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House Committee to Vote on Credit Rating Reform Bill
Tuesday, July 8, 2008
By Andrew Ackerman

The House Financial Services Committee has tentatively scheduled a vote for July 15 on a bill that would require credit rating agencies to rate municipal, corporate, and other securities in the same manner and based on the likelihood of repayment alone, committee staff said yesterday.

Introduced June 19 by chairman Barney Frank, D-Mass., and cosponsored by three other Democrats, the bill aims to address what the lawmakers believe is an inherently unfair system in which high-quality munis are rated lower than corporate debt that has a similar or higher risk of default.

In a recent letter sent to Frank last month that was not disclosed until yesterday, the Government Finance Officers Association and seven other issuer groups, including the National Association of Counties, the National League of Cities, and the National Association of Local Housing Finance Agencies, said the legislation would significantly help state and local governments.

"We expect that ensuring that the rating agencies use 'uniform and accurate credit ratings' will lower borrowing costs and make it easier for new investors to participate in the municipal securities market," the letter said, citing language from the bill.

The groups also said that they welcome another provision of the bill that would require the Treasury Secretary to investigate, review and make recommendations on the state of the municipal bond insurance industry.

"Recent downgrades of the major insurers have caused considerable - and costly - problems for many governments," the letter added.

The committee had been scheduled to vote on the rating bill late last month, but delayed its markup at the request of Republican members who said they needed additional time to consider it.

Marisol Garibay, a spokesman for Alabama Rep. Spencer Bachus, the ranking Republican on the committee, was unable to comment as of press time yesterday. Last month, Republican staffers called for the committee to hold a hearing before it votes on the measure, but Democratic staffers said they are unlikely to hold one.

Despite Frank's intent to quickly move the measure through his committee, a knowledgeable person stressed yesterday that the markup date could still change.
Meanwhile, a companion bill, which would require action by the House Ways and Means Committee, does not appear likely to be taken up by that committee anytime soon, congressional sources said yesterday.

Though it's unlikely that either bill will ever become law because they were introduced so late into the Congress, the companion bill, co-sponsored by Rep. Richard Neal, D-Mass., chairman of the House Ways and Means Committee's panel on select revenue measures, is also eagerly sought by issuer groups.

That bill seeks to loosen restrictions on tax-exempt bond ownership stemming from the 1986 Tax Reform Act by, among other things, increasing to $30 million the tax law's so-called bank deductibility limits, which currently allow banks to deduct 80% of the costs of purchasing and carrying the bonds of states and localities whose annual tax-exempt bond issuance does not exceed $10 million.

It would allow more borrowers that sell bonds through conduit issuers to qualify as small issuers by electing to apply the $30 million issuance limit to themselves rather than the conduit issuer.

A spokesman for Neal did not return telephone calls or e-mails yesterday, but a knowledgeable source said that no vote on the bill has yet been scheduled.
The National Association of Health and Educational Facilities Finance Authorities, which signed the GFOA letter, stressed in a separate letter to Frank that the bill's language allowing the $30 million exemption to apply at the borrower level is "critical."

"This provision will be well used for low-cost financing for small but valuable charities which have modest financing needs and are of little interest to Wall Street and the national investment community," said the letter, which was signed by NAHEFFA president Blaine Bandi.

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