[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
SECOND ANNIVERSARY OF THE ENACTMENT OF THE BANKRUPTCY ABUSE PREVENTION
AND CONSUMER PROTECTION ACT OF 2005: ARE CONSUMERS REALLY BEING
PROTECTED?
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
MAY 1, 2007
__________
Serial No. 110-13
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
U.S. GOVERNMENT PRINTING OFFICE
35-112 PDF WASHINGTON : 2007
---------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government
Printing Office Internet: bookstore.gpo.gov Phone: toll free (866)
512-1800; DC area (202) 512-1800 Fax: (202)512-2250 Mail: Stop SSOP,
Washington, DC 20402-0001
COMMITTEE ON THE JUDICIARY
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California LAMAR SMITH, Texas
RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr.,
JERROLD NADLER, New York Wisconsin
ROBERT C. SCOTT, Virginia HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina ELTON GALLEGLY, California
ZOE LOFGREN, California BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas STEVE CHABOT, Ohio
MAXINE WATERS, California DANIEL E. LUNGREN, California
MARTIN T. MEEHAN, Massachusetts CHRIS CANNON, Utah
WILLIAM D. DELAHUNT, Massachusetts RIC KELLER, Florida
ROBERT WEXLER, Florida DARRELL ISSA, California
LINDA T. SANCHEZ, California MIKE PENCE, Indiana
STEVE COHEN, Tennessee J. RANDY FORBES, Virginia
HANK JOHNSON, Georgia STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois TOM FEENEY, Florida
BRAD SHERMAN, California TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York JIM JORDAN, Ohio
ADAM B. SCHIFF, California
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota
Perry Apelbaum, Staff Director and Chief Counsel
Joseph Gibson, Minority Chief Counsel
------
Subcommittee on Commercial and Administrative Law
LINDA T. SANCHEZ, California, Chairwoman
JOHN CONYERS, Jr., Michigan CHRIS CANNON, Utah
HANK JOHNSON, Georgia JIM JORDAN, Ohio
ZOE LOFGREN, California RIC KELLER, Florida
WILLIAM D. DELAHUNT, Massachusetts TOM FEENEY, Florida
MELVIN L. WATT, North Carolina TRENT FRANKS, Arizona
STEVE COHEN, Tennessee
Michone Johnson, Chief Counsel
Daniel Flores, Minority Counsel
C O N T E N T S
----------
MAY 1, 2007
OPENING STATEMENT
Page
The Honorable Linda T. Sanchez, a Representative in Congress from
the State of California, and Chairwoman, Subcommittee on
Commercial and Administrative Law.............................. 1
The Honorable Chris Cannon, a Representative in Congress from the
State of Utah, and Ranking Member, Subcommittee on Commercial
and Administrative Law......................................... 2
WITNESSES
Mr. Steve Bartlett, President and CEO, Financial Services
Roundtable, Washington, DC
Oral Testimony................................................. 8
Prepared Statement............................................. 10
Ms. Shirley Jones Burroughs, Gastonia, NC
Oral Testimony................................................. 15
Prepared Statement............................................. 16
Mr. Henry J. Sommer, President, National Association of Consumer
Bankruptcy Attorneys, Philadelphia, PA
Oral Testimony................................................. 18
Prepared Statement............................................. 21
Ms. Yvonne D. Jones, Director, Financial Markets and Community
Investment, U.S. Government Accountability Office, Washington,
DC
Oral Testimony................................................. 49
Prepared Statement............................................. 51
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Letter and study by the American Bankers Association, the
Consumer Bankers Association, et al., submitted by the
Honorable Chris Cannon, a Representative in Congress from the
State of Utah, and Ranking Member, Subcommittee on Commercial
and Administrative Law......................................... 4
Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress from the State of Michigan,
Chairman, Committee on the Judiciary, and Member Subcommittee
on Commercial and Administrative Law........................... 7
Prepared Statement of Eugene Crane, President, National
Association of Bankruptcy Trustees............................. 71
Letter and supporting documents from the American Bar
Association, submitted by the Honorable Linda Sanchez, a
Representative in Congress from the State of California, and
Chairwoman, Subcommittee on Commercial and Administrative Law.. 74
Letter and supporting documents from Chad Wm. Schulze, Esquire,
Milavetz, Gallop & Milavetz, P.A., submitted by the Honorable
Linda Sanchez, a Representative in Congress from the State of
California, and Chairwoman, Subcommittee on Commercial and
Administrative Law............................................. 113
Official Form 22A (Chapter 7), submitted by the Honorable Linda
Sanchez, a Representative in Congress from the State of
California, and Chairwoman, Subcommittee on Commercial and
Administrative Law............................................. 159
APPENDIX
Material Submitted for the Hearing Record
Report on Personal Bankruptcy Statistical Study by SMR Research
Corp., submitted by the Financial Services Roundtable, to the
Honorable Howard Berman, Chairman, Subcommittee on Courts, the
Internet, and Intellectual Property............................ 180
Response to Post-Hearing Questions from Steve Bartlett, President
and CEO, Financial Services Roundtable, Washington, DC......... 204
Response to Post-Hearing Questions from Henry J. Sommer,
President, National Association of Consumer Bankruptcy
Attorneys, Philadelphia, PA.................................... 208
Response to Post-Hearing Questions from Yvonne D. Jones,
Director, Financial Markets and Community Investment, U.S.
Government Accountability Office, Washington, DC............... 211
Documents of personal bankruptcy filing of Shirley Jones
Burroughs, Gastonia, NC........................................ 213
Prepared Statement of David C. Jones, President, Association of
Independent Consumer Credit Counseling Agencies................ 259
SECOND ANNIVERSARY OF THE ENACTMENT OF THE BANKRUPTCY ABUSE PREVENTION
AND CONSUMER PROTECTION ACT OF 2005: ARE CONSUMERS REALLY BEING
PROTECTED?
----------
TUESDAY, MAY 1, 2007
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:30 a.m., in
Room 2141, Rayburn House Office Building, the Honorable Linda
T. Sanchez (Chairwoman of the Subcommittee) presiding.
Present: Representatives Sanchez, Johnson, Lofgren,
Delahunt, Watt, Cannon, and Feeney.
Staff Present: Susan Jensen, Counsel; Michone Johnson,
Chief Counsel; Daniel Flores, Minority Counsel; James Paul,
Professional Staff; Norberto Salinas, Counsel; Elias Wolfberg,
Professional Staff; Alexandrine DiBianchi; Erik Stallman,
Senior Counsel to Representative Lofgren; Jason Everett,
Legislative Assistant to Representative Watt; and James Paul,
Professional Staff.
Ms. Sanchez. This hearing of the Committee on the
Judiciary, Subcommittee on Commercial and Administrative Law
will now come to order. I will recognize myself first for a
short statement.
Two years ago last month, President Bush signed into law
the Bankruptcy Abuse Prevention and Consumer Protection Act,
pushing through the most complex and dramatic changes of our
Nation's bankruptcy law in more than 25 years. Today's hearing,
which focuses on consumer bankruptcy, is one of a series that
our Subcommittee will conduct on the impact of the 2005
amendments on the bankruptcy system.
We have heard extensively from the consumer community that
many of the consumer bankruptcy reforms were problematic. In
particular, the act's means testing requirement to determine a
debtor's ability to repay debts and mandate that consumer
debtors receive credit counseling prior to filing for
bankruptcy relief were two provisions that have proved to be
problematic.
Recent developments in the subprime mortgage industry have
brought to light additional problems with the act. After being
lured into easy mortgage refinancing arrangements with teaser
interest rates, more and more American homeowners find they are
unable to make their monthly mortgage payments. As a result,
many attempt to enter into bankruptcy to minimize the risk of
losing their homes through foreclosure.
However, bankruptcy, which once served as a safety net for
the honest, but unfortunate debtor, has now become a minefield
of ``gotchas.'' According to a recent survey of bankruptcy
attorneys by the National Association of Consumer Bankruptcy
Attorneys, 81 percent agreed that it is more difficult for
people facing foreclosure to obtain bankruptcy relief since the
2005 act became law.
Let me give just one example. To satisfy the means test, a
chapter 7 debtor must now complete Official Form 22, this form
right here, that consists of 57 sections. This complex form
requires a debtor to supply extensive financial information and
supporting documentation. We are putting people through a
bureaucratic maze while they are trying desperately to regain
their financial footing.
I challenge my colleagues as homework this evening to see
how long it takes you to complete this form. I have looked at
it, and it looks substantially more difficult than our own
Federal employee disclosure forms.
So it is against this backdrop and with the benefit of 2
years having passed since the enactment of the 2005 act that we
look forward to hearing from today's witnesses.
To help us further explore these issues, we have a truly
notable witness panel. We are pleased to have former
Congressman Steve Bartlett, President of the Financial Services
Roundtable; Ms. Shirley Jones Burroughs; Mr. Henry Sommer,
President of the National Association of Consumer Bankruptcy
Attorneys; and Ms. Yvonne Jones, the Financial Markets and
Community Investment Director at the Government Accountability
Office, or GAO.
I now, at this time, would like to recognize my colleague
and Ranking Member, Mr. Cannon, the distinguished Member from
Utah, for any opening remarks he may have.
Mr. Cannon. Thank you, Madam Chair.
The Bankruptcy Abuse Prevention and Consumer Protection Act
of 2005 was signed into law by President George W. Bush on
April 20, 2005. The act represents one of the most
comprehensive overhauls of the Bankruptcy Code in more than 25
years, particularly with respect to its consumer bankruptcy
reforms. These consumer bankruptcy reforms include, for
example, the establishment of a means test, a mechanism to
determine a debtor's ability to repay debts; and the
requirement of that debt is that the consumer debtor receives
credit counseling prior to filing for bankruptcy relief. Most
of the act's provisions went into effect October 17, 2005.
This Subcommittee held a hearing in July 2005 to assess how
the executive order for United States Trustees and the Judicial
Conference were proceeding regarding the formation and issuance
of various rules, forms, guidelines, and procedures that were
required under the law. In addition, the Senate Judiciary
Committee held a hearing on the implementation of this law in
December of last year. The upshot of both of those hearings is
that, while it is a little too early to tell, there are some
indicators that the law may have had a dramatic, positive
effect on the American bankruptcy system.
