On July 28, the Treasury Department published a Best Practices Guide for U.S. Residential Covered Bonds. The Best Practices Guide follows and serves as a complement to the FDIC’s Final Covered Bond Policy Statement dated July 15. The Best Practices Guide aims to present a “standardized model for Covered Bonds issued in the United States in the absence of dedicated legislation.” For a Covered Bond to be consistent with the Best Practices template, the program’s documentation must comply with a number of criteria, including:

  • the maturity for the Covered Bonds must be between one and thirty years;
  • the collateral must be performing, first-lien, one-to-four family residential mortgages, underwritten at the fully-indexed rate, with documented income, with a maximum LTV of 80%, and that are not negative-amortization loans;
  • there must be a minimum of 5% overcollateralization; and
  • the Covered Bonds may account for no more than 4% of an issuer’s liability after issuance.