and Exchange Commission); Impact on state, local, 
and tribal governments: Elizabeth Cove Delisle; Impact on the 
private sector: Paige Piper/Bach.
    Estimate approved by: Theresa Gullo, Deputy Assistant 
Director for Budget Analysis.

                       Federal Mandates Statement

    The Committee adopts as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates Reform 
Act.

                      Advisory Committee Statement

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                  Applicability to Legislative Branch

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of the section 
102(b)(3) of the Congressional Accountability Act.

                         Earmark Identification

    H.R. 940 does not contain any congressional earmarks, 
limited tax benefits, or limited tariff benefits as defined in 
clause 9 of rule XXI.

             Section-by-Section Analysis of the Legislation


Section 1. Short title

    This section provides a short title which may be cited as 
the ``United States Covered Bond Act of 2011.''

Section 2. Definitions

    This section contains various definitions used in the Act, 
including those for ``covered bonds,'' ``eligible issuers,'' 
``eligible assets,'' and ``covered bond regulators.''

Section 3. Regulatory oversight of covered bond programs established

    This section directs the Secretary of the Treasury, in 
consultation with the covered bond regulators, to issue 
regulations establishing a covered bond regulatory oversight 
program and to establish minimum over-collateralization 
requirements for covered bonds backed by each of the different 
eligible asset classes. The Secretary of the Treasury is also 
required to maintain a public registry of approved covered bond 
programs.
    This section authorizes each covered bond regulator to (1) 
approve the covered bond programs of eligible issuers under its 
primary supervision; (2) prohibit the additional issuance of 
covered bonds by an issuer if the issuer is not complying with 
the requirements of the Act or the directives of the covered 
bond regulator; (3) set a cap on covered bond issuance, 
consistent with safety and soundness considerations, for each 
issuer as a percentage of the issuer's total assets; and (4) 
levy fees on covered bond issuers under the covered bond 
regulator's primary supervision in order to cover the costs of 
administering the oversight program.
    This section also requires each cover pool securing covered 
bonds to satisfy an asset coverage test that assesses whether 
the minimum over-collateralization requirements are met, and 
obligates the issuer and an independent asset monitor to 
confirm on a periodic basis whether the asset coverage test is 
satisfied. This section also establishes eligibility criteria 
for cover pools and recordkeeping obligations of eligible 
issuers.

