The Municipal Bond Fairness Act, H.R. 6308, sponsored by House Financial Services Committee Chairman Barney Frank (D-MA), has been reported to the House after unanimously passing during the Financial Services Committee markup July 30, 2008 following adoption of a Manager's Amendment. The bill would require rating agencies to rate municipal bonds using the same criteria applied to corporate bonds—based on the likelihood of repayment. Municipal bonds are historically stable investments with limited risk of default, yet they pay, in the words of Chairman Frank, "an unreasonably high risk premium" because of the separate standards applied by ratings agencies.
The bill would allow distinctions for general obligations debt, which is backed by the full faith and credit of the municipal issuer, and revenue bonds, which are not and are riskier. The bill also requires the use of consistent ratings symbols for all securities and instruments. The committee also adopted amendments offered by Rep. Peter Roskam (R-IL) and Rep. Frank Capuano (D-MA). Roskam's amendment authorizes the Government Accountability Office to study different treatment of bond classes by the ratings agencies, the effect of a single-rating system on retail investors, ratings methodologies and other issues. Capuano's amendment clarified language related to the use of additional credit factors in ratings.
The bill has received both bipartisan and broad public support. Given the election year and the credit crunch, Representatives of all stripes are likely to tout this legislation as one of many resources that can help shore-up the economy. Although Chairman Frank has been adamant about seeking a vote this year to make the bill law, the bill must be shepherded through the House Ways and Means Committee and embraced by the Senate, which has yet to do so.
Municipal bonds have been a hot topic in Washington and the nation throughout this year, and, as the election draws near, it would not be surprising if the bill made it to the floor. If it does, it will be one of many significant insurance issues to come before the Congress during what promises to be an exciting fall.