As the House begins discussion of a massive regulatory reform bill tomorrow, preemption and haircuts for secured creditors are likely to provoke intense debate.

But with more than 250 amendments filed to the legislation — itself the combination of several bills — experts said tracking changes will be difficult and the margin for error wide.

"The potential for very significant unintended consequences is huge as you are starting to have drafting problems and moving things around in ways you don't understand," said Oliver Ireland, a partner in the Morrison & Foerster law firm. "If they keep moving at this speed, the number of problems is going to be very significant."

The amendment most likely to be approved is a 135-page measure from House Financial Services Committee Chairman Barney Frank, which would make changes throughout the reform package.

The Frank amendment would, among other things: funnel $3 billion of Troubled Asset Relief Program funds to emergency foreclosure prevention efforts; factor in the acquisition of thrift deposits when calculating the 10% national deposit cap, and let regulators weigh on- and off-balance-sheet assets differently when determining whether a bank poses a threat to the financial system.

A final vote on the legislation is expected by Friday.

Two other major issues likely to be tackled this week are how much leeway the Office of the Comptroller of the Currency (OCC) should get to preempt state consumer protection laws and whether secured creditors should be forced to take a 20% haircut during the resolution of large, systemically important companies.

On preemption, lawmakers are expected to battle over competing Democratic amendments.

In one corner is Rep. Melissa Bean, D-Ill., who is championing an amendment that would let the OCC determine that a federal standard created by a new consumer protection agency is sufficiently high for all national banks and federal thrifts. As a result, any state law that exceeded this standard would be preempted.

Under the Bean amendment, states could petition the proposed Consumer Financial Protection Agency to raise its standard. If a majority of states filed such petitions, the agency would be compelled to consider raising the federal standard.

The amendment would also try to codify a June 29 Supreme Court decision that said state attorneys general can enforce non-preempted state consumer protection laws against national banks.

But Frank and Rep. Mel Watt, D-N.C., are pushing a much narrower amendment meant to clarify that the OCC could preempt state consumer laws on a case-by-case basis if they interfered with the business of banking. Their amendment is meant to roll back the sweeping 2004 preemption rules adopted by the OCC.

Industry representatives objected to the Frank-Watt amendment on Tuesday, arguing that it does little to improve the situation. It was unclear whether the Bean amendment had much support.

Though Richard Hunt, the president and chief executive of the Consumer Bankers Association, called the Bean amendment an improvement, he said it is insufficient. "Our No. 1 issue is still preemption," he said.

Confusion persisted Tuesday over another section of the bill that would force secured creditors to take a 20% haircut in the resolution of a company whose demise is determined to be a threat to the economy.

Reps. Brad Miller, D-N.C., and Dennis Moore, D-Kan., added the provision during the committee debate, but since then, industry representatives and the Federal Deposit Insurance Corp. (FDIC) have fought each other over it.

The Federal Home Loan banks have said the amendment would prevent them from giving advances to large banking companies, and large-bank lobbyists have said it would drive up their cost of funds. But Miller and FDIC Chairman Sheila Bair, who pushed for the provision, argue that the measure is intended to target only short-term lending to systemically significant nonbanks and would not affect depository institutions or the Federal Home Loan banks.

Miller was expected to offer a revised amendment that would explicitly exempt government-backed sources of credit including the Home Loan banks, government-sponsored enterprises, Treasury securities and Federal Housing Administration debt.

Industry representatives said Tuesday that even a watered-down provision could drive up the cost of credit for large institutions by spooking other secured creditors.

The Mortgage Bankers Association is opposing a provision that would require originators to retain 5% of the risk when securitizing a loan. It has sought exemptions for certain types of loans, such as 30-year, fixed-rate mortgages.

"Risk retention has been our biggest concern," said Tom Koonce, the association's vice president of legislative affairs. "Instead of trying to encourage homeownership and lending, this would actually decrease the availability of credit liquidity and would be especially troublesome for independent, nondepository lenders who make up [up] to 40% of the mortgage market today."
While banking industry lobbyists were working to build support for amendments that would soften the bill, they were also fending off additional amendments that they feared would add burdens.

An amendment from House Judiciary Committee Chairman John Conyers would let judges rework mortgages in the bankruptcy process. This measure has previously passed the House but died in the Senate.

Still, industry observers, who argue that the bankruptcy measure would drive up the cost of credit, said that including it in regulatory reform brings the issue back to life and could make it a bargaining chip in negotiations between the House and Senate.

"You put it in there now because it preserves the opportunity to do cramdown through financial reform," said Jaret Seiberg, an analyst at Concept Capital. "The fact is, the Senate is not going to get to this until late in the first quarter, and if there is a populist uproar in the first quarter, it's a lot easier to proceed if it's already in the House version."

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