For example, after the initial spike in personal bankruptcy
filings, there were almost 620,000 filings in the first 2 weeks
of October 2005. The number of filings has dropped to almost
20-year lows. The number of filings has gradually increased but
remains significantly below the pre-reform numbers.
Another major focus of the reforms was to get debtors who
can pay some of their unsecured loans, generally things like
credit card debt, to pay what they can afford under a chapter
13 bankruptcy. The post-reform numbers do show that chapter 13
bankruptcies form a larger share of personal filings than they
did at pre-reform. This is despite the fact that the Director
of the Executive Office of the U.S. Trustees stated, at least
at the bankruptcies conference, that only one half of 1 percent
of all chapter 7 bankruptcies are being converted to chapter 13
bankruptcies under the means test. That low number of
conversions may be reflected in the IRS methodology, which is
more generous to filers post-reform than it was pre-reform, but
again, data remains preliminary.
One interesting aspect of bankruptcy reform was the
requirement that filers obtain credit counseling before filing
for bankruptcy. This provision was put into place to educate
debtors about their options and to give them some sound money
management tools in the hopes that consumers would be able to
avoid bankruptcy and the black mark on their credit history, if
they could.
While a recent GAO study shows that the benefits of that
provision is disputed, there have been some salutary aspects.
For example, credit counseling services have essentially
obtained a new Federal regulator in the form of the U.S.
Trustees. GAO reports that the great majority of
representatives are consumer advocacy groups, Federal agencies,
industry participants, and other stakeholders.
Those we spoke with believe that credit counseling agencies
approved by the trustee program have been reputable. In
addition, no Federal or State law enforcement officials we
spoke with identified any Federal or State enforcement actions
related to consumer protection issues against any providers
subsequent to their approval.
While the data, the hard data, are not readily available,
the trustees report that nearly 10 percent of all credit
counseling certificates have gone unused, indicating that many
individuals may have been steered into alternative paths to
bankruptcy. If those numbers hold up, it would mean that almost
37,000 individuals were saved from bankruptcy from May to
October of last year alone. That is a significant achievement.
I would like to introduce a letter and a study into the
record by the American Bankers Association, the Consumer
Bankers Association, the Independent Community Bankers of
America, the Financial Services Roundtable, and the Mortgage
Bankers Association, among others.
Ms. Sanchez. Without objection, so ordered.
[The information referred to follows:]
Letter and study by the American Bankers Association, the Consumer
Bankers Association, et al., submitted by the Honorable Chris Cannon, a
Representative in Congress from the State of Utah, and Ranking Member,
Subcommittee on Commercial and Administrative Law
Mr. Cannon. Thank you, Madam Chair.
Ms. Sanchez. Thank you.
Mr. Cannon. That speaks to the importance of these
bankruptcy reforms.
Finally, the Subcommittee is intending to hold a series of
hearings on bankruptcy, and I would like to place on the record
two topics which I believe are worthy of discussion: first, the
need for more bankruptcy judges, which has been approved by the
House and has failed in the other body on several occasions;
second, the compensation of trustees in chapter 7 cases, who
are paid $60 per case regardless of the time it takes to
settle.
I thank you, Madam Chair. I appreciate your consideration.
I yield back the balance of my time.
Ms. Sanchez. I thank the gentleman for his statement.
Our honorable Chairman of the full Committee, Mr. Conyers,
who was here moments ago, had to leave for a memorial service.
So, without objection, I would like to enter his opening
statement into the record.
[The prepared statement of Mr. Conyers follows:]
Prepared Statement of the Honorable John Conyers, Jr., a Representative
in Congress from the State of Michigan, Chairman, Committee on the
Judiciary, and Member Subcommittee on Commercial and Administrative Law
It is no secret that I was strongly opposed to the bankruptcy
legislation signed into law two years ago. In my judgment, the bill
favored credit card companies and corporations over ordinary consumers;
it exposed women and children to major new debts; and it did little to
anything to crack down on abusive lending practices.
The bill's proponents asserted that it was a fair compromise that
only punished wealthy debtors. But the bill I saw appeared to give
creditors massive new rights to bring threatening motions against low
income debtors. It permitted credit card companies to reclaim common
household goods which are of little value to them, but very important
to the debtor's family, and made it next to impossible for people below
the poverty line to keep their house or their car in bankruptcy.
The bill's supporters argued it protected alimony and child
support. But the bill I reviewed seemed to create major new categories
of nondischargeable debt that compete directly against the collection
of child support and alimony payments; and allowed landlords to evict
battered women without bankruptcy court approval, even if the eviction
posed a threat to the woman's physical well being.
At the same time the legislation appeared to do little to
discourage abusive under-age lending, nothing to discourage reckless
lending to the developmentally disabled, nothing to regulate the
practice of so-called ``subprime'' lending to persons with no means or
little ability to repay their debts, and nothing to crack down on
unscrupulous pay-day lenders that prey on members of the armed forces.
Today, at long last, we begin the process of evaluating this bill
in cold hard light of day. We have asked the GAO to study many of these
issues that I have raised, and I hope we can use the hearing process to
further educate the Members about the real life impact of this
legislation.
Once we obtain the facts, we can consider what actions are needed
to relevel the playing field and allow hard working families the
opportunity to begin their lives again.
Ms. Sanchez. And without objection, other Members' opening
statements will also be included in the record.
Without objection, the Chair will be authorized to declare
a recess of the hearing.
I am now pleased to introduce the witnesses on our panel
for today's hearing. Our first witness, former Congressman
Steve Bartlett, is the President of the Financial Services
Roundtable. Mr. Bartlett served as a Member of Congress for the
Third District of Texas from 1983 to 1991 and as Mayor of
Dallas, Texas, from 1991 to 1995.
Our second witness is Shirley Jones Burroughs. Ms.
Burroughs is a resident of Gastonia, North Carolina, and has
recently participated in the chapter 13 filing process.
Our third witness is Henry Sommer. Mr. Sommer is the
President of the National Association of Consumer Bankruptcy
Attorneys and a member of the National Bankruptcy Conference.
Mr. Sommer is also the supervising attorney at the pro bono
Consumer Bankruptcy Assistance Project in Philadelphia and is
Editor in Chief of ``Collier on Bankruptcy'' and the entire
Collier line of bankruptcy publications.
Our final witness is Yvonne Jones. Ms. Jones is the
Director of the Financial Market and Community Investment Team
at GAO. Prior to joining GAO in 2003, Ms. Jones worked at the
World Bank, developing projects in the education sector in East
Asian countries, assisting sub-Saharan African countries to
reduce their commercial bank debt levels and help design
financial restructuring programs in Eastern and Central Europe
and the former Soviet Union.
I thank all of you for your willingness to participate in
today's hearing. Without objection, your written statements
will be placed into the record in their entirety, and we would
ask that you limit your oral remarks to 5 minutes.
You will note that we have a lighting system that starts
with a green light. At 4 minutes, it will turn yellow to warn
you that you have a minute to wrap up, and then at 5 minutes,
it will turn red. If you do notice that the light turns red, we
would appreciate your best efforts to try to quickly wrap up
your testimony.
After all of the witnesses have presented their testimony,
Subcommittee Members will be permitted to ask a round of
questions, subject to the 5-minute rule.
Mr. Bartlett, will you please now proceed with your
testimony.
TESTIMONY OF MR. STEVE BARTLETT, PRESIDENT AND CEO, FINANCIAL
SERVICES ROUNDTABLE, WASHINGTON, DC
Mr. Bartlett. Thank you, Madam Chair and Ranking Member
Cannon and Members of the Committee. It is a pleasure to be
here. My name is Steve Bartlett. I am the President and CEO of
the Financial Services Roundtable.
I do appreciate this Committee holding this oversight
hearing. There is much to be learned about the bankruptcy
reform law, and this Subcommittee helps us to understand it. I
have attached several attachments to my statement, and I would
ask that they be included in the record.
Ms. Sanchez. Without objection, so ordered.
Mr. Bartlett. Madam Chair, bankruptcy reform is still new.
It was passed 2 years ago, as you noted, by overwhelming
bipartisan support; and our organization has been quite
involved in the implementation of it.
So far, from the perspective of the American consumer and
the economy, the new bankruptcy reform law is working quite
well. Bankruptcy filings are down; more Americans than ever are
getting quality credit counseling, and as a result, consumers
have the opportunity to become better educated about financial
management.
A few statistics: Consumer bankruptcy filing rates have
dropped from an annualized rate of 1.5 million a year in the
previous 5 years down to, last year, 573,000. We think they
will normalize at around 700,000 to perhaps 800,000 a year. It
dropped by about half.
Second, more consumers are choosing chapter 13 repayment
plans over chapter 7, and that is as the law intended.
Third is counseling. We have conducted some surveys of the
certified counselors, and our estimates are that about 57,000
traditional credit counseling sessions were occurring per month
prior to the law, and that is now a total of 148,000 per month,
so it, roughly, tripled as to the number of counseling
sessions.
Now, recall that the principal policy objective of
bankruptcy reform was the following: that people with above-
median, income who can repay some or all of their debts, ought
to do so while making chapter 7 bankruptcy a relief available
to those who cannot. That was the intent, and that is what is
happening.
Bankruptcy reform has also strengthened the ability of
homeowners to use chapter 13 to stop foreclosures and to catch
up on past-due mortgages. Several reforms were made on that.
That is the intent of chapter 13; that is one of the outcomes.
In these difficult times of an increased foreclosure rate, that
is what is happening.
Third, credit counseling is now more readily available and
is quality credit counseling. As the GAO report noted on credit
counseling, the credit counseling reinforces the potential for
good coming from the new law's credit counseling mandates.
According to the GAO, the Justice Department has generally
done a good job in weeding out potential bad actors among
counselors. We, in our industry, found that there was a large
need which, frankly, we had not expected that is being filled,
and that is the certification process of being able to certify
the quality, nonprofit, good-guy counselors from the others.
There have been few complaints, if any, that I know of
about competency of approved counselors. More consumers are
getting better counseling and financial education than ever
before. In fact, the Justice Department estimated that about 10
percent of consumers who get prebankruptcy counseling do not
file for bankruptcy.
Now, as an industry, we are working to build on the law
mechanisms to reach consumers sooner rather than later. We
think that credit counseling can live up to its full potential
better if we bring people in earlier for earlier counseling. We
have instituted MyMoneyManagement.net over the Internet as a
way of reaching consumers at the earliest indications that they
have difficulties.
