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WASHINGTON-Now that a motion to invoke cloture was decidedly approved, the bankruptcy reform bill could be well on its way to becoming law. Credit union lobbyists indicated that the 69-31 Senate vote in favor of cloture, a motion with a 60-vote minimum to limit debate to a maximum of 15 hours for each side, could be a sign of things to come for the Bankruptcy Abuse Prevention and Consumer Protection Act (S. 256). Proponents of the bill had been concerned that the cloture vote would be close and if it did not pass, the bill might not be revisited this year. “We put a lot of pressure on folks and it really paid off,” CUNA Vice President of Legislative Affairs and Senior Legislative Counsel Gary Kohn said in reaction to the vote count. Until the day before, he commented, it was “nip and tuck.” Thanks to the invocation of cloture, at press time it was looking highly likely that a vote on the bankruptcy bill would come shortly. NAFCU Senior Legislative Representative Murray Chanow predicted, possibly March 10 would be the magic date. A simple majority is needed to pass the bill out of the Senate. Both lobbyists said the Democrats would probably use up more of their time than the Republicans to present their amendments. Kohn said the Democrats had a dozen amendments filed to introduce and the Republicans would likely use most of their time to rebut those. “I doubt there’s many or any that will get accepted,” Chanow followed up. NAFCU’s lobbyist explained that Senator Bob Bennett (R-Utah) may offer technical changes to the netting provisions in the bill that could be accepted. Credit unions are keeping an eye on this section to ensure credit union parity (See side bar). Additionally, Senate Judiciary Committee Chairman Arlen Specter (R-Pa.) may introduce an amendment to offset the costs of adding new judges under the bill. Senate Majority Leader Bill Frist (R-Tenn.) had indicated he would like to go to final passage Tuesday or Wednesday, but the amendments could slow things down. Prior to the cloture vote, two amendments to increase the minimum wage-for which a rule was passed to require 60 votes for passage-were defeated. Senator Charles Schumer’s (D-N.Y.) clinic violence amendment was also defeated 46-53. The amendment would have prevented violent clinic protestors from protecting their assets from fines in bankruptcy proceedings. The amendment had caused enormous problems with pushing the bill through Congress and into law over the last couple years as it had become known as the abortion clinic violence amendment, a highly volatile subject. Two other amendments were accepted in committee. One by Senator Jeff Sessions (R-Ala.) clarifies that those with serious medical conditions or on active duty can receive special treatment under the means test. The other came from Senator Edward Kennedy (D-Mass.), an ardent opponent of the bill, and would limit bonuses to officers in corporate bankruptcies. If passed by the Senate, the House has the option of taking up the Senate bill and passing it, with or without amendment, or proceeding with its own bill, H.R. 685. The current Senate bill is very similar to the version passed by the House last session. “The House has not yet decided on what course of action to take,” CUNA’s Kohn said. Chanow said House Judiciary Chairman Jim Sensenbrenner (R-Wis.) indicated to him that he would like the bill to go through the committee first, for either a mark up or hearing. “When you’re in the majority in the House, you can pretty much do things the way you want,” Chanow commented, whereas Senate procedures pose more problems. Whatever process the House follows, leaders will probably try to avoid a conference, which has served as a hurdle for bankruptcy reform in the past. “I can’t image that’s what they would want to do,” said Chanow. The cloture vote in the Senate was a major step for bill, Kohn noted, and he does not think the House would hold it up over a couple of amendments. He believes that, if passed by the Senate, the House will probably take up the bill in April at the earliest, following the Spring/Easter Recess from March 21 through April 1. “I think they want to move it pretty quickly,” Kohn added. “The long journey toward a fairer bankruptcy code is almost over,” CUNA Senior Vice President for Legislative Affairs John McKechnie remarked. “For too long, credit union members have had to carry the burdens of those who choose to abuse the system, and this legislation will be an important step in the right direction.” South Carolina Federal Credit Union President and CEO Scott Woods added, “Reforms in this law will benefit all consumers. We’ve seen record losses from bankruptcy cases