WASHINGTON — Working with consumer groups and members of Congress, NAFCU said that a compromise it sought over H.R. 3609, the Emergency Home Ownership and Mortgage Equity Protection Act, allowing bankruptcy judges to alter mortgages shall be limited to subprime and non-traditional loans, was included in a manager's amendment at mark up.

The final vote was 17-15 to send the bill to the House floor, said NAFCU Director of Legislative Affairs Brad Thaler.

A number of interest groups and members of the House Judiciary Committee earlier approved the inclusion of the language in principle, said NAFCU, and while NAFCU believes it is still not a perfect bill, the adoption of the compromise is a significant step forward.

“We've been working on getting a manager's amendment that addresses many of the concerns with the bill,” said Thaler. “We have been successful in getting a manager's amendment drastically limiting the scope.”

The manager's amendment would limit the bill to covering subprime loans as defined in HR 3915; non-traditional loans based on regulatory guidance; only those loans currently in foreclosures; loans made after Jan. 2000; loans currently existing at the time of enactment; adds a means test; sunsets in seven years.

The manager's amendment would exempt 95% of credit union loans, NAFCU estimates. Thaler said he believes it limits the protection to those, “who truly need relief. NAFCU has been working intensely with members of Congress and their staff to ensure that in their desire to find a solution for the subprime situation, they don't throw the baby out with the bathwater.”

But CUNA's analysis of the compromise is that it is incomplete at best, and at worst, detrimental to the almost 500 credit unions that offer interest only loans. CUNA believes that groups actively advocating for this compromise are essentially pushing for cram down legislation– something credit unions have told them they adamantly oppose.

CUNA realizes that it is unlikely committee staff will agree to any further modification at this time, but have expressed a willingness to work with them between Committee and the floor vote, which is not expected until next year. Thaler also confirmed speaking with staffers in order to clarify language that IO prime loans shouldn't be included in the bill.

Discussions with lobbyists, the Center for Responsible Lending, and Judiciary Committee staff have brought about this compromise, NAFCU said. “We are delighted to have come to this compromise which affords consumers welcome relief from possible foreclosure but still protects the majority of credit union loans,” said NAFCU President Fred Becker. He added, “At a time like this, the last thing we want to do is make credit harder to come by when people need it most.”

H.R. 3609 would allow homeowners to avoid foreclosure by filing for a mortgage restructuring under Chapter 13 of the bankruptcy code. The provision would allow bankruptcy court judges to revise the interest rate, remaining value and maturity of the loan. The compromise on H.R. 3609 also would limit the mortgage bankruptcy option to existing subprime or non-traditional loans that are in foreclosure, or those at least 60 days in arrears.

Under the agreement, the definition of a “non-traditional” loan would come from federal regulators' subprime mortgage guidance, which applies the term to interest-only mortgages and adjustable-rate mortgages with payment options that can lead to negative amortization. Such loans typically are not provided by credit unions. The subprime definition is taken from language passed by the House in H.R. 3915.

In a letter to Rep. John Conyers, (D-Mich.), CUNA pointed out its concerns with the provision in the manager's amendment, which includes the broad definition of “non-traditional mortgages” that a bankruptcy judge may reduce in value.

“This would impact almost 500 credit unions that have made 'interest only' loans in good faith and in response to member requests,” CUNA wrote. “These are not subprime loans, but rather loans which were rigorously underwritten with full and clear disclosures. Members of credit unions in housing markets such as California found these types of loans were necessary to allow them to purchase what, in many cases, would be classified as 'starter homes.'”

CUNA said it would support the manager's amendment if the definition of “non-traditional loans” were modified to address only negative amortization loans that are not otherwise covered by the definition of “subprime loan.”

CUNA also told Chairman Conyers that it appreciated the fact that the manager's amendment includes provisions that indicate the bill will only apply to mortgages made within a defined time period and bankruptcy courts would only be able to use this temporary authority for seven years. “During our meetings with your staff, we indicated our flexibility with regard to the time period chosen to define loans subject to modification in bankruptcy,” CUNA wrote. “Therefore, we can support the January 1, 2000-to-date-of-enactment period specified in the manager's amendment. These provisions should address concerns about the potential long-term adverse effects of the legislation.”

While CUNA allows that only 5.4% of CUs have some “non-traditional” mortgages– about 460 CUs– they represent $272 billion-in-assets. That's about one-third of all CU assets. Of those 460 CUs, they have $5.8 billion in non-traditional loans that account for 3.2% of assets, and 7.1% of mortgage loans.

At 108 of these CUs, non-traditional mortgages account for at least 10% of first mortgage loans outstanding. Further, there are nearly 120 credit unions in California (mostly large CUs with experienced mortgage lending staffs) that offer these loans– largely because the real estate market in California is so expensive, these “non-traditional” (interest-only) loans are the only way many members can finance homes.

If this provision stays in the bill, credit unions might be forced to stop offering these loans out of concern that they would be subject to “cramdown” if the borrowers decided to enter bankruptcy. In short, CUNA believes the credit unions would lose.

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