We have also instituted a program called ``Hope'' in which
we reach out to homeowners who own mortgages, borrowers or
homeowners, to say, ``At the earliest signs of trouble, please
call. We will work with you. We will work with the lenders by
using independent counselors to try to settle the situation and
to try to prevent foreclosing.''
Counseling is good; earlier counseling is better than later
counseling, and certified counselors are essential to the
process. These agencies that have been certified are doing a
good job. They are reaching out to consumers. We are getting no
complaints. In fact, these agencies are quite beneficial to the
American consumer. We are better off for the efforts of these
agencies. They are on the front lines. They bear the heavy
load.
Based on the reports that we received from the approved
agencies, these agencies are working as Congress had intended.
They are waiving counseling fees for those who cannot pay. Our
reports indicate about 22 percent of those who come in for
counseling have the fee waived. The fee itself is nominal, an
average of about $50.
Now, much of the attention has been focused on
prebankruptcy counseling, and I think the GAO did note, as did
my stop sign, that it is time to stop.
Madam Chair, may I conclude with several points?
The bankruptcy reform legislation passed by the House by
wide bipartisan margins is working. It is working for the
consumer and the economy. Those who have need have access, full
access, to bankruptcy; and above-median-income people who can
repay a portion of their debts do so. Bankruptcies are down;
credit counseling is up.
We urge you to continue to give the law a chance to work
with adequate oversight.
Ms. Sanchez. Thank you, Mr. Bartlett.
[The prepared statement of Mr. Bartlett follows:]
Prepared Statement of Steve Bartlett
summary of testimony
Good morning, Madam Chair and Ranking Member Cannon, my name is
Steve Bartlett and I am President & CEO of The Financial Services
Roundtable. Thank you for inviting me to participate in this hearing to
examine the implementation of Public Law 109-8, the bankruptcy reform
statute that was signed into law two years ago.
I have several attachments to my statement and I would ask that
they be included in the record.
The Financial Services Roundtable represents 100 of the largest
integrated financial services companies providing banking, insurance,
and investment products and services to the American consumer. Our
companies account directly for $65.8 trillion in managed assets, $1
trillion in revenue, and more than 2.4 million jobs.
The American consumer is the lifeblood of the economy and it is in
the best of interests of Roundtable member companies to have well-
educated consumers who manage debt prudently. With such breadth and
debt, Roundtable members are in a good position to assess impact of
legislative changes such as bankruptcy reform.
Bankruptcy Reform is still new. So far, from the perspective of the
American consumer and the economy, the new bankruptcy reform law is
working quite well. Bankruptcy filings are down, more Americans than
ever are getting credit counseling and, as a result, consumers have the
opportunity to become educated about prudent financial management. Let
me cite some statistics to demonstrate my point:
consumer bankruptcy filing rates have dropped
dramatically to 573,203 in 2006 from an average annualized rate
of 1.5 million for the prior 5 five years; private sector
estimates for 2007 range from 500,000 to 800,000 consumer
bankruptcies
more consumers are choosing Chapter 13 repayment
plans over Chapter 7 than under the old law; 27.5% consumer
elected Chapter 13 under the old law or as compared to 35-40%
under the new law who select Chapter 13 under the new law
there were 1,230,195 total credit counseling sessions
at Justice Department-accredited agencies as of March, 2007,
compared to an average of 57,087 total counseling sessions per
month for 2005, the year before bankruptcy reform
These numbers indicate that the means-test and the pre-bankruptcy
credit counseling mandate are working. Recall that the principal policy
objective of bankruptcy reform was to say that people with above-median
income who can repay some or all of their debts ought to do so while
leaving in place bankruptcy relief for those who really need it. That
seems to be happening under the new law.
In addition, bankruptcy reform has strengthened the ability of
homeowners to use Chapter 13 to stop foreclosures and catch up on past
due mortgages. Even prior to the reform law, Chapter 13 was often used
by consumers to save their home. Now, if mortgage lenders misapply
mortgage payments in a Chapter 13 plan, they can be subject to punitive
damages. As lenders adjust to this new requirement, Chapter 13 will be
an even better option for saving the family home.
One major result of bankruptcy reform is increased credit
counseling, which educates consumers. Credit counseling can help keep
consumers from getting into financial trouble and, for those consumers
for whom bankruptcy is an appropriate option, credit counseling keeps
consumers out of financial trouble in the future.
In fact, the Department of Justice has estimated that 10% of
consumers who get pre-bankruptcy counseling do not file for bankruptcy.
This means that counseling is important and meaningful for some
consumers, even if there is anecdotal evidence that it may not help
others. Counseling is widely available from numerous sources through
multiple channels-in-person counseling, telephone counseling and
Internet counseling. To the extent that the counseling program could be
made to work better for more consumers, we should do so. It would be a
mistake to cut consumers off from financial education. We think the
number of consumers who decide not to file for bankruptcy could be
higher. Industry is working to build on the law to reach consumers much
sooner in the financial cycle so that credit counseling can live up to
its full potential. If consumers wait until they are completely
underwater, counseling may not live up to its full potential. At the
Roundtable, we have started mymoneymanagement.net as a way of providing
consumers early access to quality credit counseling. In addition, we
have instituted a program called HOPE to help homeowners and mortgage
lenders negotiate win-win solutions when a mortgage becomes past due.
The non-profit counseling agencies have stepped up to the plate to
make bankruptcy reform work. They applied to become certified agencies
and promised to live by the ethical requirements established by the
Justice Department. As the GAO noted, there have been few, if any,
complaints about DOJ approved agencies. They perform a valuable public
service by providing financial management advice to consumers and the
lending industry is pleased they choose to participate in the pre-
bankruptcy counseling process.
We are all better off for the efforts of these agencies. They are
on the front lines and bear the heavy load. Based on the reports we
have received from most of the approved agencies, it seems clear these
agencies are acting as Congress intended. For instance, they are
waiving counseling fees for those who can't pay. According to our
statistics, counseling fees were waived for 22% of counseling sessions.
And fees are relatively modest. At the Roundtable, the lending industry
created a grant program to support credit counseling approved agencies,
of which there are 157.
The credit lending industry has also created a website--
mymoneymanagement.com--which guides consumers to DOJ-approved agencies.
Some of our member companies are already directing customers to this
site as soon as they show signs of financial difficulties to assist
consumers earlier in the process.
It is important to understand that Justice Department certification
is a significant enhancement for the quality of credit counseling
available to consumers. There has not been a governmental ``seal of
approval'' that identifies quality agencies before. Also, the increased
attention around bankruptcy reform and credit counseling seems to have
driven up demand for credit counseling.
While much of the attention has focused on pre-bankruptcy
counseling, post-bankruptcy educational counseling is immensely
important as well. This counseling comes at a very important time for
the average consumer. The consumer, having filed for bankruptcy, will
be ready to learn new financial skills.
The Roundtable believes that counseling requirements could be
improved by regulations. In a comment letter, we suggested that pre-
bankruptcy certificates should be valid for one year, rather than
merely 6 months, to allow consumers more time to consider alternatives
to bankruptcy. The Roundtable submitted a letter to the Department of
Justice detailing regulatory changes and I have attached that letter to
my statement. The Roundtable has also joined with the Consumer
Federation of America and a leading counseling trade association
proposing consensus recommendations for regulatory changes to make the
system work for all stakeholders--lenders, borrowers and counselors.
The Roundtable strongly believes each issue can be addressed
through regulatory implementation strategies designed to further
Congressional intent.
Prior to enacting Public Law 109-8, Congress had not reformed
bankruptcy laws since 1978. We need to let the law mature before
understanding its real impact.
Congress did the right thing for consumer and the economy in
passing bankruptcy reform; now it's time to make sure that this
legislative success is implemented correctly. Time will tell if the
major consumer protection provisions in bankruptcy reform will work as
intended. Under the new law, mortgage lenders can be subject to
punitive damages for misconduct in Chapter 13 cases. And unsecured
lenders have to consider voluntarily reducing balances or take
increased losses in bankruptcy. And single moms and custodial parents
have much-enhanced access to the assets of people who owe child
support. Finally, the Federal Reserve is now engaged in a rulemaking
process to improve the quality of financial disclosures made to
consumers. When Congress voted for bankruptcy reform, Congress voted
for these crucial consumer protections.
However, there are implementation challenges. For instance, as will
be discussed in my full statement, the forms being produced by the
Judicial Conference have the potential to disrupt the means-test by
allowing debtors to claim deductions for non-existent expenses, for a
car they do not own, for example. Bankruptcy reform was surely not
intended to allow above-median income debtors to escape repayment by
deducting expenses they don't actually have. We feel that this issue,
as well as any others, should be addressed through the rulemaking
process.
In conclusion, I would make several points. The bankruptcy reform
legislation passed both the House and the Senate by wide, bi-partisan
margins. The new law is working for the consumer and the economy. Those
in need still have full access to bankruptcy and above median income
people who can repay a portion of their debts do so. Bankruptcies are
down; quality credit counseling is up; consumers have access to better
information about financial management. What we need now is careful,
bi-partisan oversight.
I thank the Subcommittee for conducting this hearing, and I am
grateful for this opportunity to testify. I look forward to answering
your questions.
__________
ATTACHMENT
TESTIMONY OF STEVE BARTLETT
Good morning, Mr. Chairman and Ranking Member Schumer, my name is
Steve Bartlett and I am President & CEO of The Financial Services
Roundtable. Thank you for inviting me to participate in this hearing to
examine the implementation of Public Law 109-8, the bankruptcy reform
statute that became effective on October 17, 2005. I would also like to
express my appreciation to the Department of Justice for providing
leadership in implementing the provisions of Public Law 109-8.
Mr. Chairman, I have several attachments to my statement and I
would ask that they be included in the record.
the financial services roundtable
The Financial Services Roundtable represents 100 of the largest
integrated financial services companies providing banking, insurance,
and investment products and services to the American consumer. Member
companies participate through the Chief Executive Officer and other
senior executives nominated by the CEO. Roundtable member companies
provide fuel for America's economic engine, accounting directly for
$50.5 trillion in managed assets, $1.1 trillion in revenue, and more
than 2.4 million jobs. As you might imagine, Roundtable members are in
a pretty good position to assess impact of legislative changes such as
bankruptcy reform.
overview of implementation and macroeconomic perspective on reform
Mr. Chairman, at least since the turn of the twentieth-century, the
American people have always had access to bankruptcy when overwhelmed
and unable to repay their debts. This is as it should be. There is no
reason to force people to toil under the burden of debts they can never
repay. For this reason, we have had a ``fresh start'' enshrined in our
bankruptcy laws since 1898. During the Great Depression in 1930s,
Congress created voluntary repayment plans as an alternative to
straight liquidation.
