WASHINGTON (1/23/09)—The Credit Union National Association (CUNA) informed House lawmakers Thursday that credit unions cannot support changes to the Bankruptcy Code that would give courts unlimited authority to modify any type of loan secured by a debtor’s principal residence. In fact, CUNA stated in a letter to leaders of the House Judiciary Committee, unless changes are made, CUNA would actively oppose such legislation. The letter to the committee chairman, Rep. John Conyers (D-Mich.), and its ranking member, Rep. Lamar Smith (R-Tex.), said that any amendment to the Code must target certain types of loans and be limited in duration. The committee conducted a hearing Thursday on bills currently under its consideration, H.R. 200, the Helping Families Save Their Homes in Bankruptcy Act of 2009, and H.R. 225, the Emergency Homeownership and Equity Protection Act. Those bills do not contain the limitations sought by CUNA on behalf of credit unions. “Therefore,” CUNA President/CEO Dan Mica wrote to the panel leaders, “Credit unions cannot support these bills in their current form, and CUNA opposes any amendment to the bankruptcy law being included in the economic stimulus legislation." Mica urged, “Adequate consideration needs to be given to the unintended consequences of amending the bankruptcy law and to the practical implementation issues associated with any amendment to the code since the bankruptcy law has no implementing regulations to serve as guidance to the courts.” Among its concerns, CUNA said a lender that made a mortgage loan using good underwriting standards should not bear the risk of a decline in the house’s value. CUNA also warned that imprudent legislative action could encourage financially fit borrowers to stop mortgage payments, triggering foreclosure, simply because they no longer want to make large mortgage payments on houses which have dropped notably in value. The letter noted that CUNA has worked for more than a year with Hill staff to design a bankruptcy amendment that would allow courts to amend only certain mortgage loan agreements secured by the debtor’s principal residence. Specifically, the authority would apply to loans determined to be “subprime,” with large re-sets of interest rates; loans with negative amortization; or loans that a court reasonably determines were fraudulent or abusive when made with no reasonable underwriting standards and expectation the borrower could actually repay the loan. For any loan falling within this category, CUNA said in the letter, a bankruptcy court should have the authority to:
* Cancel prepayment penalties; * Lower the interest rate to the current conventional fixed market rate; * Extend the maturity of the loan; and * Adjust the principal balance to no lower than the current market value of the house if, when the house is eventually sold by the debtor, the debtor would not only have to repay the remaining loan balance established by the plan, but also have to turn over to the original first and junior lien holders any net proceeds up to the original mortgage balances, even after discharge, also known as recapture.
Use the resource link below to read CUNA's complete letter.