WASHINGTON — Credit union lobbyists are seeking to limit the damage from what they see as an all-but-certain congressional passage of legislation allowing bankruptcy judges to rewrite the terms of mortgages.
Both CUNA and NAFCU say the measure, which is likely to be included in the economic stimulus package working its way through Congress, would penalize credit unions even though they didn't cause the subprime crisis and would make credit unions less likely to make home loans to some consumers who are deemed to be high credit risks.
The measure, including the so-called cram-down provision, would allow judges hearing the cases of people who file for Chapter 13 bankruptcy to rewrite the terms of mortgages if the consumer contacted the lender about a reduction before filing for bankruptcy.
CUNA and NAFCU are pushing to limit the provision to subprime mortgages, but lobbyists for those groups said that the sentiment on Capitol Hill seems to be to include all mortgages.
“Many people received loans that were not in their best interest, and they are having trouble making payments. But the economic conditions are such that even people with prime mortgages are having trouble, so that's why the change in Congress,” said Ryan Donovan, CUNA's vice president for legislative affairs.
Donovan noted that his organization is working to include a provision requiring people who sell their property for more than the cram-down amount to repay the difference to the lender.
The measure received a shot in the arm when Citigroup, which has received $45 billion under the Troubled Assets Relief Program, became the first major financial institution to drop its opposition to the measure. But other major financial institutions have not followed suit.
The American Bankers Association and the Financial Services Roundtable both remain opposed to the measure.
NAFCU Director of Regulatory Compliance Anthony Demangone said even talk of a cram-down measure makes their members worried.
“It could affect the bottom line of credit unions and raise safety and soundness concerns because of the possibility of assets vaporizing,” he said. “And it will also lessen the stigma of bankruptcy.”
Modifying the terms of mortgages does not always mean an end to trouble for consumers. Almost 37% of consumers whose mortgages were modified during the first quarter of last year defaulted on payments within six months, according to a study by the Office of Thrift Supervision.
Consumer groups are pushing for the measure, and this will be one of the first tests of their newly found strength on Capitol Hill and in the executive branch.
“It is painfully clear that the continuing, and indeed worsening, foreclosure crisis is perhaps the single largest impediment to economic recovery,” said a coalition of consumer and civil rights groups. “We cannot afford to have the mortgage foreclosure crisis go on one day longer than is necessary as a millstone around the neck of our struggling economy.”
This is one of the issues that CUNA and NAFCU lobbyists predicted they would be playing defense on throughout the two-year session of the 111th Congress, which opened earlier this month. It is one of the reasons that both associations ramped up their political involvement and worked to ensure more of their friends were elected or re-elected.
Other issues include changes to the rules regarding credit cards, additional changes to the bankruptcy laws and making credit unions comply with the provisions of the Community Reinvestment Act.
Senate Majority Whip Richard Durbin (D-Ill.) is the main sponsor of the cram-down measure in that chamber, and it also has the support of other key Democrats, including Senate Banking Committee Chairman Christopher Dodd (D-Conn.). House Judiciary Committee Chairman John Conyers (D-Mich.) and Rep. Brad Miller (D-N.C.), a member of the house Financial Servicess Comittee, are the key backers in that chamber. Miller is one of the closest allies and advisers of House Speaker Nancy Pelosi (D-Calif).
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