However, as originally envisioned, straight liquidation under
Chapter 7 was meant to be a last resort for people with no ability to
pay. Congress continued America's progressive tradition by enacting
Public Law 109-8 to channel higher income consumers into repayment
plans while permitting the truly destitute and the poor to go into
straight liquidation. The Roundtable supports both the letter and
spirit of these important reforms.
Mr. Chairman, to provide a quick explanation of how the new law is
being implemented, I would say the sense of the Roundtable member
companies is that the law is working well and consumers as well as the
economy are benefiting.
The number of bankruptcy filings has plummeted since 2004 and 2005.
Some of this was certainly due to people rushing to file under the old
law. Our companies and most analysts who have looked at the situation
believe the drop off in filings is due to more than just people filing
in 2005 to beat the new law.
We agree with those in Congress who have recently pointed out that
losses to the economy that result from bankruptcy filings slow economic
growth to some extent. When a business--any business, large or small--
loses money because a customer files for bankruptcy, the business often
has to increase what it charges other customers. I would submit that
this is not good for consumers or the economy.
I know that some, including Senator Grassley who sits on this
Subcommittee, have considered the effect of Public Law 109-8 and have
put the total costs savings to the American economy at around $60
billion. Reduced losses of this size are a positive for the economy.
This leads me to my first question I would identify for the
Subcommittee: How has bankruptcy reform affected the American economy?
The answer to that question will take a cumulative effect over the next
few years, but it is an important question to ask.
The low rate of consumer bankruptcies presents other significant
questions for the Subcommittee as it tries to assess the success or
failure of Public Law 109-8.
Is the infrastructure in place to handle a surge in
filings; specifically, are there enough certified credit
counselors?
Does the Department of Justice have enough resources
to implement the means test?
I don't know the answers to these questions yet. I would, however,
urge diligent monitoring of the implementation of the new law to ensure
there are adequate resources available to make the system work.
credit counseling
I would also like to mention the potential for social and economic
good coming from the pre-bankruptcy credit-counseling mandate. As the
Subcommittee knows, in order to file for bankruptcy under the new law,
a consumer must first get a certificate from an approved counseling
agency attesting to the fact that the consumer has completed a
counseling session. A certificate is good for 6 months. And, prior to
receiving a discharge of debt, a consumer must undergo another
counseling session designed to teach on-going financial skills.
The Department of Justice has publicly stated that they believe
around 10% of the pre-bankruptcy certificates issued have not been used
yet. This is a positive sign. But I think we can do better.
The industry funded a ``no-strings-attached'' grants program for
every approved agency that sought a grant. There are 153 approved pre-
bankruptcy counseling agencies and another 275 agencies have been
approved to provide post-bankruptcy educational counseling.
These non-profit agencies, both NFCC and AICCA agencies, perform a
valuable public service by providing financial management advice to
consumers and we are pleased they choose to participate in the pre-
bankruptcy counseling process. Based on the reports we have received
from over 70% of approved agencies, it seems clear these agencies are
acting as Congress intended. For instance, we believe they are waiving
counseling fees about for those who can't pay. In October, 2006, fees
were waived for 22% of counseling sessions. And fees are relatively
modest at about $36 per session.
In addition, there has been a dramatic increase in traditional
credit counseling sessions this year as compared to last year, which
may be linked to the new law. I have attached to my statement a report
prepared for the Roundtable that discusses what most approved
counseling agencies are telling us about the situation on the ground.
One difficulty the Roundtable has identified is how to get to
consumers sooner in the financial cycle. If we just wait until
consumers are completely ``under water,'' it may be that the counseling
mandate will not live up to its full potential. To make counseling more
effective, the Roundtable has created a website--
mymoneymanagement.com--that refers consumers to DOJ-approved agencies
for credit counseling before they are considering bankruptcy. In fact,
some of our member companies are now directing their customers who fall
behind in payments to this website so those consumers can get help
earlier. All of us in the responsible lending community hope this will
help consumers sooner, to the benefit of everybody.
I have one final note on credit counseling. As can be seen in my
attachment, the Roundtable has received scattered reports that
bankruptcy attorneys have been seeking to blunt the effect of the
counseling mandate by steering clients to agencies they consider
``friendly.'' We have been told by counseling agencies that in some
cases attorneys pay directly for the counseling services. I would
suggest to the Subcommittee that these business practices, if they
continue, could erode the significant potential consumer benefits of
pre-bankruptcy counseling. I am aware that members of the Subcommittee
have written a letter to the Deputy Attorney General about one specific
agency and the Roundtable applauds this oversight initiative.
the means test
In addition to credit counseling, one of the centerpieces of
bankruptcy reform was the means test. In this regard, I would make
several observations to the Subcommittee. The good news is that during
the last year, the number of objections to the means-testing filed in
court has been modest. The Department of Justice is diligently
implementing the means-test.
In addition, to date, no creditor has filed a means-test objection
as it has the right to do under the new law. I think this is so in part
because higher income debtors are either skipping bankruptcy or are
self-selecting to go into Chapter 13. Thus, there is no evidence at all
to support the fears expressed by some before enactment of Public Law
109-8 that creditors would use this new right inappropriately.
The Subcommittee should know that one positive effect of the new
law which I attribute to the means test is an increase in the number of
Chapter 13 cases relative to Chapter 7 cases. It seems as if more
consumers are opting for Chapter 13 in light of the new law. This is
certainly a positive trend and one of the major goals of the
legislation.
The final point I would make regarding the means-test involves the
Judicial Conference rule making process. In particular, I would call
the Subcommittee's attention to the fact that the forms created to
measure repayment capacity to implement the means test seems to allow
debtors to calculate repayment ability by deducting for expenses they
don't actually have. For instance, consumers are directed to deduct an
expense for owning a car even if they don't own one.
The Roundtable believes that this creates an inaccurate measure of
repayment ability. The means test was designed by Congress to
accurately measure repayment ability; allowing debtors to deduct
phantom expenses is not consistent with Congressional intent. I have
attached to my statement a letter submitted by associations commenting
on the Interim Rules and making this point.
constitutional challenges to public law 109-8
Mr. Chairman, the very full legislative record developed by
Congress before the enactment of Public Law 109-8 focused on the manner
in which debtor attorneys were responsible for abuses of the system. I
certainly would never want to paint all attorneys as corrosive to the
bankruptcy process. I know there are many well-intentioned and serious
attorneys who represent consumers considering bankruptcy in an
appropriate way. But, as the hearing record makes clear, there were
bankruptcy mills that simply processed consumers without providing
meaningful legal advice or looking out for the best interests of
consumers. The Federal Trade Commission even issued a warning to the
public about deceptive advertising by attorneys.
Congress sensibly reacted by imposing disclosure requirements on
attorneys and prohibiting them from advising consumers to defraud
creditors. These consumer protections were designed to help consumers
by giving them full access to all the information they need to make
informed choices.
So, it is with some concern that I must call the Subcommittee's
attention to a lawsuit filed in Connecticut to have these consumer
protections declared unconstitutional. The plaintiffs in this case
believe that attorneys have a right under the Constitution to deceive
the public or hide information from clients or advise consumers to
commit fraud by running up debts just before filing for bankruptcy to
game the means-test.
The Justice Department is aggressively litigating on the other side
of the issue. However, if these consumer protections are invalided by
judges, I hope Congress can find some way to protect unwary and
unsophisticated consumers from the kinds of deceptive practices the
Federal Trade Commission warned about.
conclusion
In conclusion, I would make several points. The Roundtable
supported bankruptcy reform and was pleased to see the legislation pass
both the House and the Senate by wide, bi-partisan margins. The new law
seems to be working for the consumer and the economy. It is working
better than anticipated--those in need still have full access to
bankruptcy and upper income people seem to be skipping bankruptcy or
opting for repayment plans. Bankruptcies are down; more Americans are
getting quality credit counseling; consumers have access to better
information about financial management. What we need now is careful,
bi-partisan oversight.
I believe that Public Law 109-8 has the potential to be of
continuing great benefit to consumers and to the economy. As I said at
the beginning of my testimony--``so far, so good.'' The work of the
Congress is not over. There are challenges and surely there will be
unforeseen bumps in the road. I thank the Subcommittee for conducting
this hearing, and I am grateful for this opportunity to testify. I look
forward to answering your questions.
Ms. Burroughs, will you now proceed with your testimony.
TESTIMONY OF SHIRLEY JONES BURROUGHS, GASTONIA, NC
Ms. Burroughs. Well, I am here today because I had to file
bankruptcy due to, I guess, just not knowing what everything
was that was in the contract when I first signed. I know there
is no law to excuse not reading everything in a contract, but
when we got to the closure, it was just not what I expected.
You wanted to get it over with; you just rush and you sign
papers.
I did not get, you know, anyone to explain what half the
meanings of the documentations were. And then, when you cannot
make payments, it is just a hard thing because you have no one
to really explain what you did not do. And that is why I am
here today, to try to help someone else.
Ms. Sanchez. You are talking, of course, about the closing
on a house that you purchased----
Ms. Burroughs. Right.
Ms. Sanchez [continuing]. and the documentation that was
required for that?
Ms. Burroughs. Correct.
Ms. Sanchez. Can you tell us just a little bit about how
that sort of put you into the circumstance of having to
consider bankruptcy as an option?
Ms. Burroughs. Just the fact that, you know, the payments--
we had to refinance a couple of times because--due to the fact
of my husband's losing income and that I lost my job at once.
And we just had to refinance to try to stay on top of things,
and refinancing was only making the rates go up instead of
lowering the rates, and it just got to a point where, you know,
what do we do?
Ms. Sanchez. As a result of not being able to make the
payments, you considered bankruptcy as an option?
Ms. Burroughs. Correct.
Ms. Sanchez. Can you tell us a little bit about how you
came to consider that as an option and what you decided to do,
ultimately?
Ms. Burroughs. In November, I think it was, as a last
resort, we decided, you know, we could not just keep not
paying. We had to find an option. So we decided to file for
bankruptcy and try to make things--you know, we wanted to make
payments, but we knew we was just falling behind.
