An amendment by Rep. Scott Garrett, R- N.J. creating a new legal and regulatory framework for U.S. covered bonds was taken out from the financial reform bill that was agreed upon early this morning.

This happened after just earlier in the week both the House and Senate conferees, who were shaping the final regulatory reform bill, tentatively accepted Garrett's proposed change.

Under the Garrett amendment, the Treasury Department would be the primary regulator of covered bonds. It will also set standards and reporting requirements for issuers.

“The ASF is disappointed the House-Senate Conference Committee has failed to include provisions dealing with covered bonds at this time," Tom Deutsch, executive director of the American Securitization Forum (ASF). "The covered bond market is an important complement to the securitization markets and the failure to address the issue is a drawback for American consumers who would directly benefit from its establishment as an important source of funding for consumer credit."

But, Deutsch said that the ASF is encouraged that members of Congress have shown their willingness to revisit the covered bond legislation in 2010.

Talk indicates that Senator Christopher Dodd, D-Conn. will hold a hearing on the subject this summer. House Representative Barney Frank, D-Mass, will supposedly hold mark up hearings in July.

Meanwhile, sources said the Federal Deposit Insurance Corp. has significant concerns regarding some of the provisions in the covered bond legislation. Since the bill's final provisions were finalized early this morning, they said that there was no chance to clarify the agency's reservations with its officials. 

The FDIC's agreement with the legislation is crucial because once a covered bond legislation is passed, the agency has to continue its policy of not seizing mortgages that are backing covered bonds when the sponsor bank fails.

There were also other major issues tackled in the financial reform bill that took predominance over covered bonds.

"Covered bonds, being a new topic, did not get as much attention in this climate," said Jerry Marlatt, senior of counsel at Morrison & Foerster said. There was a timing issue in the sense that, "people's attention was brought to the subject so late in the process that there was no  time to find out what the concerns were and to how to address them."

In a related development, the ASF’s Board of Directors has authorized the creation of a new ASF Covered Bonds Subforum. This new group will lead advocacy for the passage of covered bonds legislation.

"We look forward to deepening our dialogues with legislators and federal banking regulators on the vital need to subject covered bonds to appropriate federal regulation and to clarify concerns regarding potential insolvency of covered bond issuers,” Deutsch said.

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