Section 4. Resolution upon default or insolvency

    This section establishes that--if a covered bond issuer 
defaults before the issuer enters conservatorship, 
receivership, liquidation, or bankruptcy--a separate estate is 
to be created that comprises the applicable cover pool, and the 
separate estate assumes liability for the covered bonds and any 
related obligations secured by that cover pool. The issuer is 
required to transfer applicable books, records, files, and 
other documents to the trustee of the estate or a designee of 
the trustee and, at the election of the trustee, to continue 
servicing the cover pool for 120 days.
    This section also provides that if the FDIC is appointed as 
conservator or receiver for an issuer before a default on the 
issuer's covered bonds results in the creation of a separate 
estate, the FDIC has an exclusive right for one year to 
transfer the issuer's covered bond program to another eligible 
issuer. The FDIC must perform all monetary and nonmonetary 
obligations of the issuer until the FDIC completes the transfer 
of the covered bond program; the FDIC affirmatively elects to 
cease further performance; or the FDIC fails to perform or cure 
any default (other than the issuer's conservatorship or 
receivership).
    This section creates a separate estate if another 
conservator, receiver, liquidator, or bankruptcy trustee is 
appointed for an issuer before a default on its covered bonds 
results in the creation of an estate. This section also creates 
a separate estate if the FDIC as conservator or receiver does 
not timely effect a transfer of the covered bond program to 
another eligible issuer; affirmatively elects to cease further 
performance; or fails to perform or cure any default. The 
separate estate comprises the applicable cover pool and assumes 
liability for the covered bonds and any related obligations 
secured by that cover pool. The conservator, receiver, 
liquidating agent, or bankruptcy court is required to estimate 
and allow any contingent deficiency claim against the issuer. 
The conservator, receiver, liquidating agent, or bankruptcy 
trustee is required to transfer applicable books, records, 
files, and other documents to the trustee of the estate or a 
designee of the trustee and, at the election of the trustee, to 
continue servicing the cover pool for 120 days.
    This section also preserves the investors' deficiency 
claims against the issuer, and provides the issuer, 
conservator, receiver, liquidating agent, or bankruptcy trustee 
with a residual interest that represents the right to any 
surplus from the cover pool.
    This section requires the applicable covered bond regulator 
to appoint the trustee of the estate and to appoint and 
supervise a servicer or administrator for the cover pool held 
by the estate. The covered bond regulator is also given the 
authority to remove and replace any trustee, servicer, or 
administrator. The trustee is required to administer the estate 
and the servicer or administrator is required to collect, 
realize on, and manage the cover pool and to invest the 
proceeds. The servicer or administrator is authorized to borrow 
funds or otherwise obtain credit for the benefit of the estate 
on a secured or unsecured basis and on a priority, pari passu, 
or subordinated basis. The estate is required to make 
distributions in order to make required payments on the covered 
bonds and to satisfy other liabilities of the estate. Once the 
estate is fully administered, the trustee is required to close 
the estate.
    This section also limits judicial, administrative, and 
other actions that may be brought against the estate or that 
would affect its resolution; requires a study by the Government 
Accountability Office on whether estates should be authorized 
to borrow from a Federal Reserve Bank to manage liquidity 
(though not credit) risks and, if so, on what conditions; and 
makes clear that taxpayers will not bear any loss from the 
resolution of an estate.

Section 5. Securities law provisions

    This section clarifies that covered bonds are securities 
but not asset-backed securities. This section also creates 
exemptions for the separate estates and residual interests.

Section 6. Miscellaneous provisions

    This section expands the Secondary Mortgage Market 
Enhancement Act of 1984 to encompass covered bonds.
    This section also provides that an estate is not a taxable 
entity and that a transfer of assets or liabilities to an 
estate is not a taxable event under the Internal Revenue Code 
and, to the extent provided by the Secretary, under state and 
local income-tax laws. The acquisition of a covered bond is 
treated as the acquisition of an investment security, and not 
as a lending transaction, under the Internal Revenue Code.
    This section also provides that covered bonds backed by the 
residential mortgage asset class or the commercial mortgage 
asset class are to be considered qualified mortgages for Real 
Estate Mortgage Investment Conduits (REMICs) and, to the extent 
provided by the Secretary of the Treasury, to be treated as 
real estate assets in the same manner as REMIC regular 
interests.
    This section provides that other bankruptcy or insolvency 
laws may not be construed or applied to interfere with the 
operation of the Act.
    This section also requires the covered bond regulators to 
report to and testify before Congress annually on the state of 
the U.S. covered bond market.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman):

  SECTION 106 OF THE SECONDARY MORTGAGE MARKET ENHANCEMENT ACT OF 1984


                        PREEMPTION OF STATE LAW

  Sec. 106. (a)(1) Any person, trust, corporation, partnership, 
association, business trust, or business entity created 
pursuant to or existing under the laws of the United States or 
any State shall be authorized to purchase, hold, and invest in 
securities that are--
          (A) * * *

           *       *       *       *       *       *       *

          (C) small business related securities (as defined in 
        section 3(a)(53) of the Securities Exchange Act of 
        1934), [or]
          (D) securities issued or guaranteed by the Federal 
        Home Loan Mortgage Corporation or the Federal National 
        Mortgage Association, or
          (E) covered bonds (as defined in section 2 of the 
        United States Covered Bond Act of 2011),

