In a “Dear Senators” compromise, Citigroup CEO Vikram Pandit softened the bank’s objections to S.61, legislation that would allow bankruptcy judges to modify mortgage loans. “Citi shares the legislation’s goal to help distressed borrowers stay in their homes,” Pandit wrote to Senators Richard Durbin, Chuck Schumer, Chris Dodd, and Patrick Leahy. “Subject to revisions…we would support this legislation.”

So what will Citi get in return for its approval? “First, mortgage principal reductions in bankruptcy proceedings will be limited to loans made on or before the date of enactment,” Pandit told the senators and their House counterparts. “Second, provisions in the bill allowing a bankruptcy judge to void a mortgage entirely for violation of consumer protection laws will be limited solely to those violation of the Truth in Lending Act (TILA) that gave rise to a right of rescission under TILA.” Finally, principal reductions will be limited to those borrowers have tried for a loan modification before filing for bankruptcy.

“The support of one of the country’s biggest lenders will hopefully spur other lenders to act,” Senator Durbin (D-IL) said in a statement last week.

That may prove to be a case of very wishful thinking. The American Bankers Association swiftly reiterated it objections to the idea. “The ABA has consistently opposed proposals that would give bankruptcy judges broad authority to unilaterally modify the terms of mortgages,” stated Floyd E. Stoner, the ABA’s executive director of congressional relations and public policy. “ABA was not a participant in the recent agreement between Citigroup and Congressional proponents of mortgage cram-down legislation,” Stone continued, arguing that the compromise “will leave in place overly broad mortgage cram-down authority” in the hands of bankruptcy judges. The Mortgage Bankers Association doesn’t like the Citi deal either. And Scott Talbott, svp of government affairs at The Financial Services says bluntly: “The compromise doesn’t fix the problems with the Durbin bill.”

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