The holiday season is a wonderful way to end the year! A time of faith, family, fellowship and-lest we forget- feasting! Food, food, and more food! Provocatively tempting aromas and tantalizing tastes, all-ah-h-h-h!- well worth the weight! And, the main focus of the feasting, the sine qua non is usually A FAMOUSLY FAT TURKEY; which, of course, brings to mind the oft-pedaled, but yet to be passed BANKRUPTCY ABUSE REFORM ACT (C'mon, quit acting so shocked; you knew darn well this was coming sooner or later! Get over it! Here it is!)
About the Bankruptcy Abuse Reform Act, Oscar Wilde said it best: "It is often with the best intentions that some of the worst work is done." Pretty perceptive of Wilde in that he-like most of the rest of us-never read, let alone studied, this 400-page magnum ugly opus. Yet even a cursory review of the act quickly reveals that -just like that holiday turkey-this particular "bird" has been fully "stuffed" by way too many cooks-all seeking to suit their own particular tastes.
All of us do feel betrayed when a member defaults on a loan. After all, the credit union is a cooperative and the member did "promise to pay." Plus, most of us can relate a tale or two of "woe and abuse" featuring "shifty" members, "opportunistic" lawyers and "bleeding heart" judges. The only problem with these yarns is that much like political campaign promises and stories of male, pre-teen sexual conquests, they usually don't hold up real well to serious scrutiny!
Real Live Facts
For example, take a look at the two charts with data from www.ncua.gov. Here are a few "facts" that are actually true!! First, credit union lending remains very strong-up 7% to $322 billion at Dec. 31, 2001. Loan delinquency is well controlled at .85% (less than 1%!) and is down by 15% over 1997. The allowance for loan loss (ALL) is actually lower at .87% than at the end of 2000!
Collectively we added .32% to the loan loss reserve in 2001, a bit less than in 2000. Since credit unions are required by federal statute and GAAP to accurately assess and accrue our potential loan losses through the ALL, the future apparently looks very bright to the CEOs who faithfully attest to credit union financial statements. (We are reporting "good numbers"-aren't we?)
Charge-offs, too, are well under control at .46% of total loans (less than ?%). In other words, 99.5% of credit union loans are repaid as promised. According to NCUA 41.1% of credit union charge-offs are related to bankruptcy. Or said another way, just .19% (less than 2/10th of 1%!) of total credit union loans result in a bankruptcy loss. Not exactly a shock wave of loss and abuse, is it? Is it?
But, hold on, there's more. In 1999, the Government Accounting Office (GAO) thoroughly analyzed the issue of personal bankruptcy. The GAO is the federal government's impartial watchdog. The GAO particularly looked at three financial industry studies of bankruptcy loss and abuse. Ernst and Young conducted two of the studies sponsored by Visa and Mastercard! Creighton University also sponsored a study, as did the Executive Office for U.S. Trustees (EOUST). Some interesting results.
Even Studies That Are Creditor Friendly...
These reports looked at bankruptcy filers who could pay something if bankruptcy had a "means test" (as the current bill promotes). The assumptions were very creditor friendly, assuming, for example, that filers' incomes and financial circumstances would not change during bankruptcy. Even so, the following were the results of the studies indicating "under best-case scenarios" who could pay. The "can pays" are those described as "abusers" in the current debate hype. (Those who would be forced into a Chapter 13 plan.)
So, based on industry-sponsored studies, the maximum "abusive level" of bankruptcy is between 3.6% and 15%. (Remember, these are industry-sponsored studies!!)
So, let's calculate what abuse means. First, remember we calculated above that total bankruptcy losses were .19% of credit union loans losses. (Total charge-offs .46% x 41.1% related to bankruptcy = .19%). Therefore, the range of loan losses related to "abusive bankruptcy" would be calculated as follows (based on the GAO studies):
Estimated level of abuse: 15% in the 1998 Ernst & Young study; 10% in the 1999 Ernst & Young and Executive Office of U.S. Trusttes study, and 3.6% in Creighton University's 1999 study
Maximum Range of Losses from "Abuse":
* .19% x 15% = .0285% (less than 3/100ths of 1%!) highest estimate
* .19% x 10% = .019% (less than 2/100ths of 1%!) mid-range estimate
* .19% x 3.6% = .0068% (less than 1/100th of 1%!!!) lowest estimate
Perhaps a clearer translation of these statistics is if credit unions want "to overcome bankruptcy abuse" all they need to do is raise loan rates by one to three one-hundredths of 1%. Worst-case cost of "bankruptcy abuse" on credit union lending rates is three basis points! (Some of you spend more on board planning sessions!)
Credit unions have many issues far more important than "one to three basis points." One of those problems could be the following three paragraphs from a September 2002 letter from Ralph Nader to CUNA CEO Dan Mica:
"It is extremely disappointing to see the Credit Union National Association link hands with the long-time enemies of the credit union movement in support of legislation which would destroy consumer bankruptcy protections and turn the nation's bankruptcy courts into a destructive punitive debt collection enterprise.
The good name of credit unions should not be attached to such an anti-consumer scheme. It is no secret to you that the credit union support is providing cover for financial institutions that have engaged in sleazy, unfair, deceptive and, yes, predatory lending practices which have forced many families into foreclosures and bankruptcy.
Using these same well-honed tactics of deception, the banks and credit card companies allied with car dealers, finance companies and other credit merchants have conducted a campaign of the "big lie" to suggest that people who fall into bankruptcy are "dead beat big spenders" intent on abusing and misusing the bankruptcy laws. The Congress, awash in campaign contributions from the financial industry, is all too willing to accept these false claims."
You certainly don't have to be a fan of Ralph Nader (personally I still think the convertible Corvair is one of the sexiest cars ever made - even Ralph Nader thought it was "hot, hot, hot!") to ask: If we are "carrying water" for "our enemies" and being rebuked by "our friends"-isn't something wrong with this picture? Shouldn't "pro-credit union" and "pro-consumer" go hand in hand? How can the bankruptcy bill be anti-consumer and pro-credit union?
One credit union national trade association recently said about 2003: "We're looking for a serious opportunity to pass the bill into law." It is time to get serious about bankruptcy reform. But, we need something a bit more serious than "opinion poll leadership" from our trade associations. The current bill's a real turkey-promise! Given the continuing controversy shouldn't we at least get together and talk it over?
If not, if careful reconsideration is too great a danger, if pointing out that this "bird is a turkey" is too embarrassing at this late date; if political posturing is all the "substance" we have, then perhaps our leadership should also-while they're at it-lobby for new legislation mandating a cure for cancer.
They'd get far better press and equally meaningful results! And, hey, we'd all support you on that one!
Jim Blaine is CEO of State Employees Credit Union. Mr. Blaine can be reached at P.O. Box 27665, Raleigh, NC 27611.