in the last decade, and the burden has been passed on to the consumer in the form of higher prices. Every consumer pays for abuse of the bankruptcy system.” He cited data from the American Bankers Association that bankruptcies cost an extra $400 a year for goods and services. South Carolina Federal Credit Union, with over $1 billion in assets and 138,000 members, is among the largest 100 credit unions in the country. Positives for Bankruptcy Reform, Not Necessarily Positives A number of consumer advocacy groups have stepped out against S. 256 and its many incarnations over the last eight or so years. A joint statement from the Center for Responsible Lending, Consumer Action, Consumer Federation of America, Consumers Union, the National Consumer Law Center and the U.S. Public Interest Research Group urged Senators “to reject the bill because it would favor creditors at the expense of Americans who have suffered genuine financial misfortune.” “It is particularly ironic that Congress would offer a gift to the credit card industry at a time when it is under fire for punitive business practices, like doubling your interest rate if you are a day late on a payment,” Linda Sherry of Consumer Action stated. CFA Legislative Director Travis Plunkett told Credit Union Times, “To try to summarize, the Consumer Federation has never opposed measures targeted at abuse” of the bankruptcy code. However, the “dramatic overhaul of the bankruptcy code” is not proportional to the problem. He cited data from the American Bankruptcy Institute that estimates 3-4% of Chapter 7 filers could afford to repay a portion of their debts. A major problem with the bill according to CFA and other consumer groups is that the bill attempts to reign in bankruptcy protections without providing adequate consumer protections. “We typically believe that credit unions are fairly balanced in extending credit.In a sea of irresponsible lending, credit unions are a (positive) model,” Plunkett emphasized. However, S. 256 as it is currently drafted gives a “free pass” to irresponsible lenders and provides no restrictions on abusive credit card lending. “To stem abuse.you have to look at lending practices,” he said. NCLC Attorney John Rao agreed, calling the consumer protections in the bill “bogus.” He, too, said that there is not much evidence of abuse, adding, “There has been a very aggressive attempt by the U.S. Trustees Office to really enforce the current abuse provisions.” Under current law, Plunkett pointed out 66% of Chapter 13 repayment plans already fail, and there are a handful of changes under the new bill that would make it even harder. For example, S. 256 would eliminate the practice of `cram downs,’ in which the bankruptcy judge takes into account the actual value of a car or mobile home rather than the amount left to pay on it, which is often more. Ironically, Rao said, “All the national credit union organizations have been the public face for supporters of this bill.Credit unions are not necessarily going to absolutely benefit from this bill.” He said that borrowers above the median income must pay on their secured debts, but for those below the median income, it is “unclear.” “This could ultimately harm credit unions where a lot of loans are secured,” Rao stated, suggesting a separate qualification or test is needed for those below median income. The attorney also sees flaws in the means test. “It’s a very strange way to try to get people to do what the bill’s sponsors say it’s going to do,” he commented. For example, when discharging secured debt like a car, the bill does not distinguish between a Ford Focus with one year left on financing and a Mercedes with five years left; the entire amount remaining on the loan is deducted from a filers income rather than `cramming it down.’ What a filer could pay on debts comes after these deductions and therefore, “rewards the most irresponsible.” As a result, it may actually push more people into Chapter 7. Additionally, Rao said, “If you’re a high roller with a lot of unsecured debts, you’re more likely to escape the means test” than more modest debtors.” Thus, it is not likely to increase the filers going into Chapter 13. “I wonder if it might even make things worse in terms of their overall losses,” he said of credit unions. A filer’s income can only be divided so many ways, he added, “pitting credit union loans against really high interest rate credit card loans.” NAFCU’s Chanow said items in the bill, such as the elimination of `cram downs’ would not disproportionately impact credit unions anymore than other lenders. “When it finally passes,” Rao concluded, “when it finally takes effect, there are going to be a lot of lenders wondering why they were