WASHINGTON -
On the one side were the traditional credit union lobbies, CUNA, NAFCU and NCUA, telling Congress that credit unions were not part of the subprime crisis, which precipitated the problems that have spread to the overall mortgage market.
On the other side was the credit union-sponsored Center for Responsible Lending, which argued before Congress that all lenders should be subject to stringent new oversight on mortgages and that the bankruptcy courts should be allowed to restructure mortgages through the Chapter 13 process, a proposal vehemently opposed by the mainstream credit union lobby.
The Jekyll-and-Hyde scenario is reminiscent of the decade-long battle over bankruptcy reform in which Self Help CU, the sponsor of the Center for Responsible Lending, and numerous other community development credit unions, including mainstream State Employees CU in North Carolina, opposed the legislation to toughen the bankruptcy code and make it harder for strapped borrowers to eliminate their debt. Among the main supporters of bankruptcy reform were CUNA and NAFCU.
NAFCU called on leaders of the Senate Judiciary Committee last week to reject a bill that would allow bankruptcy court judges for the first time to restructure the terms of mortgages through the Chapter 13 process. On the eve of hearings into the proposal, NAFCU urged Committee Chairman Pat Leahy, the Vermont Democrat, and ranking Republican Arlen Specter, of Pennsylvania, to scale back a proposal meant for troubled subprime borrowers, lest it draw in mortgages of all kinds.
CUNA's position is a little more nuanced and would entail a carving out of most mortgages from the restructuring of the bankruptcy courts.
The bill making its way through the Senate and the House separately is aimed at helping the estimated two million borrowers, most of them of subprime mortgages, who will have their rates jump in the coming months, pushing many of them into foreclosures. Illinois Sen. Richard Durbin, the chief sponsor of the Senate bill, is chairing today's hearing on the issue. Despite Democratic sponsorship, both bills appear to have support of many Republicans, as the spreading mortgage crisis has no party affiliation.
NAFCU told the senators to open the bankruptcy courts to mortgage restructurings could create havoc in the mortgage market, even have unintended consequences of raising rates for riskier borrowers and increasing uncertainty in the secondary market.
The credit union lobby group is working with lawmakers in the House in hopes of limiting the ability of bankruptcy courts restructure mortgages to only subprime loans, those defined generally as carrying rates 3% or more higher than the comparable Treasury rate.
The bankruptcy bills are among several moving through Congress, which would set new standards for licensing of mortgage lenders, and for underwriting, escrowing and selling of mortgages on the secondary market.