Ms. Sanchez. Did you consult with somebody before you
decided to enter the bankruptcy process?
Ms. Burroughs. We did not consult with anyone. We found
Attorney Wayne Sigmon, and I think we went to the Internet, and
we found him, and we met him in court on the day of
foreclosure, and we went through all the options with him. My
husband did, anyway.
Ms. Sanchez. And was your decision to enter into bankruptcy
sort of your attempt to save your home?
Ms. Burroughs. It was.
Ms. Sanchez. Okay.
Do you feel that the process that you went through in terms
of buying your house, you know, the folks who did the financing
for the house--do you feel they explained things adequately or
honestly and gave you an assessment of what your payments would
look like in the future?
Ms. Burroughs. No. Because when we went in--you know, our
mortgage has changed so much. I mean, I think the mortgage has
changed three times with new buyers and, you know, refinancing
with different companies. It was just getting out of control.
We never knew what to expect with payments, and it just was out
of control.
Ms. Sanchez. Have you found the bankruptcy process to be an
easy, straightforward, and clear process for you?
Ms. Burroughs. No, it was not easy. I mean, it is a lot of
paperwork. But you do what you need to do. It is less stressful
now, going through, you know, knowing I can make a payment, and
everything is okay.
Ms. Sanchez. So how have your payments changed since going
through the bankruptcy process?
Ms. Burroughs. I think we are making payments around,
maybe, $2,000, I will just say, for the second and first
mortgage all together. The payments went down at least $1,000,
and they decreased even more since my husband has been placed
on active duty, so----
Ms. Sanchez. Okay. Thank you so much for your
participation. I am sure other Members of the panel will have
questions for you. Thank you again, Ms. Burroughs.
[The prepared statement of Ms. Burroughs follows:]
Prepared Statement of Shirley Jones Burroughs
I am Shirley Jones Burroughs and I reside in Gastonia, North
Carolina with my husband and two children, ages 16 and 19. My husband
and I have worked all our lives to provide for our family. My husband
is a truck mechanic and I work for an insurance company. We purchased
our home in December, 1999. Our joint gross income for 2004 was
$92,745.00 including $5,931 we withdrew from our retirement plans to
make debt payments. In 2005 our gross income was $74,288.00 for my
husband and $23,392.00 for me. In 2006 our gross income was
$55,681.01for my husband, $28,220.00 for me, and $4,270.00 withdrawal
from his retirement. We hated to dip into our retirement savings, but
we were trying to keep up with our debts and avoid bankruptcy.
When we purchased our home, we entered into a first mortgage with
Homecomings Mortgage and a second mortgage with EMMCO THE MORTGAGE
SERVICE STATION INC., which was assigned to Associates Financial
Services of America, Inc. (``Associates''). In March, 2000, and
approximately four months after we purchased our residence, Associates
contacted us and offered to refinance our mortgages. They stated that
we could lower our payments through refinancing and consolidate all of
our debts.
On March 30, 2000 we refinanced both mortgages through Associates.
Our new first mortgage in the sum of $109,730.75 was used to pay the
balance due to Homecomings Mortgage of $91,808.19 and the balance due
to Associates of $16,374.12. The second mortgage in the sum of
$10,199.98 was used to pay other debts including $2,888.55 to American
General and $6,396.21 to CitiFinance. We received no cash proceeds from
the refinancings. The new first mortgage payment was $1,170.22 per
month with interest at 12.49 percent per annum and the new second
mortgage payment was $214.37 with interest at 18 percent per annum.
On June 29, 2001 we again refinanced our second mortgage with
CitiFinancial Services, Inc., (formerly Associates). In this
refinancing our new loan amount was $9,990.24 with an Annual Percentage
Rate of 15.45 percent. Our first payment was $184.86, and then we had
29 scheduled payments of $179.94 and then 90 more scheduled payments of
$153.07. To my knowledge, we received no cash proceeds from this
refinancing.
On August 16, 2002 we once again refinanced our two mortgages with
CitiFinancial. These refinancings were done upon CitiFinancial's
promise that our monthly payments would be reduced. In the 2002 first
mortgage we financed $113,938.76 with interest at an annual percentage
rate of 11.95 percent, a first payment of $1,621.41 and 359 payments of
$1,167.57. $113,630.87 of the cash proceeds of this loan were paid to
CitiFinancial. In the 2002 second mortgage we financed $10,350.57 with
interest at an annual percentage rate of 14.61 percent payable in 30
scheduled payments of $186.43 and then 90 more scheduled payments of
$150.11. The cash proceeds of this second mortgage refinancing went to
payoff the June 29, 2001 CitiFinancial second mortgage. Again, we
received no cash proceeds from either refinancing. All of the amounts
added to our mortgages went to the fees and charges in the multiple
refinancings.
In 2006 we began to fall behind in our mortgage payments to
CitiFinancial mainly because I was unemployed for some time. On
November 22, 2006 CitiFinancial commenced a foreclosure proceeding in
the State Court to foreclose upon the first mortgage. The foreclosure
sale date was scheduled for January 24, 2007.
After exploring available options to try to save our home from
foreclosure, we found that our only real option was to file a Chapter
13 bankruptcy case. Through the Internet, we found our bankruptcy
attorney, Mr. Wayne Sigmon. He explained that we could file a Chapter
13 case and cure the payment arrears on the first mortgage to
CitiFinancial in monthly court payments over a 60 month period while
continuing to make our regular monthly payments due to CitiFinancial
after the filing of our bankruptcy case directly to CitiFinancial. As
to the second mortgage, he advised that we could ``lien strip'' the
second mortgage through a lawsuit he would file in our bankruptcy case
against CitiFinancial since the market value of our residence was less
than the principal balance due upon the first mortgage. In this way the
second mortgage would no longer be a lien upon our residence and the
balance due would be treated as unsecured debt in our Chapter 13 case.
Our Chapter 13 case was filed on January 22, 2007. Our plan called
for monthly payments to the Chapter 13 Trustee of $1,050.00 plus direct
payments to CitiFinancial ``outside of the plan'' of $1,160.00. These
payments were feasible because our combined monthly net income was
$4,332.64 which consisted of $3,132.65 from my husband's job and
$1,200.00 from my unemployment compensation.
In our Chapter 13 case we scheduled CitiFinancial's first mortgage
arrears to be $5,800.00 which was 5 monthly payments of $1,160.00 each.
We scheduled the outstanding principal balance to be $132,802.53. Both
of these figures came from monthly statements we had received from
CitiFinancial. At our Chapter 13 meeting of creditors, we were shocked
to learn that CitiFinancial filed a proof of claim in our case alleging
that the first mortgage arrears as of our Chapter 13 filing date were
$14,789.03 and that the total balance due is $135,218.81. A copy of
this proof of claim is attached hereto as Exhibit ``A''. Obviously, if
our arrears are $14,789.03, our Chapter 13 payments will increase
significantly. Our attorney advised us that mortgage servicers often
inflate claims in Chapter 13 cases and that he would review the
documents and file a formal objection to this claim.
Our attorney has now reviewed our CitiFinancial mortgage documents
and he has objected to the proof of claim. He has advised that our
mortgage is a classic example of predatory mortgage lending. The
mortgage interest is compounded on a daily rather than monthly basis.
This is why we now owe somewhere between $132,000 and $135,000 on the
mortgage while the original amount financed was $113,938.76. He advised
that he has seen this type of interest computation in numerous
CitiFinancial mortgages. Attached hereto as Exhibit ``B'' is an
amortization schedule that shows how our mortgage balance would have
been reduced if our loan had interest compounded monthly rather than
daily. To my knowledge, we were never warned by CitiFinancial about the
possibility that we would make numerous payments on our loan and still
owe substantially more than we borrowed.
Our attorney has also advised that our mortgage contains an
arbitration provision. CitiFinancial never explained to us how an
arbitration provision works and I had never even heard of arbitration
until my attorney brought it to my attention.
On March 22, 2007 my husband, a member of the Army reserve, was
called to active duty and he has been deployed to Iraq. His net monthly
military pay after taxes is $1,141.75 so that our combined monthly
income has dropped from $4,332.64 to $3,024.27, a difference of
$1,307.97 per month. With this decrease in income, I cannot afford to
make both my Chapter 13 Trustee payments and my monthly mortgage
payments to CitiFinancial. My attorney has filed a motion in the
bankruptcy court requesting that, pursuant to the Servicemembers Civil
Relief Act, the interest rate on our secured debts be reduced to 6
percent per annum while my husband is on active duty. If this motion is
allowed, my direct monthly payment to CitiFinancial should be $767.07
(Exhibit ``C'' hereto), plus a monthly payment upon the alleged
$14,789.03 arrears through the Trustee of $285.91 (Exhibit ``D''), and
an approximately 5% Trustee's commission on the arrearage payment
($14.29) for a total monthly payment to CitiFinancial of $1,067.27.
Even this payment will be a real struggle for us to make now that
we have reduced income and greater expenses due to my husband's service
in Iraq. If, as proposed by the consumer groups, the Bankruptcy Code
allowed us to reamortize the CitiFinancial mortgage at a 6 percent per
annum fixed rate over a thirty year term from the bankruptcy petition
date, even with CitiFinancial's alleged balance due of $135,218.81, the
payment would be $810.71 (Exhibit ``E''), a monthly savings of $256.56.
My children and I could dearly use this money to live on.
Ms. Sanchez. Mr. Sommer, will you please begin your
testimony.
TESTIMONY OF HENRY J. SOMMER, PRESIDENT, NATIONAL ASSOCIATION
OF CONSUMER BANKRUPTCY ATTORNEYS, PHILADELPHIA, PA
Mr. Sommer. Thank you, Madam Chair and Members of the
Committee. My name is Henry Sommer, and I am an attorney who
specializes in bankruptcy and consumer law matters. For over 32
years, I have represented families and individuals in
Philadelphia who have sought my help with serious debt
problems, often involving foreclosure.
I am President of the National Association of Consumer
Bankruptcy Attorneys, and I am testifying today on behalf of
our 2,700 members. I would like to address my testimony to two
principal topics: one, how the 2005 amendments have impacted
consumer debtors, and two, how the bankruptcy laws should be
amended to give homeowners a more effective remedy to deal with
the foreclosure crisis our Nation is now facing.
In answering the fundamental question posed by this
hearing, I would say that the 2005 amendments to the Bankruptcy
Code are not protecting consumers; they are hurting consumers.
