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Battle lines have been drawn between consumer groups and financial institutions-and between credit unions-on legislation regarding mortgage cram-downs. I suspect however, that many have yet to draw a line in the sand. On this, I offer two questions to consider. Who should have jurisdiction for making these decisions-financial institutions or bankruptcy courts? Second, what is the real harm in H.R. 1106?Let’s consider the role of the bankruptcy court.Traditionally, courts were divided into two types: Courts of Law and Courts of Equity. Under English common law, and in some states, the courts of law heard only lawsuits in which damages (money) were sought. The decisions of a court of law were based on contract terms and individual rights.The court of equity was required when a party requested special remedies. Relief provided by a court of equity included such actions as injunctions and specific performance or actions. The court of equity was petitioned when the solution required someone to do something or refrain from doing something.Today, almost every court of equity has merged into a court of law. Depending on the circumstances, most courts can order equitable or monetary remedies. The exception is federal bankruptcy courts. United States bankruptcy courts are the one example of courts operating solely as courts of equity.The bankruptcy courts’ role is to compel people to do something or stop doing something. Decisions usually result in paying an obligation or being discharged from its responsibility. In most cases, the decisions are based on a case-by-case assessment of facts. The court may need to ask what should be the fair outcome. The issue concerning cram-downs pivots on the bankruptcy courts’ ability to make this equitable assessment.Opponents of cram-downs may say to let financial institutions make the call for whom to permit modifications. While I have high confidence in credit unions to make the right decisions, I’m not so comfortable with other institutions making the right decisions for consumers. Remember, some of these same lenders brought us loans based on stated income with predatory rates. If consumers cannot trust the financial industry to make the right decisions, shouldn’t a neutral party make them?So, what is the real harm in H.R. 1106?After reading the actual bill, I learned that a court would have to make at least four findings in order to invoke its power to cram down a mortgage loan claim. First, the court has to recognize that a debtor has indeed filed a Chapter 13 bankruptcy petition. Second, the court has to see that the mortgage in question is the debtor’s principal residence. Third, the debtor’s principal residence must be the subject of a notice that a foreclosure may be commenced. Finally, the court has to find that the market value of the home is less than the balance of the mortgage.The way I see it, if a member’s home is facing foreclosure, bankruptcy or not, the market is going to cram down the mortgage at the auction sale. Expecting a bidder to pay more than the market value is unrealistic. Further, collecting on a deficiency judgment for a bankrupt member with negative equity is even more remote.My credit union is not anxious to take additional losses. But when I put my consumer hat on, I shudder to think of profit-motivated lenders making equitable decisions. If consumers need an unbiased tribunal to provide special remedies, H.R. 1106 offers a practicable solution.

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Peter Westerman


Credit Union Times

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