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Credit unions back mortgage bankruptcy compromise
WASHINGTON (2/27/08)—After months of negotiations with Senate lawmakers, the Credit Union National Association (CUNA) has thrown its support behind an economic stimulus bill with modified language on allowing mortgage modifications in bankruptcy proceedings. The bill, introduced by Senate Majority Leader Harry Reid (D-Nev.) earlier this month, would provide $200 million for housing counselors to help families about to lose their homes to foreclosure. It would also raise the cap on mortgage revenue bonds, permit Community Development Block Grants to be used on foreclosed properties, and require improved disclosures to mortgage borrowers. The bankruptcy provisions in the legislation are modeled on a bill drafted by Senate Majority Whip Richard Durbin (D-Ill.) called the Helping Families Save Their Homes in Bankruptcy Act (S. 2136). In a letter to Reid and Senate Minority Leader Mitch McConnell (R-Ky.) Tuesday, CUNA reiterated its concern with “any legislation that would open the Bankruptcy Code” so soon after major revisions were enacted, referring to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. However, said the letter from CUNA President/CEO Dan Mica, credit unions recognize the need to be responsive to the current crisis in the subprime mortgage market. “We appreciate the effort that Sen. Durbin and his staff have made over the last several weeks to address many of our concerns,” Mica wrote. One important improvement noted in the letter concerns Durbin’s new definition of non-subprime loan. Mica said the change showed the senator’s recognition that some lenders, credit unions in particular, made suitable interest-only loans that legitimately factored in a borrower’s ability to repay the loan. The Senate is expected to act this week on the Reid stimulus package, with the Durbin amendment allowing bankruptcy judges to adjust the terms of certain loans made before the enactment of the law which are secured by the debtor’s principal residence, or secured by subprime mortgages, as well as some nontraditional mortgages. Under the plan, if a loan is secured by a first mortgage, a subprime loan would be one that has an annual percentage rate greater than 3% over the yield on a comparable security issued by the Treasury Department. If it is subordinate loan, subprime would be defined as a loan greater than 5% plus the equivalent Treasury security. The amendment also includes a “means test” to qualify for the special relief and a bankruptcy judge would have the authority to reduce the “allowed secured claim” to an amount no lower than the current value of the house. Last December, the House Judiciary Committee passed a similar although not identical, bill that would allow judges to cram down mortgage debt in bankruptcy, and also allow restructuring. Minority Leader McConnell is scheduled to address a record crowd of about 4,500 credit union representatives at CUNA Governmental Affairs Conference next week in Washington.


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