WASHINGTON (2/10/09)—The Credit Union National Association wrote two lawmakers regarding mortgage bankruptcy provisions that potentially enable any dissatisfied mortgage borrower to walk away from a loan—and maybe even keep the house. CUNA has been working for more than a year against “cramdown” provisions in pending legislation that would allow bankruptcy courts to modify the terms of existing mortgages. In a letter sent Monday to Sen. Evan Bayh (D-Ind.), CUNA expressed appreciation of recent comments in which Bayh stated he would seek improvements to pending legislation that would permit courts to modify the mortgages of debtors in bankruptcy. This legislation has been introduced in both the Senate (S. 61) and the House (H.R. 200). CUNA has urged that if lawmakers proceed with “cramdown” legislation at all, it must be limited specifically to loans determined to be “subprime,” with large re-sets of interest rates, loans with negative amortization, or loans a court determines were fraudulent or abusive. Adopting a limited provision would “not only provide relief to certain debtors, but would serve the important purpose of helping to ensure that these types of lending products do not re-emerge,” CUNA said in its letter to Bayh. For any loan falling within the category described above, CUNA believes a bankruptcy court could have the authority to:
* Cancel prepayment penalties; * Lower the interest rate to the current conventional fixed market rate; * Extend the maturity of the loan; and * Adjust the principal balance to no lower than the current market value of the house if, when the house is sold by the debtor – whether the sale occurs before or after discharge – the debtor and creditors share in the appreciation of the property.
However, the CUNA letters warned, H.R. 200 contains language that could encourage borrowers’ gaming of the mortgage lending system. “We have heard from credit union executives about borrowers who are not even delinquent on their mortgage loans and who have not lost their jobs, suddenly stopping payments and triggering foreclosure because they just no longer want to make large mortgage payments on houses which have dropped notably in value. “If the bankruptcy law is changed to allow modification of all loans, these borrowers could seek to have their mortgage restructured by the bankruptcy court,” the CUNA letter to Senator Bayh warned. In its letter to Rep. John Conyers (D-Mich.), CUNA identified a critical flaw with language added by the Judiciary Committee during its recent consideration of H.R. 200 with respect to the bill’s approach to “right of rescission.” According to the letter, the bill, as amended by the Committee, would allow even a nonmaterial, technical and unintentional violation of Truth in Lending rules to result in a debtor getting to keep a house with a lender being paid “absolutely nothing.” "This is clearly an unfair result, and we question if this was truly the intent of the supporters of this provision," the letter stated. CUNA indicated it was willing to assist supporters of this provision perfect the language to avoid any unintended consequences. Use the resource link below to read the complete letters.