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Updated July 2, 2008
The response to the subprime crisis has brought about an array of legislative proposals. These suggested proposals include a major reworking of bankruptcy law and legislation addressing mortgage lending issues. NAFCU remains concerned about the unnecessary regulatory burdens that the expansive mortgage lending proposals will place on credit unions, which have not been part of the problem.
Moreover, NAFCU believes that a major reworking of bankruptcy law to encompass all mortgages could cause unintended impacts to the availability and cost of credit that may outweigh any benefits and lead to a further tightening of credit for consumers. H.R. 3609, the “Emergency Home Ownership and Mortgage Equity Protection Act of 2007” was amended and reported favorably out of the Judiciary Committee on December 12, 2007. As amended, H.R. 3609 is not an ideal solution but a workable one. Since, credit unions continue to be exemplary in putting their members in products with rates closer to standard Treasury rates, H.R. 3609 as amended would effectively exclude some 95 percent of all credit union mortgages from the bill’s scope.
The bill as amended would:
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Take the sub-prime definition from H.R. 3915, the Mortgage Reform and Anti-Predatory Lending Act of 2007, which the House passed on November 15;
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Take the non-traditional definition from the regulators guidance issued earlier on non-traditional loans (includes interest only loans);
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Apply only to sub-prime and non-traditional loans currently in foreclosure, defining foreclosure as when the breach letter goes out at 61 days;
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Apply only to those loans made after January 1, 2000 that currently exist, meaning that there would not need to be pricing adjustments on future loans;
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Apply the “means test” from the 2005 Bankruptcy Act to those seeking relief.
Additionally, the bill only applies to bankruptcies commenced in the next seven years. (That is, the bill would “sunset” in seven years).
The Senate Judiciary Committee has also acted on legislation similar to H.R. 3609. On October 3, 2007, Senator Richard Durbin (D-IL) introduced S. 2136 and Senator Arlen Specter introduced S. 2133.
The primary difference between these proposals is that S. 2133 allows bankruptcy court judge to change the interest rates only. On April 3rd, after the Senate failed on a procedural vote on the floor to attach a modified version on S. 2136 to the Senate’s version of the Foreclosure Prevention Act, the Senate Judiciary Committee reported the modified bill out of Committee. NAFCU worked with Senator Durbin to modify his bill and come up with more acceptable language that somewhat mirrors the compromise passed by the House Judiciary Committee. T
he modified bill would limit relief to only subprime and non-traditional loans and would exempt certain interest-only prime loans that meet key criteria and that were not predatory in nature.
This would still address the legislative intent of the bill, assisting homeowners that are experiencing difficulty in the current housing market. The modified bill limits the impact of the bill to loans that exist at the time of enactment.
NAFCU believes that this will work to address concerns raised regarding the pricing of risk for future loans. Additionally, NAFCU feels that being able to use the means test to determine ability to repay is an important aspect of this modified bill. NAFCU continues to work with Senator Durbin and others to include a cap on the amount of ‘cram-down’ that a judge is able to mandate and we believe that adding this provision would make the package better.
No floor action has been scheduled in either the House or the Senate on this measure.
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