WASHINGTON — The House Financial Services Committee approved legislation Friday that would lessen the impact on certain collateralized loan obligations from the Volcker Rule as part of a package of regulatory relief bills.

The bill, which passed the committee with strong Democratic and Republican support, would grandfather many CLOs issued before February and clarifies the definition of commercial loan pools subject to the Volcker Rule going forward. It was one of five bills passed with strong bipartisan support, addressing issues ranging from Consumer Financial Protection Bureau mortgage rules to financing options for credit unions.

The CLO legislation, introduced by Rep. Andy Barr, R-Ky., came after banks big and small cried foul over unintended consequences in the recent regulation implementing the Dodd-Frank Act provision. Some institutions have warned that without a legislative fix they will have to divest billions of dollars of their holdings in CLOs before next year's effective date for the Volcker Rule. (The bill passed the committee by a vote of 53 to 3.)

The trading ban, first proposed by former Federal Reserve Board Chairman Paul Volcker, blocks banks from having ownership interests in certain hedge and equity funds. But the industry argued the rule defined "ownership interest" too broadly — including circumstances where holders of securities could merely fire a loan pool's investment manager — thereby catching CLOs that banks said were not the focus of the Dodd-Frank provision.

Barr's bill would allow banks to still invest in many CLOs that were issued before Jan. 31, 2014, while also clarifying which situations qualify CLOs for an exemption. Under the legislation, holders of a security would not have an "ownership interest" in certain cases where managers can be fired for a material breach of contract. Yet the committee also signed off on an amendment — sponsored by Rep. Carolyn Maloney, D-N.Y. — that limits the grandfathering provision to only certain CLOs. The amendment also gives banks holding CLOs that are not grandfathered two more years, until 2017, to divest.

"The original grandfathering provision in this legislation was too broad and could have undermined the intent of the Volcker Rule," Maloney said in a press release. "I'm glad we were able to work together to correct the problem. My amendment preserves the legislative intent of the Volcker Rule while clarifying that traditional creditor-protective voting rights are not, by themselves, equivalent to an ownership interest."

Other legislation passed by the committee include a bill introduced by Reps. Steve Stivers, R-Ohio, and Joyce Beatty, D-Ohio, that would allow privately insured credit unions to borrow from the Federal Home Loan Bank System. The bill passed the committee 55 to 0.

A separate bill, introduced by Barr and Rep. Ruben Hinojosa, D-Texas, would establish an appeals process for areas to seek designation as a "rural" community under the CFPB's Qualified Mortgage Rule. Such a designation would provide an exemption from QM for certain loans made in the community.

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