To call this a ``consumer protection act'' is a classic example
of George Orwell's ``Newspeak.'' In fact, it is widely
recognized as one of the most anticonsumer pieces of
legislation ever passed by Congress.
The amendments were premised upon allegations that there
was widespread abuse in the consumer bankruptcy system and that
many who filed chapter 7 bankruptcy cases could afford to pay a
significant portion of their debts. The reality is, this was
never true, and the experience since the effective date of the
amendments has borne that out. Very few debtors, only about one
half of 1 percent, have been charged with abuse under the
bill's vaunted means test, even though its threshold of abuse
is very low. A debtor can be charged with abuse if a debtor is
deemed able to pay as little as $100 a month toward her debts
or deemed able to pay only a tiny percentage of what is owed.
Not surprisingly, we have seen no trace of the $400-to-$550
benefit which the bill's backers promised would redound from
its passage to every household in the country. Indeed, abusive
credit card practices, including higher and higher late
charges, have only increased, at least until some companies
recently agreed to change a few of those practices while
testifying at hearings in this new Congress.
The biggest impact of the new law has been the enormous
increase in the cost and burdens of filing a bankruptcy case. I
doubt that it was the intention of even those who voted for the
bill to increase documentation requirements, bureaucratic
paperwork and other costs so much that honest, low-income and
working families, not the high rollers at whom the amendments
were supposedly aimed, are deterred or prevented from obtaining
the bankruptcy relief they need. But that is what has happened.
The filing fee has increased by 50 percent. There are new
fees for credit counseling and education which usually total
another $100, and there has been such a great increase in the
documentation required in every case that attorneys have had to
increase their fees at least 50 percent. Bankruptcy has gone
from being a relatively low-priced proceeding that can be
handled quickly and efficiently to being an expensive minefield
of new requirements, tricks and traps that can catch the
innocent and unsuspecting debtor.
There is simply no reason, especially in the cases of
lower-income debtors, that all of this extensive documentation
demanded by the amendments is necessary. Every consumer
bankruptcy attorney has had the experience of explaining these
requirements to prospective clients only to have the clients go
away discouraged and never return.
Every consumer debtor must obtain all payment advices for
the 60 days before the bankruptcy is filed, a tax return or a
tax transcript for the most recent year and sometimes
additional years. They must provide an attorney with
information detailing every penny of their income for the 6
months before the petition is filed; they must provide bank
statements to the trustee and evidence of current income. They
must attend a prepetition credit counseling briefing even if
their problems are unavoidable medical catastrophes and not
unwise spending. They must attend a financial management course
in order to receive a discharge.
Attorneys must complete numerous additional forms,
including a 6-page means test form that requires arcane
calculations about which there are many different legal
interpretations, and this is on top of the 20 or 30 pages of
forms that were already required in every bankruptcy case.
According to the United States Trustee Program, attorneys
must also provide clients with pages and pages of so-called
disclosures, many of which are irrelevant to the client's case
or inaccurate, which then requires additional time explaining
them. And trustees in some districts demand even more
documents. And if a consumer debtor is subject to an audit they
have to provide even more, including 6 months worth of income
documentation, 6 months of bank statements and an explanation
of each and every deposit and withdrawal from any account over
those 6 months. And the bankruptcy credit counseling
requirement is primarily yet another barrier to bankruptcy.
Even the credit counselors report that only 2 to 3 percent of
the perspective debtors they see can even contemplate a debt
management plan.
Now, most of this documentation is unnecessary, even to the
ostensible goals of the 2005 amendments. In the vast majority
of cases consumers are nowhere near the thresholds at which the
abuse provisions kick in.
Ms. Sanchez. Mr. Sommer, your time is expired, so if you
can conclude, and then we'll get back to you with questions.
Mr. Sommer. Well, let me just say that the second thing I
wanted to talk about was some amendments we proposed that would
help people facing foreclosure. We think the Bankruptcy Code
needs to be amended to deal with the new kind of mortgages, the
exploding ARMs that were not present in 1978 when chapter 13
was drafted. And the details are attached to my testimony.
Thank you.
[The prepared statement of Mr. Sommer follows:]
Prepared Statement of Henry J. Sommer
Ms. Sanchez. Thank you, Mr. Sommer, we appreciate your
testimony. And as I said, your written testimony will be
submitted fully for the record.
Ms. Jones, if you would please proceed.
TESTIMONY OF YVONNE D. JONES, DIRECTOR, FINANCIAL MARKETS AND
COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE,
WASHINGTON, DC
Ms. Jones. Madam Chairwoman and Members of the
Subcommittee, I appreciate the opportunity to participate in
today's hearing on the impact of the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005. My statement
focuses on the credit counseling and debtor education
requirements of the act and is based on our report that was
released last month.
The Bankruptcy Act requires individuals to receive credit
counseling before filing for bankruptcy and to take a debtor
education course before having their debts discharged.
According to the act's legislative history, a goal of the
prefiling credit counseling requirement is to ensure that
consumers understand the options available to them and the
consequences of filing for bankruptcy.
However, the requirement raised a number of concerns, in
part due to ongoing investigations of some practices in the
credit counseling industry, such as steering clients to
inappropriate debt repayment plans. Also, some Members of
Congress and others were concerned that the cost and
availability of counseling and education services could be
barriers to people wishing to file for bankruptcy.
Responding to those concerns, Congress required that
providers of credit counseling and debtor education meet
certain criteria and obtain approval from the U.S. Trustee
Program.
Overall, we found that the Trustee Program's process for
approving credit counseling and debtor education providers was
generally systematic and thorough. As of April 2007, the
Trustee Program had approved 159 credit counseling and 285
debtor education providers. Few formal complaints have been
made against these providers and Federal and State law
enforcement authorities with whom we spoke did not identify any
recent enforcement actions against them under consumer
protection laws.
And as of last month no credit counseling provider approved
by the Trustee Program had had its tax exempt status revoked.
However, the Internal Revenue Service told us it was examining
the tax exempt status for these providers. The Trustee Program
said it was carefully monitoring the situation.
We also found that the content of the credit counseling and
debtor education sessions generally complied with statutory and
program requirements. We did not find evidence that prefiling
credit counseling agencies discourage clients from filing for
bankruptcy. And very few clients appear to enter into debt
repayment plans administered by these agencies.
At the same time, however, we found that the value of the
credit counseling requirement is not clear. Anecdotal evidence
suggests that by the time most clients receive counseling their
financial situations are dire, leaving them with no viable
alternative to bankruptcy. The requirement for credit
counseling may thus be more of an administrative obstacle than
a timely presentation of meaningful options. Because there's
currently no mechanism for tracking the results of counseling
sessions it is difficult to assess how well the counseling
requirement is serving its purpose.
In our report we recommended that the Trustee Program
develop the capacity to track and analyze the results of the
prefiling counseling. The Trustee Program agreed with this
recommendation.
We also found that there was less debate about the debtor
education requirement. Most participants in the bankruptcy
process believed this requirement was beneficial.
Concerning fees, we found that consumers are generally
charged $50 or less per session, which industry observers and
consumer advocates generally believe to be reasonable. The
Bankruptcy Act requires that counseling be offered without
regard to a client's ability to pay, and evidence suggests that
fees are generally being waived as appropriate.
However, we found that providers' policies on fee waivers
varied. To help ensure that all providers waive fees as
appropriate, we recommended that the Trustee Program issue
formal guidance on what constitutes a client's ability to pay.
The program agreed with this recommendation and will begin
developing such guidance later this year.
Finally, we found that the number of approved counseling
and education providers appear sufficient to give consumers
timely access to these services. And although in-person
counseling and education sessions are not available in certain
parts of the country, this concern is somewhat mitigated
because the great majority of clients appear to be counseled by
telephone or via the Internet.
Accessing services in foreign languages has been a
challenge for some consumers. We found the Trustee Program is
taking steps to better communicate providers' language and
translation services. Currently, 64 credit counseling and 48
debtor education providers offer courses in Spanish, and two
large nationwide providers can hold sessions in up to 150
languages.
In conclusion, we found that within a limited time frame
the Trustee Program established policies and procedures for
selecting credit counseling and debtor education providers, and
thus far relatively few concerns have been raised about the
competence of approved providers.
Madam Chairwoman, this completes my prepared statement. I
would be happy to respond to any questions that you or other
Members of the Subcommittee may have.
[The prepared statement of Ms. Jones follows:]
Prepared Statement of Yvonne D. Jones
Ms. Sanchez. Thank you, Ms. Jones, for your testimony.
Before we begin the first round of questions there are
several documents that I would ask be admitted into the record
without objection. I would like to submit the National
Association of Bankruptcy Trustees' statement of President
Eugene Crane on the Second Anniversary of the Bankruptcy Abuse
and Consumer Protection Act.
[The prepared statement of Mr. Crane follows:]
Prepared Statement of Eugene Crane, President,
National Association of Bankruptcy Trustees
Madam Chair Sanchez, Ranking Member Cannon, and other distinguished
Members of the Subcommittee, let me thank you for the opportunity to
provide the views of our Association to your Subcommittee on this very
important subject.
The National Association of Bankruptcy Trustees (NABT) is an
organization of panel trustees, independent fiduciaries appointed in
every chapter 7 bankruptcy case. Of the approximate 1,200 such Trustees
nationwide, the vast majority are members of the organization. Our
organization carries out the major work involved in the bankruptcy
system, handling thousands upon thousands of cases each year. We
protect both debtors and creditors from abuse of the system.
We carry out important public policy priorities as directed by the
Congress, such as insuring that child support orders are enforced,
safeguarding patient health care needs and records, and protecting
pensions obligations. We help local, state and federal governments by
being one of the largest collectors of back taxes in the U.S.
In most chapter 7 cases, the Debtors never appear before a judge,
but are examined by the Trustees beginning with a review of the
petitions filed, and a hearing conducted by the Trustees to which
creditors may appear and participate. Many functions and required
performance duties are contained in the Bankruptcy Act and Bankruptcy
Rules and the Office of the United States Trustee (U.S.T.) Acts to
oversee the carrying out of such duties. The U.S.T. is a part of the
Justice Department.
