Bankruptcy Back (Again); Fate Is Unsure (Again)

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Like the cherry blossoms that decorate the capital city every spring, the bankruptcy reform bill showed its colors last week, only earlier than it had in recent years.

For the fourth straight Congress House leaders introduced a bill they said will help credit unions and other lenders by helping them collect more from the growing numbers of bankruptcy filers, but sponsors, including the credit union lobby, hope this one won't be halted by the controversial abortion protest language that helped thwart the last three efforts.

In a hearing before a panel of the House Judiciary Committee to kick off the new campaign, Lucille Beckwith, president of Palmetto Trust FCU, told lawmakers that credit unions' losses caused by bankruptcies continued to climb last year to $775 million. Beckwith, speaking on behalf of CUNA, said that credit unions support the three main aspects of the bill, identical to the previous ones, to require a means test for Chapter 7 filings; mandatory financial education for all filers; and retention of the ability to reaffirm, or voluntarily repay, selected debts.

Despite the appearance of the CUNA representative, as well as support from NAFCU, enthusiasm for the credit union-backed bill is waning, the product of the three previous three failures when defeat came in the final days of Congress. One leading credit union supporter of the bill said he has backed off his advocacy this year despite the continuing toll of bankruptcies on his credit union, because of the energy expended and the resulting disappointment the past few years. Other credit union executives attending CUNA's recent GAC expressed similar reservations.

The bill is expected to pass the House easily, as it did each of the last three Congresses, but run into trouble again in the Senate, where Democratic leaders are widely expected to combat Republican efforts to bypass the provision barring abortion clinic protesters from shielding their assets under bankruptcy.

Cynics of the legislative process see the bankruptcy bill as a piggy-bank for lawmakers, with which well-funded lobby groups, including the banks, retailers, auto finance companies and credit unions (yes, now considered well- funded), continue to pour millions of dollars in campaign contributions towards congressional leaders to help obtain their support. This gives lawmakers considerable motive to continue to push the bill for another year or two.

Of course, this is not just the fourth straight Congress for this issue, as the idea of a means-based bankruptcy system was germinated more than 10 years ago when Congress passed legislation, supported by the credit union lobby, creating a commission to study the need for bankruptcy reform.

Private Insurance Option Creates Schism In Groups

WASHINGTON-Members of the Consumer Federation of America voted at the group's annual meeting last week to extend its endorsement of federal deposit insurance from all bank and savings and loans to include credit unions, as well (see related story, page 1). The resolution, adopted on a 36-17 vote, was initiated by Navy FCU President Brian McDonnell, a CFA member, and supported by NAFCU, which has initiated its own campaign against the private insurance option.

McDonnell said he proposed the resolution because he is worried that the whole credit union movement could be tarnished by another private insurance disaster, such as the one surrounding RISDIC, the Rhode Island insurer that brought down dozens of credit unions and banks when it failed in 1991.

"I've seen how it has impacted us in the past, in Rhode Island and Maryland, and places like that," McDonnell told The Credit Union Journal.

CUNA, which represents both federal and state chartered credit unions, voted against the resolution.

Mark Wolff, CUNA's vice president for public affairs, said CUNA believes that state charters "ought to have the choice of private insurance if they want it."

The issue of private insurance, which reared its head last year with the decision by credit union giant Patelco CU to defect from the federal insurance system, threatens to create a new schism in the credit union movement and complicate matters on Capitol Hill, just as important initiatives are being hatched.

On the one side, you have NAFCU, whose members are barred from private deposit insurance, anyway, slamming private insurance, just when lawmakers are considering extending eligibility for the Federal Home Loan Bank System to privately insured credit unions. The controversy threatens to expand if NAFCU finds a patron to sponsor a move to ban the private insurance option, currently available only to state-chartered credit unions.

NCUA, the keeper of the federal insurance fund for credit unions has also expressed its concerns, most overtly in a letter to state regulators in Colorado who are studying whether to allow state charters there the private insurance option.

On the other side you have CUNA, which represents both federal and state credit unions, more than 200 of which continue to maintain private coverage.

Their reasons include the higher coverage offered by American Share Insurance, the only surviving private insurer of what was once a network of more than two dozen, as well as a desire to get out from under the regulatory/supervisory nexus of NCUA, which coverage by NCUSIF requires.

State regulators have also weighed in on the side of the private insurance option, seeing it has another perk of the dual chartering system.

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