Lenders are scrambling to kill an amendment to the Senate's consumer bankruptcy reform bill that could let debtors keep their homes without paying their mortgages.
Introduced by Sen. Byron Dorgan, D-Ill., the amendment would give bankruptcy judges authority to enforce the Home Ownership and Equity Protection Act, which imposes strict disclosure requirements on lenders that make high-fee or high-interest-rate loans.
A judge could void the mortgage and let the debtor keep the house if the lender violated any of the disclosure requirements, even if the error was inconsequential, lenders claim. This means the lender loses both the mortgage and the security interest in the property.
"This is a disturbing development and makes a very harsh law even more Draconian," said Stephen F.J. Ornstein, a partner in the Washington office of the Thacher, Proffitt & Wood law firm. "It is grossly unfair to lenders."
"We don't like that worth a darn," said Bill Cumberland, general counsel to the Mortgage Bankers Association of America. "This magnifies the penalty for not dotting your i's and crossing your t's far beyond what Congress intended."
Wright H. Andrews, a partner at the Washington law firm Butera & Andrews who represents the National Home Equity Mortgage Association, warned the courts would be clogged with lawsuits if the amendment is accepted.
"Anytime a person thinks they would have any chance of establishing even a 2-cent error so they could have a $100,000 debt eliminated would certainly file a lawsuit," Mr. Andrews said.
An official in Sen. Durbin's office said the industry is overreacting. The law is targeted at lenders that intentionally break the law, she said. "There are going to be some changes," she said. "We want to address real genuine concerns, but not gut the good parts."
Philip S. Corwin, a principal at Federal Legislative Associates who lobbies for the American Bankers Association, said killing the amendment could cause Democrats to unite against the overall bankruptcy bill, which would make it nearly impossible to garner the 60 votes necessary to close debate and move to a vote.
"There are partisan aspects of this," he said. "This is one of the Democratic amendments which they say brings balance to the bill."
A vote is expected Friday on S 1301, the Senate's version of consumer bankruptcy reform. The bill would let creditors ask a judge to bar consumers from using Chapter 7 to eliminate all their unsecured debts.
The request would be granted if the judge determines that the borrower has enough income to repay at least 20% of unsecured debt within five years.
Senate Majority Leader Trent Lott has warned that debate over appropriations and health-care bills could delay bankruptcy legislation until September.
The House approved a consumer bankruptcy reform bill June 10 that uses a formula based on income and living expenses to determine who could eliminate unsecured debts in Chapter 7 and who would repay them in Chapter 13.