The activities carried out are mandated by many provisions of the
law, rules and regulations, and are necessary and crucial to the
operation of bankruptcy. The Bankruptcy Abuse and Consumer Protection
Act , (the ``ACT'') effective October 2005, added many new and
different duties to the Trustee. Trustees have an obligation to secure
relief for honest but unfortunate debtors and to investigate filings
for abuse, wrongdoing and improper filings as well as to protect the
interests of all parties to a proceeding and, pursue and reduce to cash
all assets available to insure an equitable distribution of assets.
The NABT is committed to maintaining the effectiveness and fairness
of the system and to that end we believe there are several areas of the
law that Congress may want to look at with an eye toward
implementation, in appropriate instances, to allow trustees to
effectively perform their duties and achieve the intended legislative
purposes. Most importantly, adequate compensation will be needed to
insure continued operation by Trustees.
As with many complex and detailed new laws, some untested
provisions proved to be contradictory, burdensome and in some
instances, difficult or too elaborate to perform. NABT urges Congress
to promptly address and remedy the ACT's defects and unforeseen
consequences.
Let me discuss a few key aspects of the law and other key issues
related to the bankruptcy system.
act provisions
1. Notification of Child Support Claimants
Sec. 704(a)(10) of the ACT imposes a new notice requirement
mandating service of notices at filing and at discharge to all agencies
and persons to whom a support obligation is due. NABT is at work
developing methods to implement the new Sec. 704(a)(10), through which
child support claimants will be notified of their rights as creditors
in Chapter 7 classes of Debtors from whom a support obligation is due.
We envision that this provision will, with the cooperation of the
EQUST, be effectively implemented through a series of procedures and
notices provided by the panel Trustee throughout the case. We believe
that, through this process, claimants owed domestic support obligations
can and will be made aware of the options available to them to enforce
Court-ordered support.
2. Additional Information Required of Debtors
NABT believes that the additional information which is required to
be furnished to the Trustee (and others), prior to the first meeting of
creditors, will aid in the identification and liquidation of assets for
the benefit of creditors. We are actively working on methods of
delivery which allow us to effectively utilize the volume of
information which will be provided to us by each Debtor. Additionally,
we will attempt to insure that this information will remain
confidential, and be used solely for the purposes intended by the
statute.
Review of this required information will serve to insure that all
assets are disclosed and, where appropriate, applied to the payment of
creditors' claims. It will also, in many cases, more adequately define
the Debtors' circumstances, which will allow the panel Trustee to
perform the job more effectively.
3. Waiver of Filing Fee
The amended 28 U.S.C. Sec. 1930 (f) (1) provides for the waiver of
Chapter 7 case filing fees for individuals with ``income less than 150
percent of the income official poverty line'' if the Court determines
the individual is unable to pay the fee in installments. Trustees are
paid compensation of $60 for administering cases in which no assets are
available for liquidation. The funding for these fees is derived from
the Chapter 7 case filing fee [see 11 U.S.C. Sec. 330(b)(1 )j and
Miscellaneous Bankruptcy Court Fees prescribed by the Judicial
Conference of the United States [see 11 U.S.C. Sec. 330(b)(2)].
There is no provision in the ACT for payment to Trustees where the
filing fees are waived. A statistical survey shows that the number of
informa pauperis cases where filing fees are waived ranges as high as
9.78% in some jurisdictions. Trustees are now faced with a reduction in
compensation for their work in administering those cases. This apparent
oversight needs to be corrected and a system established to provide
adequate funding for payment of Trustee fees in these cases.
4. Protecting Patient Records
The ACT adds a new Sec. 351 to the Code that provides a procedure
for notification and disposal of patient records in cases where the
Trustee does not have sufficient funds to pay for the storage of
records in the manner required under applicable federal or state laws.
The ACT fails to take into account that in some circumstances Trustees
will lack sufficient funds to comply with the procedure established
under Sec. 351. For example, under Sec. 351 Trustees are required to
undertake various costly actions including: storing records for one
year; publishing a notice in one or more appropriate newspapers;
notifying every patient and appropriate insurance carrier by mail;
communicating by certified mail with each appropriate federal agency;
and destroying the records, It is estimated that these costs could
range anywhere from $3,500.00 in smaller cases (500 or fewer patients)
to $35,000.00 in medium cases (10,000 patients) and higher in large
cases (up to 100,000 patients and more). If Trustees do not have the
funds to pay for the storage and notices required in Sec. 351, patient
records may not be administered properly and could be lost.
The problem can be corrected by allowing a court in no asset or
limited asset cases, upon motion of the Trustee, to direct the person
or persons responsible for maintaining, storing or disposing of patient
records under state law, prior to the appointment of the Trustee, to
resume the responsibility of preserving the records. In such
circumstances, the responsible party would be directed, by court order,
to perform the functions required under Sec. 351.
5. Payment in Converted Cases
The ACT was intended to provide a mechanism and payment schedule
for Chapter 7 Trustees to receive compensation in cases converted or
dismissed pursuant to 707(b). The ACT included changes to Sec. 1326(b)
of the Code specifying the payment schedule to be applied if Trustees
are allowed compensation due to the conversion or dismissal of case
under Sec. 707(b). These changes are inadvertently ineffective,
however, unless Sec. 326 of the Code is also modified to provide for
Trustee compensation in converted or dismissed cases. Under current
judicial interpretations of Sec. 326, Trustees have been denied
compensation in cases converted or dismissed under Sec. 707(b) because
Trustees have not actually disbursed or turned over monies to parties
in interest in such cases (which that statute requires as a
prerequisite).
The problem can be corrected by adding a new subsection (e) to
Sec. 326 to provide that the Court may allow reasonable compensation
for services rendered by the Trustee, if the Debtor in a Chapter 7 case
commences a motion to dismiss or convert and such motion is granted, or
if the case is converted from Chapter 7 to another chapter, and the
actions or positions of the Chapter 7 Trustee were a factor in the
conversion of the case. Since cases are most often converted from
Chapter 7 to 13 without the processing of a formal Sec. 707(b) motion
(a threat of a motion is often sufficient), Trustees should be allowed
compensation if their actions or positions were a factor in the
conversion of the case (i.e., discovery of undisclosed or undervalued
assets).
Trustees have and will continue to direct those Debtors who have an
ability to repay some or all of their debts into a Chapter 13 repayment
plan. It was the intent of Congress to reward us for these efforts, and
encourage our continued vigilance.
6. Avoiding Automatic Dismissal in Asset Cases
The ACT modifies Sec. 521 of the Code to compel an automatic
dismissal of cases where certain information is not timely provided. If
a Debtor does not reaffirm or surrender collateral within 45 days after
the first meeting of creditors, the automatic stay under Sec. 362(a) is
terminated and the property ``shall no longer be property of the
estate,'' even if there is equity in that property for the benefit of
the estate.
The automatic dismissal language raises concerns insofar as it
renders valuable property ``no longer property of the estate'' and
places it beyond the reach of the Trustee or the court. Trustees may
not be able to determine whether there are unencumbered non-exempt
assets to administer by the deadlines imposed under Sec. 521, in part,
because debtors who are dilatory in reaffirming/surrendering are often
unresponsive to trustees. Although trustees may ask for extensions of
the Sec. 521 deadlines, circumstances may prevent the trustee from
having sufficient information to support a motion for an extension of
time.
7. Increase in ``No Asset'' Fee
Under the present law, Trustees receive $60 for administering
Chapter 7 cases in which ``no assets'' are liquidated. The last
increase in this Trustee compensation occurred in 1994, when the fee
was raised from $45 to $60.
The ACT imposes new, and more duties on Chapter 7 Trustees. There
are significantly more documents to review, notification of specific
classes of creditors (child support claimants), a higher degree of
scrutiny of the true economic status of individual Debtors (review of
income tax returns and payment advices prior to conducting a Section
341 meeting of creditors), and more statistical reporting in order to
allow a monitoring of the effectiveness of the system.
NABT is actively involved in educating Trustees as to
implementation of the ACT and fulfillment of these new requirements. It
is the statutory duty of Chapter 7 Trustees to acclimate themselves to
the new system, so that they can continue to properly administer
bankruptcy cases.
Sixty dollars (the fee for the last 12 years) is not fair and
adequate compensation to administer a bankruptcy case. Our Association
strongly believes that an increase in this fee, even if it is
moderately less than the $40 per case increase Congress passed last
year, is in order. Without a fee increase, many young attorneys will
choose not to become Trustees. This will make the system slower, more
cumbersome and less efficient for all parties involved, both debtors
and creditors. There has been bipartisan support for raising Trustee
compensation for no asset cases. We again urge the Congress to act on
this increase without delay. We would also request that any increase be
subject to a consumer price index adjustments so that are fees are not
frozen as they have been for the past 12 years.
8. Percentage Compensation in Cases with Assets
Section 326 needs to be amended to address and provide for
increased percentage applications, particularly to small asset cases,
if not to all asset cases. Trustees are not paid on surplus
distribution to debtors, but only on ``all moneys disbursed or turned
over in the case by the trustee to parties in interest, excluding the
debtor. . . .'' The section should be amended to increase the
percentage applications extending the 25% on the first $5,000 to the
first $25,000, with commensurate adjustments thereafter. An increase in
this category would offset the small fee compensation we receive per
case. Additionally, creditors and the public benefit if trustees are
adequately incentivized to locate assets that might be hidden from the
bankruptcy court.
As we mentioned above, the figures in Sec. 326 should also be
subject to consumer price index adjustments every three years, like
other parts of the bankruptcy code. We know the Act provides for
increases automatically for chapter 13 trustees (5 U.S.C. 5303);
debtors' exemptions (11 U.S.C. 522); involuntary case qualifying
amounts; chapter 13 qualifying amounts; preference actions; and many
more, but there is no increase for trustees.
This concludes my statement. NABT looks forward to working with you
during this Congress, particularly on the compensation issue which
affects our members ability to carry out this Act.
Thank you.
Ms. Sanchez. Also, a document from the American Bar
Association with respect to the subject of today's hearing,
``Are Consumers Really Being Protected Under the Act?''
[The information referred to follows:]
Letter and supporting documents from the American Bar Association,
submitted by the Honorable Linda Sanchez, a Representative in Congress
from the State of California, and Chairwoman, Subcommittee on
Commercial and Administrative Law
Ms. Sanchez. Also, testimony--it's actually a letter
attaching the decision of a District Court in Minnesota
regarding the term ``debt relief agency,'' as defined in the
appropriate U.S. Code.
