Long-awaited bankruptcy legislation heads to conference, CUNA and NAFCU not exactly united

WASHINGTON - In the late innings of the bankruptcy reform game, CUNA and NAFCU have not presented the united front that some credit union leaders have asked of the trades when vital credit union issues emerge on Capitol Hill. For the last couple of years when the prospect of bankruptcy reform came up, most credit union lobbyists said they didn't want to get too excited given the continued failure of Congress to pass legislation. Now with the House and Senate passing their own versions of bankruptcy reform relatively early in the year the passage of bankruptcy legislation actually looks promising, according to some credit union lobbyists close to the issue. But CUNA and NAFCU are disagreeing on one important provision in the Senate bill that concerns all credit unions stung by bankruptcies-reaffirmations. Under the existing Bankruptcy Code debtors have the ability to reaffirm certain debts in order to maintain a relationship in good standing with that creditor. Many bankruptcy judges are against reaffirmations, reasoning that debtors need full relief to get back on their feet. The Sessions-Reed amendment of the Senate bankruptcy bill (S. 625) mandates that debtors pass a sort of reaffirmation "means test." Debtors first have to pass a low income/high expense means test before they can qualify for bankruptcy relief. If they pass that initial test and want to reaffirm a debt they then must pass a high income/low expense means test to show they can repay that debt. NAFCU came out strongly against this amendment, while CUNA supported it. "CUNA is saying that recent changes in the Sessions-Reed amendment have significantly improved that bill with regard to reaffirmation, but it burdens the debtor with having to first prove insolvency to qualify for bankruptcy relief, and then turn around and prove their solvent enough to reaffirm a debt," said Brian McDonnell, President/CEO of Navy FCU and a member of NAFCU's board. McDonnell described the amendment as a "Catch-22" and said if it survives when the bill goes to conference it will virtually force bankruptcy attorneys into pushing their clients into full bankruptcy relief without any reaffirmations. "This is based on pure practical knowledge of bankruptcy courts. It's going to place attorneys representing clients in an untenable position. They're going to say to clients `you're either insolvent or you're not.' `If you're not insolvent then you won't qualify for relief,' " said McDonnell. "At best they're (CUNA) slightly misleading credit unions by suggesting the improved version of the language in the amendment is going to have any positive means on members' ability to reaffirm," said McDonnell. Why are reaffirmations so important to credit unions? The trades claim that because of the unique relationship credit unions have with members, and the people-helping-people philosophy of credit unions, credit union members are more likely to reaffirm their credit union debts than other non-credit union debts. This benefits members, they argue, because they can still enjoy low credit union loan rates, instead of being pushed into the sometimes obscene rates that filers fall prey to post-filing. That theory is not with support. In its lengthy report to Congress in 1997, the National Bankruptcy Review Commission said that credit unions, because of their structure, should be treated differently when it comes to allowing members to reaffirm credit union loans. And some credit unions boast 50%-plus reaffirmation rates. "My personal experience as chairman of my credit union tells me reaffirmations are important to credit unions. Last year we reaffirmed about 15% of total bankruptcies for close to $500,0000 worth of loans. I've talked with neighboring credit unions who have reaffirmation rates as high as 50%," said David Gilbert, a director for Aberdeen Proving Ground FCU, Aberdeen, Md., and a member of the NAFCU board. "We think if CUNA would support the NAFCU position on reaffirmations and we both go into conference with a united position, we have a better chance of getting legislation that gives members the chance to reaffirm their credit union debts," said Gilbert. CUNA officials say that the final language of the Sessions-Reed reaffirmation amendment has improved the reaffirmation provision of the Senate bill, but that there has been some confusion over their position. "Obviously there has been a misunderstanding about our position on the issue of reaffirmations," said CUNA President Dan Mica. "Reaffirmations are extremely important to the credit union movement and any limitations-especially those that were in the original Senate bill are unnecessary and inappropriate." "Our preference would be no negative language impacting reaffirmations. While the Sessions-Reed amendment has significantly improved the original reaffirmation provisions of the Senate bill, it still falls short of the House passed language," said Mica. Mica said the uproar over CUNA's position doesn't really have merit because CUNA is still very much in favor of the reaffirmation language in the House bill (H.R. 833), and CUNA is hopeful that the House language will survive in conference. "CUNA is going to say they prefer the House version, but you can't have it both ways. If you can't get the House version, then you have to significantly alter language in the Reed amendment," said McDonnell. Gary Kohn, vice president and senior legislative counsel for CUNA, says the surviving Sessions-Reed amendment is an improvement over original versions because it removes the prohibition of coercive language in bills. "The original bill would have prohibited coercive language. If that language had stayed in it would have had a chilling effect on reaffirmations," said Kohn. Kohn said that when credit unions learn of a member's bankruptcy path, it's common practice for the credit union to send them a letter explaining that the credit union has a policy of not extending loans and services to any member who causes the credit union a loss, and then offers the member the ability to reaffirm their credit union debt. Coercive language prohibitions could have hindered credit unions' ability to do that. Kohn agreed with NAFCU's position that many members won't be able to reaffirm their credit union debt under the Senate version because of the income/expenses tests, but that CUNA was focused on removing the coercive language provisions and would focus on getting the House reaffirmation language passed in Conference. Murray Chanow, director of legislative affairs for NAFCU said that while he doesn't agree with CUNA's position on the amendment, it may not have an effect on the final reaffirmation language of the bill. "If you remember during the push for H.R. 1151, we had the joint campaign, but we didn't always agree on everything. I think NAFCU and CUNA, in the end, want the same thing," said. "There's more than one way to attack an issue in lobbying." McDonnell, however, thinks the bankers will fight with all their might to prevent Congress from passing bankruptcy reform that includes a credit union carve-out on reaffirmations. "I don't think the banks are going to allow credit unions to have an exemption for reaffirmations. This is an important issue CUNA and NAFCU have to work together on to alter the language in the Reed amendment," said McDonnell. But Chanow doesn't think the credit union reaffirmation provision will be the focus of much of the debate in conference. "There are a lot of bigger issues to work out, namely the minimum wage legislation that was tacked on to this bill. There's also some major differences on homestead exemption. The credit union issue won't be the focal point," said Chanow. "Our strategy is to explain to the conferees exactly what the difference is between banks and credit unions and why credit unions asked for the reaffirmation exemption in the first place," said Chanow. CUNA and NAFCU have disagreed on bankruptcy issues before. Most notably, NAFCU thought CUNA made a mistake joining the National Bankruptcy Coalition, which included a number of banking groups, including the American Bankers Association. -pgentile@cutimes.com