In Senate, Cram-Downs Are Medicine And MBL Cap Is the Spoonful of Sugar

Credit unions may get what they have long wanted-an increase in the cap on member business loans. However, they could also get a spoonful of castor oil with the cram-down revisions.Lifting the MBL cap, which Sen. Charles Schumer (D-N.Y.) is proposing, has been a goal of credit unions since the current cap of 12.25% was mandated by law in 1998. But the price of that-agreeing to a measure allowing bankruptcy judges to rewrite the terms of mortgages (the cram-down provision) is something CU lobbyists have long said is unacceptable.“We are trying to make it [the bankruptcy bill] as minimally painful as possible,” said CUNA Vice President of Legislative Affairs Ryan Donovan.As for linking it to the MBL, CUNA Senior Vice President for Legislative Affairs John Magill said “those are two separate tracks, and we are not seeing them as tied together.”NAFCU lobbyists did not return phone calls seeking comment.CUNA and NAFCU have in the past pushed for a provision limiting cram-downs to subprime and nontraditional loans.But Sen. Richard Durbin, (D-Ill.), the measure’s main sponsor, has said that scaling back the measure in that way would defeat the purpose, which is to substantially reduce the number of foreclosures.The negotiations were continuing at press time, and Senate leaders have not announced when it would be considered either in committee or by the full Senate.Earlier this month, CUNA, NAFCU and other representatives of the financial services industry succeeded in getting a provision in the House-passed version requiring the homeowner to make a greater effort to reach an agreement with the mortgage holder before filing for bankruptcy.Negotiators in the Senate are trying to resolve two conflicting goals: first, lawmakers’ desire to take steps to ensure that homeowners who are having trouble making mortgage payments have the maximum chance to save their homes through programs such as the Obama administration’s foreclosure prevention plan. Second, the desire of credit unions to help their members but not face the financial penalties during a recession that could come from having contracts rewritten by a judge.One option would be to say that a judge couldn’t rewrite a mortgage if a lender has offered the borrower relief as spelled out by the Obama administration’s program. That program provides financial incentives for lenders and loan servicers to renegotiate the terms of mortgages. Under the program, the loan rate would be capped for the life of the loan, and the goal of rewriting the terms of the mortgage is to reduce the percentage of income a family pays for its mortgage to 31%.Although the cram-down provision has received most of the attention, the bill contains other components that credit unions like, including making NCUSIF coverage of accounts up to $250,000 permanent and increasing the NCUSIF’s borrowing authority with the Treasury Department from $100 million to $6 billion. That amount hasn’t been raised since the fund came into existence in 1971. It also would give the NCUSIF five years to restore itself to the proper equity ratio if it falls below the congressionally mandated level of between 1.2% and 1.5%. Currently, this must be done within a year.NCUA Chairman Michael E. Fyzel asked Senate Banking Committee Chairman Christopher Dodd (D-Conn.) to temporarily increase the NCUSIF’s borrowing authority to $30 billion for use “in extreme circumstances.” FDIC Chairman Sheila Bair has requested that her insurance fund’s borrowing authority be raised to $500 billion.Fryzel also asked Dodd to give his agency additional authority to use the NCUSIF to address “systemic risk in catastrophic situations.”Donovan said they would like to see the Senate include a provision allowing the Central Liquidity Facility to lend to corporate credit unions because doing so could relieve some of the financial burden that natural person credit unions will likely face to finance the NCUA’s Corporate Credit Union Stabilization Plan.The NCUA has not taken a position on that proposal.–[email protected]