Credit Unions and Trades Should Have Supported Cram-Down Legislation

CUNA recently announced that any cram-down legislation is DOA.When my retirement comes in about four years, one of the greatest regrets of my three-decade credit union career will be that I did not speak out aggressively against credit unions getting in bed with banks and credit card companies to promote the so-called bankruptcy reform legislation several years ago.I cannot be silent again.CU trades were desperate to find a post-HR 1151 issue to keep support and funding coming from constituent credit unions. The more emotional the issue, the better.Needing such an issue, they locked in on bankruptcy reform as the emotional issue to rally credit unions and urged us to attend lots of conferences, hike many legislative hills, write letters, make phone calls and, of course, ramp up the fiery rhetoric against those who were supposedly damaging credit unions through spurious bankruptcy filings. It didn’t hurt CUNA and league fundraising, either.Time and time again, bank, credit card and credit union publicity machines wrote of horrific examples of the extremely rare bankruptcy abuser who stiffed some lender while maintaining a seven-figure retirement account and living in a mansion.These highly selective stories had nothing to do with the reality of the typical bankruptcy filing.Hard data from associations of bankruptcy attorneys who represent lenders reflect that the majority of bankruptcy filings were, and are, by women. In fact, in the year just prior to bankruptcy reform, 15% more women filed than men. Most women who file are those recently made single through divorce, who have custody of children and are attempting to manage on greatly reduced income.Adding to this is the cold reality that the primary causes of bankruptcy are not irresponsible consumer purchasing; rather, it is caused primarily by runaway medical expenses, followed closely by the financial distress caused by reduction of household income due to divorce.Those who object to my arguments will trot out the lame assertion that credit card debt is the primary cause of bankruptcy. What do you think is on those credit cards: vacations, plasma televisions, video games, designer clothes? Hardly! What you will find on the maxed-out credit cards of bankrupt women and broken families is rent, food, children’s clothing, gas for the car, doctor office visits, hospital bills, medication and cash advances for basic necessities.We in credit union leadership could have been on the side of the angels and should have opposed what the banks and credit cards companies were doing. Instead we sold our souls for the sake of finding an industrywide galvanizing issue.In the past two months our trade organizations called upon us to rise up and oppose proposed cram-down legislation. Sadly, it seems to have worked, and we are again in league with the devil.Aside from the humanitarian issues, there were very pragmatic reasons for supporting the legislation because the alternative to a cram-down for a credit union in bankruptcy court will usually be worse than any cram-down would have been by a bankruptcy judge under the proposed, now defeated, legislation.I speak from experience both broad and deep. In the 1980s I worked for a large credit union in Texas for almost 10 years under an NCUA letter of understanding and agreement where I was responsible for the workout of more than $300 million in nonperforming assets. I am confident that I have testified in bankruptcy court more times and foreclosed more homes than 99% of the readers of this publication.Here is the reality: one way or another, every loan balance for any home in foreclosure, in bankruptcy, is going to get crammed down. It’s not the judge that does the deed-it’s the market that causes the reduction of the value.Had the proposed legislation passed, the loan balance would have been reduced to equal the property value based on an independent, professional market valuation. The borrower would then pay off the new (reduced) principal balance via amortizing principal and interest payments, at a market interest rate, keep paying the taxes and insurance and keep the house in good condition.It is extremely important to note that the proposed legislation would not have permitted the cram-down unless the debtor was already in bankruptcy and the lender had already initiated foreclosure proceedings. The lender was going to get the property or a loan equal to the value of the property.The language that was pumped out by our trade organizations about this issue was terribly disingenuous. Actually, it was disgusting.The CEO of one of the largest state leagues sent out a pitifully frantic letter stating that cram-downs would apply to all mortgages. That was a lie. It would have encompassed only mortgages in bankruptcy-and then only for mortgages that were already in the process of foreclosure by the lender. There were additional restrictions that would have protected the lender.So, what’s the alternative now without the legislation? Well, the credit union now gets to proceed to foreclosure and the borrower loses the property.Does the credit union now come out any better financially? Nope. It comes out worse.The result is that the credit union now gets the very same foreclosed house on its books and must put it on those books at the reduced market value but now it’s empty and the family is on the street. The credit union now gets to pay all of the costs of selling the house plus has to cover the taxes, insurance and maintenance costs until the property does sell.Take it from someone with experience of millions of dollars worth of foreclosed homes during the bad days of the S&L collapse era; the credit union is going to take an additional 10% to 15% haircut on the selling price because all purchasers of foreclosed properties expect a bargain.Will we get stiffed by a deadbeat once in a while? Sure. But bankruptcy filings would not have increased just to get home loan balance reductions. Bankruptcy is a humiliating and demeaning experience fraught with long-term, seriously negative consequences for the person filing.It strikes me that credit union management teams and boards who cried out that the legislation would have resulted in a rise in bankruptcies just to get a cram-down must have a really despicable opinion of their own members.What is most distressing is that the language I hear from most credit union leadership about members in bankruptcy conveys strident tones of vengeance rather than the primary goal of collection of as much principal and interest as possible-and possibly helping a family recover from financial disaster. My recommendation is that we immediately reverse our public stand on this and get on the side of the people on this issue. The financial result will be the same and it will once again differentiate us from the banks that we so enjoy excoriating.