supporting this bill.” He stated that there has not been good faith debate on real reform to the bankruptcy code. Plunkett agreed. “If this were a narrow, targeted bill, the kind credit unions might have written on their own, we’d be at the table negotiating with them,” he said. But, the current bill is not. The consumer groups had no qualms about voluntary reaffirmations for credit union members, according to the two representatives. “There were some real abuses with reaffirmations, not necessarily with credit unions, but I think it makes it worse,” Rao said. He said the credit union industry representative that testified on the bill made credit unions’ case, but the provision also gives other financials opportunities to abuse it. As worded, Rao said, the judge only has to `think’ the reaffirmation has been entered into in good faith. “Credit unions overall are a model of responsible behavior here,” Plunkett said. He said this difference of opinion between credit unions and CFA has not caused problems in the groups’ other cooperative efforts. “Cooperation is strong. We’ve just agreed to disagree,” Plunkett said. For Rao, it is a different story. “It really has [become a problem]. I just really don’t understand this. It’s really changed, not necessarily [NCLC's], but my view about credit unions.” Proponents of S. 256 have “good reason to be upbeat-at least at this time,” Rao concluded. NCLC, as well as CFA, are still working hard to get the word out against the bill. “We’re not giving up until this bill becomes law,” Plunkett affirmed. If the bill does become law, both groups said they would be continuing their public and congressional education efforts. NCLC will be updating its manual for bankruptcy attorneys. U.S. PIRG Consumer Programs Director Ed Mierzwinski said in the joint statement from the various consumer groups, “By making it harder for consumers to wipe away abusive loans in bankruptcy, this bill rewards the bottom feeders in the lending industry. These are the firms bombarding college students with high interest credit card offers, or peddling predatory mortgage loans to older Americans, or marketing payday loans at triple digit interest rates to cash strapped members of the military.” Not all credit unions are enamored with the bill either. Martin Eakes, CEO of the Center for Responsible Lending and Self-Help Credit Union in Durham N.C., urged the Senate to reject this bankruptcy legislation because it punishes homeowners and actually helps irresponsible creditors collect more of the loans they made to people obviously unable to pay them back.” “It also is likely to push more homeowners into the arms of predatory lenders. Reckless credit card lenders already cover their losses to bankruptcy by charging extremely high rates,” said Eakes. PIRG wrote a letter to Senators late last month stating, “Instead of enacting a one-sided bill that benefits the credit card industry, at the expense of consumers who are already victims of their unfair practices, Congress should conduct immediate oversight hearings of the credit card industry and rein in its unfair practices that have led to staggering increases in debts owed by American families. The bill’s so-called credit card disclosure provision is a cruel hoax that will not benefit consumers.” Just a couple weeks ago, during CUNA’s Governmental Affairs Conference, State Employees Credit Union President and CEO Jim Blaine shared the stage with Senator Kennedy and others at a press conference in opposition to S. 256. Other complaints by consumer groups: * The bankruptcy bill contains severe restrictions to prevent those with legitimate financial difficulties from getting a fresh financial start in bankruptcy by defining items like a family’s spending on mass transit to be excessive if they also own a car. * The bill favors many affluent debtors by allowing them to keep multi-million dollar homes and corporate executives would not be subject to the harsh means test. * It also makes debtors more vulnerable to eviction from their residence. * The bill erodes bankruptcy’s fresh start by making more debts nondischargeable in both chapters 7 and 13. “CFA’s saying what they’ve always said and it hasn’t gotten them very far,” CUNA’s Kohn said. Chanow admitted, “The bankruptcy bill does put a priority on child support, alimony, and other unsecured debts before credit unions.But if credit unions are able to recover 10% more than they were able to before, then that’s more.” He quickly added, “More than 250,000 bankruptcy filers last year were credit union members. Credit unions want to try to recover some of that money to prevent losses to members.” [email protected]

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