19–006 

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— 


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(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; 


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(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 


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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 overcollateralization 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. 


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(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 overcollateralization 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 overcollateralization 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 


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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 


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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, LIQ- UIDATION, 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 transVerDate Mar 15 2010 00:38 Mar 07, 2012 Jkt 019006 PO 00000 Frm 00007 Fmt 6659 Sfmt 6621 E:\HR\OC\HR407P1.XXX HR407P1

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action 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.— 


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(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 


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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 ADMINIS- TRATOR.—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 


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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 


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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 assetbacked 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),’’. 


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(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 regVerDate Mar 15 2010 00:38 Mar 07, 2012 Jkt 019006 PO 00000 Frm 00013 Fmt 6659 Sfmt 6602 E:\HR\OC\HR407P1.XXX HR407P1

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ulators, 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 ‘‘dualrecourse’’ 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. 


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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: 


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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. Vela ́zquez ...................... ........... ........... 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 (NY) .............. X ........... .............

Mr. McHenry .......................... X ........... ............. Mr. Baca .............................. ........... ........... .............

Mr. Campbell ........................ X ........... ............. Mr. Lynch ............................. ........... X .............

Mrs. Bachmann .................... X ........... ............. Mr. Miller (NC) ..................... ........... X .............

Mr. McCotter ......................... X ........... ............. Mr. David Scott (GA) ............ X ........... .............

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. Vela ́zquez ...................... 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 (NY) .............. X ........... .............

Mr. McHenry .......................... ........... X ............. Mr. Baca .............................. ........... ........... .............

Mr. Campbell ........................ X ........... ............. Mr. Lynch ............................. X ........... .............

Mrs. Bachmann .................... ........... X ............. Mr. Miller (NC) ..................... X ........... .............

Mr. McCotter ......................... ........... X ............. Mr. David Scott (GA) ............ X ........... .............

Mr. McCarthy (CA) ................ ........... ........... ............. Mr. Al Green (TX) ................. X ........... .............


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RECORD VOTE NO. FC–47—Continued 

Representative Aye Nay Present Representative Aye Nay Present 

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. Vela ́zquez ...................... 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 (NY) .............. X ........... .............

Mr. McHenry .......................... ........... X ............. Mr. Baca .............................. ........... ........... .............

Mr. Campbell ........................ X ........... ............. Mr. Lynch ............................. X ........... .............

Mrs. Bachmann .................... ........... X ............. Mr. Miller (NC) ..................... X ........... .............

Mr. McCotter ......................... ........... X ............. Mr. David Scott (GA) ............ X ........... .............

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: 


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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. 


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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. 


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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. 

a Amounts 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 assetbacked 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 


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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 


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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. 


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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-asyou-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-YouGo 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. 


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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 


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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. 


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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), øor¿ 

(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 

* * * * * * * 


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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, øand¿ 

(C) any regular interest in another REMIC transferred 

to the REMIC on the startup day in exchange for regular 

or residual interests in the REMICø.¿, 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). 

* * * * * * * 


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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 overcollateralization, 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. 

RUBE ́ N HINOJOSA. 

MELVIN L. WATT. 

GWEN MOORE. 

Æ 


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