In a bid to help passage, Senate Democrats are courting credit unions to endorse legislation that would grant a bankruptcy judge the power to modify home mortgages, including reducing principal.
Senate Democrats are viewing the credit unions as an easier get than banks and are dangling a sweetener in front of the Credit Union National Association and the National Association of Federal Credit Unions: a bill to lift the ceiling on business loans credit unions can make. But that isn't enough to get them on board.
In their public comments, credit unions have shown more flexibility than banks on the bill that would allow borrowers to have their mortgages restructured through a Chapter 13 filing, just like consumer debt such as second homes, autos and boats.
"For our members, it's a toxic issue. But we also want to be engaged in the [housing] crisis," said Ryan Donovan, vice president of legislative affairs for CUNA. "We all have a responsibility to reduce foreclosures."
Contrast that with the statement of Jamie Dimon, CEO of JPMorgan Chase & Co., who expressed his opposition to the bill Wednesday at the U.S. Chamber of Commerce: "We do think it could cause another whole new round of problems in the capital markets." Despite strong opposition from the banking industry, the House voted 234-191 to approve the measure March 5. Proponents say it would help stem foreclosures by forcing lenders to modify their loans under threat of having a judge reduce the principal of the loan to market value. Lenders argued the measure would bring more uncertainty to the mortgage market and result in higher interest rates.
Credit union lobbyists have been in contact with Senate Majority Whip Durbin, sponsor of the Senate version, and Sen. Charles Schumer, D-N.Y. The two need help because at least 11 Democrats have major concerns, according to one banking lobbyist, and Senate GOP leaders feel confident about stopping the measure.
Democrats have offered to combine a Schumer bill that would eliminate the cap that restricts credit union lending to small businesses at 12.25 percent of their total assets coupled with the bankruptcy bill, according to a Schumer aide.
The offer was rejected, according a lobbyist, because credit unions would like to see the bankruptcy option restricted to only subprime and risky loans known as "Alt-A." Durbin spokesman Max Gleischman said his boss met Wednesday with CUNA President Dan Mica, but "nothing was offered. No deals were offered." He could not comment on Schumer's talks but said Democrats are in contact with a number of institutions. So far Citigroup Inc. is the only one to endorse the House bill, which would limit the bankruptcy option to only existing loans and require borrowers to contact their lender 30 days before a bankruptcy filing.
The bankruptcy bill has been referred to the Senate Banking Committee, where Banking Chairman Christopher Dodd said he would like to move it within weeks.
Donovan said CUNA thought it was close to a deal with Durbin in the 110th Congress on limiting the bankruptcy option to subprime and Alt-A loans. NAFCU endorsed a 2007 House bill that contained similar restrictions. But proponents have said the bankruptcy option should be available to all loans given the housing downturn.
Moderate House Democrats added language to the bill to require judges to consider whether homeowners were offered a "qualified" loan workout similar to that proposed by the Obama administration, which would lower interest rates for up to 9 million borrowers and set their monthly payments to 31 percent of their income.
But the banking industry has asked for more, specifically language requiring a judge to place borrowers into the Obama plan or something similar if they qualified, and exclude them from a principal reduction. That stance appears to be the banks' firm line.