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WASHINGTON-Following a report in Credit Union Times (September 18, 2002) about a letter three North Carolina Credit Unions signed onto in opposition to the bankruptcy reform bill, State Employees Credit Union CEO Jim Blaine, one of the signers, said the “hate mail has been rolling in.” According to Blaine, credit unions really do not appreciate what they are involving themselves in, partly because they have not read the text of the legislation and partly because the numbers do not warrant such vast support. City-County Federal Credit Union CEO Dean Nelson fired off a letter to his colleague September 25 calling into question Blaine’s sympathy for filers. In the initial letter, Blaine said that most bankruptcy filings are the result of divorce, illness, or job problems, but Nelson strongly disagreed with that notion. “That is just not true. The majority of the members that file on us just spend too much and most of it is on credit cards and frivolity. Our Credit Review Committee has studied this in depth and concurs vehemently,” City-County’s CEO wrote. He characterized his credit union as an “aggressive lender” that is opposed to risk-based lending and his charge off rate is 0.45% and delinquency stands at a mere 0.50%. Nelson claimed that 86% of the charge offs are due to bankruptcy and 75% of those are Chapter 7s, which allow the filer a clean slate. “The bankruptcy laws need revision and although the proposed law isn’t perfect, it is way better than we have now,” the bankruptcy supporter wrote. “There is this delusion that all bankruptcy is wrong and this bill will make it go away. The facts don’t support that,” Blaine countered. He accepted that there may be some problem areas where abusive bankruptcies are high, and although he supports bankruptcy reform, the current bill is unbalanced. “Dean thinks he’s going to get something out of this. He isn’t,” Blaine added. He also questioned whether anyone in the credit union community had actually read the text of the several hundred-page document. Another source, who requested to remain anonymous, pointed out State Employees Credit Union’s 7.04% net worth ratio as a potential reason for its opposition. The credit union CEO said that the six-month waiting period between the bill’s signing and enactment would increase bankruptcy filings and drop State Employees’ net worth ratio below acceptable PCA ratios. Blaine called the claim “outrageous” and explained that his credit union targets a 7% net worth ratio for optimum “capital efficiency.” “That is why we should be supporting secondary capital, not bankruptcy,” he said. Credit unions are “supposed to use the money as prudently and efficiently as possible,” he stated. So, what will credit unions get out of bankruptcy reform? According to Blaine’s analysis of NCUA data, less than three basis points per loan. He noted that lending increased 11% in 2000 and another 7% in 2001. Also, the average delinquency rate at federally insured credit unions has actually dropped since 1997. The rate declined from 1.01% in 1997 to 0.74% in 2000, with an up tick in 2000 to 0.85%. According to Blaine, delinquency is down by 15% from 1997. Additionally, charge offs have held fairly steady at 0.46% for 2001 and 0.42% for 2000. Blaine agreed that a lot of credit union members filed bankruptcy in 2001-225,598 according to a memo he sent Credit Union Times. Still that is only 0.3% of the 80 million credit union members in America, he pointed out. Blaine said NCUA data demonstrates that bankruptcy related charge offs accounted for 41.1% of total credit union charge offs. Therefore, the total charge offs (0.46% of loans, see above) multiplied by those that are bankruptcy related, comes to 0.19% of all credit union loans resulting in a bankruptcy loss. The CEO cited several studies of abusive bankruptcy filings, but one performed by Ernst and Young in 1998 provided a worst-case scenario of 15% abusive filings. At 15% times the 0.19% of all loans that are charged off due to bankruptcies, losses equal 0.0285%. Blaine also emphasized that the bill attempts to push bankruptcy filers into Chapter 13, where some debt is repaid, but only about one-third of Chapter 13 filers ever complete their repayment agreement. To added insult to injury, the unsecured debt is the last to be paid, he said. -

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