BWM C.S.H.B. 3334 75(R)BILL ANALYSIS FINANCIAL INSTITUTIONS C.S.H.B. 3334 By: Marchant 4-15-97 Committee Report (Substituted) BACKGROUND In recent years, the legislature took important, significant steps to ensure the integrity of public funds by tightening the limitations on appropriate investments for public units. However, those limitations were carried over into the Public Funds Collateral Act by reference between the two laws. Many financial institutions carry collateralized mortgage obligations with stated maturities of greater than the ten years in their portfolios. The Public Funds Investment Act only permits CMOs with a stated maturity of ten years or less to be investments. Thus these instruments are not permitted as collateral either. PURPOSE This bill amends the Public Funds Collateral Act to add collateralized mortgage obligations which have an expected weighted average life of ten years or less and which do not constitute a "high risk mortgage security." When public funds investment law was amended last session to tighten investments and create more oversight, the changes were also incorporated into the Public Funds Collateral Act by reference. Many financial institutions hold collateralized mortgage obligations with a stated final maturity of greater than ten years in their portfolios. This bill would allow them to use those investments as collateral. RULEMAKING AUTHORITY It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency or institution. SECTION BY SECTION ANALYSIS SECTION 1. Amends Section 2257.002(5), Government Code, by adding a new paragraph (D) and (E) to add fixed-rate and floating rate collaterized mortgage obligations to the list of eligible securities. SECTION 2. Amends Subchapter A, Chapter 2257, Government Code, by adding Section 2257.0025. Section 2257.0025(a). Provides that a flat-rate collateralized mortgage obligation is considered a high-risk mortgage security if: (1) the security has average life sensitivity with a weighted average life that: (A) extends by more than four years, or (B) shortens by more than six years; and (2) the security is price sensitive. Section 2257.0025(b). Provides that a floating-rate collateralized mortgage obligation is considered a high-risk mortgage security if: (1) the security bears an interest rate equal to the contractual cap on the instrument; or (2) the security is price sensititve. SECTION 3. Effective date: September 1, 1997. SECTION 4. Emergency clause. COMPARISON OF ORIGINAL TO SUBSTITUTE The Committee Substitute to HB 3334 is a Texas Legislative Council draft of the original bill. While there are no substantive changes, the original text has been formatted according to Legislative Council guidelines.