           *       *       *       *       *       *       *

                              ----------                              


                     INTERNAL REVENUE CODE OF 1986



           *       *       *       *       *       *       *
Subtitle A--Income Taxes

           *       *       *       *       *       *       *


CHAPTER 1--NORMAL TAXES AND SURTAXES

           *       *       *       *       *       *       *


Subchapter M--Regulated Investment Companies and Real Estate Investment 
Trusts

           *       *       *       *       *       *       *


PART IV--REAL ESTATE MORTGAGE INVESTMENT CONDUITS

           *       *       *       *       *       *       *


SEC. 860G. OTHER DEFINITIONS AND SPECIAL RULES.

  (a) Definitions.--For purposes of this part--
          (1) * * *

           *       *       *       *       *       *       *

          (3) Qualified mortgage.--The term ``qualified 
        mortgage'' means--
                  (A) * * *
                  (B) any qualified replacement mortgage, [and]
                  (C) any regular interest in another REMIC 
                transferred to the REMIC on the startup day in 
                exchange for regular or residual interests in 
                the REMIC[.], and
                  (D) covered bonds that are secured by 
                eligible assets from the residential mortgage 
                asset class or the commercial mortgage asset 
                class, as such terms are defined in section 2 
                of the United States Covered Bond Act of 2011.
        For purposes of subparagraph (A), any obligation 
        secured by stock held by a person as a tenant-
        stockholder (as defined in section 216) in a 
        cooperative housing corporation (as so defined) shall 
        be treated as secured by an interest in real property. 
        For purposes of subparagraph (A), any obligation 
        originated by the United States or any State (or any 
        political subdivision, agency, or instrumentality of 
        the United States or any State) shall be treated as 
        principally secured by an interest in real property if 
        more than 50 percent of such obligations which are 
        transferred to, or purchased by, the REMIC are 
        principally secured by an interest in real property 
        (determined without regard to this sentence).

           *       *       *       *       *       *       *


                             MINORITY VIEWS

    There is a bipartisan consensus that covered bonds 
represent a potentially useful component of a reformed housing 
finance market. Experience has shown us, however, that this is 
an area in which great care must be exercised in establishing 
such a market. Our view is that, before this bill comes to the 
House, we should add amendments supported by the FDIC that 
would provide the authority it needs both before and after a 
bank fails.
    Before a bank fails, the FDIC is not empowered to prevent 
covered bond programs from destabilizing the institutions that 
use them or to reduce excessive risk to the FDIC Deposit 
Insurance Fund. As the FDIC learned in connection with the 
failure of Washington Mutual, a covered bond program with no 
limits on size or amount of overcollateralization can quickly 
become a liquidity drain on the sponsoring institution at a 
time that it can least afford it.
    After a bank fails, the FDIC under H.R. 940 would have no 
authority to re-capture any of a covered bond program's over-
collateralization, no matter how large. Unlike the treatment of 
other secured lending, the FDIC would not be permitted to 
repudiate a program and pay off the bonds, even with interest 
to the date of payment. This would subject the FDIC to a 
waiting period of many years before the value of any 
overcollateralization could be re-captured. No other secured 
creditor has this right. H.R. 940 effectively shields covered 
bond investors from the risk of loss by giving them superior 
rights in a receivership ahead of the FDIC.
    We believe additional work is needed to create a sound 
regulatory scheme and provide adequate resolution authority to 
ensure that a new covered bond market is on solid footing.

                                   Barney Frank.
                                   Emanuel Cleaver.
                                   Gary L. Ackerman.
                                   Andre Carson.
                                   Luis V. Gutierrez.
                                   Wm. Lacy Clay.
                                   Brad Miller.
                                   Michael E. Capuano.
                                   Maxine Waters.
                                   Stephen F. Lynch.
                                   Carolyn B. Maloney.
                                   Ruben Hinojosa.
                                   Melvin L. Watt.
                                   Gwen Moore.

                                  
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