[The information referred to follows:]
Letter and supporting documents from Chad Wm. Schulze, Esquire,
Milavetz, Gallop & Milavetz, P.A., submitted by the Honorable Linda
Sanchez, a Representative in Congress from the State of California, and
Chairwoman, Subcommittee on Commercial and Administrative Law
Ms. Sanchez. And, lastly for the record, I would also like
to submit the infamous Form 22 with its 57 parts of inquiry
that folks who are interested in filing bankruptcy claims must
fill out to begin that process.
[The information referred to follows:]
Official Form 22A (Chapter 7), submitted by the Honorable Linda
Sanchez, a Representative in Congress from the State of California, and
Chairwoman, Subcommittee on Commercial and Administrative Law
Ms. Sanchez. And without objection, so ordered.
We are now going to begin a round of questioning. Members
will each have 5 minutes to question the witnesses. I would ask
the witnesses to be mindful of the fact that we have but little
time each to ask questions, so try to be brief in your
responses.
And I would like to begin with Mr. Bartlett with my first
question. You've testified also before the Senate Judiciary
Committee last December, and in that testimony you stated that,
quote, ``We need to reach consumers much sooner in the
financial cycle so that credit counseling can live up to its
full potential. If consumers wait until they are completely
under water, counseling may not live up to its full
potential.''
How would you propose to reach consumers much sooner in the
financial cycle? Because apparently, as we've seen from Ms.
Burroughs, sometimes people with the best of intentions have to
begin the bankruptcy process, and that is really when the
counseling kicks in.
Mr. Bartlett. Madam Chair, ironically one of the probably
unintended or at least undiscussed outcomes of the new law is
that consumers are getting to counseling earlier, but they're
not getting in in a way that shows up in the statistics. We
survey all the certified credit counseling agencies and we've
determined that about 30,000 counseling sessions a month,
additional sessions happen with these certified agencies more
than were happening in prior years. And we think that is
because these agencies are certified, consumers can find them
on the Internet, they've been certified by the U.S. Justice
Department, so it gives the consumers a much higher sense of
satisfaction.
We think the other thing that is happening is that with the
publicity about it, with the conversations about it, we think
that consumers are increasingly aware that the earlier they get
to the counseling the better they are and the easier it will be
and easier to accommodate.
And then third is we as an industry, we are pushing all
kinds of information to consumers to say get thee to a
counselor. If you're having difficulty, then counselors can
help because they can help you with your money management.
So is it going to be perfect? Is everyone going to get to a
counselor early in the process? No.
Ms. Sanchez. So you believe the majority of consumers are
getting the credit counseling that they need early enough in
the process?
Mr. Bartlett. No, I wouldn't say majority. I wish life were
that good. I would say that a lot more today because of this
new law than were prior to the law, because of the
certification process and the industry is promoting it, is
telling consumers to get to a counselor and we're making it
available.
Ms. Sanchez. Mr. Sommer, do you have any thoughts about
whether or not debtors are getting their credit counseling
advice in a way that is timely given the circumstances that
they're in in terms of thinking about bankruptcy?
Mr. Sommer. Unfortunately, most debtors go to counseling
only when they find out the requirement to file bankruptcy. And
by then, as the counselors themselves say, hardly any of them
are financially capable of doing a debt management plan.
The counseling is particularly a problem in timing when
people are facing foreclosure, such as Ms. Burroughs, because
it can serve as an impediment when the foreclosure sale may be
very imminent. And there are courts that have said that people
who get counseling on the same day as they file bankruptcy
can't file bankruptcy.
So we think there are certain categories of people at a
minimum who ought to be exempted from counseling when it's
clear counseling can't stop a mortgage foreclosure.
Ms. Sanchez. Thank you. Mr. Bartlett, in his prepared
testimony described a lawsuit filed in Connecticut in which he
said the plaintiffs in this case believe that attorneys have a
right under the Constitution to deceive the public, hide
information from clients, or advise consumers to commit fraud
by running up debts just before filing for bankruptcy to gave
the means test. Are you familiar with that lawsuit, Mr. Sommer?
Mr. Sommer. Actually, our organization is a plaintiff along
with the Connecticut Bar Association in that lawsuit.
Ms. Sanchez. What would your response be to Mr. Bartlett's
characterization?
Mr. Sommer. Well, that is simply a false characterization
of a lawsuit. It would be ridiculous to argue that attorneys
have the right to counsel their clients to commit fraud, and we
made no such argument, as the papers would demonstrate. Our
argument was that professional ethics already prohibit that
kind of activity. And really the provisions of the law which
prohibit advice about lawful activity impair attorneys' ethical
duties to fully advise their clients about lawful means of
dealing with their problems.
Ms. Sanchez. Thank you. Mr. Bartlett, over the nearly 8
years that the BAPCPA was under consideration by Congress, we
continuously heard that each American family was paying a $400
to $550 ``bankruptcy tax'' for bankruptcy filing. Since the
enactment 2 years ago have interest rates dropped
significantly?
Mr. Bartlett. I don't know that they have, and I don't know
that you could point to one law as either increasing or
decreasing interest rates.
Ms. Sanchez. Have the costs of goods and services been
lowered in response to the perceived savings resulting from the
enactment of the act?
Mr. Bartlett. I would say the cost have declined. We're
running at an average of about a 1.5 million consumer
bankruptcies a year prior to the law. And last year it was
537,000. We think it will be about half, about 700,000. So it
would be 700,000 fewer bankruptcies.
Ms. Sanchez. But I'm specifically referring to this
``bankruptcy tax'' that we heard about over and over and over
again. I mean, I can only tell you what my experience is. I get
solicitations for credit cards in the mail every day. And the
interest rates that they're asking me to pay are 24.99 percent.
I think the lowest one I have recently received, and I have an
excellent credit rating, I might add, was like for 19.99
percent.
I haven't seen a significant decrease in the interest rates
on credit cards that are being offered as a result of the
enactment 2 years ago. And yet one of the major arguments we
heard over and over and over again in response to why we should
support this bill was that consumers are paying this huge
``bankruptcy tax'' and that if we just cut down all the
frivolous bankruptcy filings every consumer's interest rates
are going to go down.
Mr. Bartlett. Madam Chair, the purpose of the new law, the
reform, is to stipulate that those consumers who can pay some
or all of their debts and who are above the median income are
expected to do so. That is exactly what's happening. And those
that cannot can go into chapter 7. And that is what's happening
also, about 700,000 chapter 7s. And then the--about 700,000 in
bankruptcy. And the rest are not filing for bankruptcy because
they can pay some or all of their debts. And that was what the
law intended and that is what's happening.
Ms. Sanchez. So the argument about ``bankruptcy tax'' was
just a specious argument then; it was never intended to save
consumers money through lower interest rates?
Mr. Bartlett. I don't think it was specious at all. I think
the total savings are the total savings and those are reflected
in the total cost of goods and services in the economy. If
people file for bankruptcies and don't pay their debts and they
could pay their debts, that is a bad thing. We think that is a
bad thing if someone can pay their debts and aren't required
to.
Ms. Sanchez. I'm just going to interrupt you and say I take
offense at the argument that it was going to have this effect
that consumers were going to pay less in interest rates if we
could reduce the number of actual bankruptcy filings.
My time has expired. I would now like to recognize my
distinguished Ranking Member for 5 minutes of questioning.
Mr. Cannon. Madam Chair, I'm happy to defer to Mr. Feeney,
who I think has another obligation, and to the other Members of
the Committee who may have other interests or commitments, and
I would be happy to go last.
Ms. Sanchez. I appreciate your generosity.
Mr. Feeney.
Mr. Feeney. I thank the Chairwoman, and I thank the Ranking
Member for his hospitality.
On that last point, Mr. Bartlett, is it your position that
there are dozens, hundreds, perhaps thousands of variables,
including international markets, that affect interest rates on
an ongoing basis and the cost of goods?
Mr. Bartlett. Of course. There are a lot of things that set
the interest rates, Chief among them the Federal Reserve. The
cost of bankruptcy is a real cost and it's a cost that is
spread out throughout the economy.
Mr. Feeney. Is it your position marginally of the thousands
of variables, including international variables, one variable
that tends to lower in your opinion the cost of interest and
the cost of goods would be relatively tight bankruptcy rules so
that fewer people are availing themselves of them?
Mr. Bartlett. I think that's correct. I think bankruptcy
should be available to people that cannot pay their debts and
not available to those who can, roughly speaking.
Mr. Feeney. And in general, losses to the economy that
result from, I don't want to say frivolous, but liberal
bankruptcy applications, what will they tend to do to job
creation for Americans, prosperity and the national economy,
realizing again that it's just one of thousands of potential
variables?
Mr. Bartlett. We have two effects. If bankruptcy allows
people who otherwise can pay their debts not to do so, as it
did prior to this law, two things happen. One is that credit
tightens up for everyone because creditors are then much
stricter on offering the credit. So those that can and would
pay their debts are sometimes denied and they shouldn't be.
Secondly, the costs go up. So those goods that someone
purchased and didn't pay for have to be paid for by everyone
else.
Mr. Feeney. Have you seen any studies or have you reviewed
any work of others or do you have an opinion as to the rough
percentage of bankruptcies that come about because of poor
decisions and poor understanding of financial literacy versus
bad luck, people that have a bad health situation, people that
get thrown out of a job. At the turn of the century if you were
an expert in manufacturing buggy whips, when the automobile
came along you were in some trouble. Do you have an opinion
relatively what the preponderance of the burden is?
Mr. Bartlett. The survey I've seen that is most on point to
your question was done by the gold standard group of credit
counselors, the National Federation of Credit Counselors. Most
of their agencies are certified by the Justice Department. And
they asked their consumers or their clients who would call for
credit counseling, and they would ask them what do you think
got you into trouble? And I think it was about 69 percent of
those debtors self-identified. They said what got us into
trouble was poor money management.
About 30 percent was a major loss of job or loss of income.
And the rest was medical or divorce or disability. About 4
percent, something like that. So about 69 percent, according to
that study, is poor money management. Other counselors I talked
with confirmed that that's about the right ratio.
Now, that leaves a large group that is loss of income, and
if that loss of income is permanent, well, then some kind of
restructuring has to occur. If it's temporary, then lenders can
figure out some way to accommodate.
Mr. Feeney. Well, I don't think--my guess is you don't, and
I don't want to blame the victim here, but a big part of the
problem--you talked about early counseling and education if
somebody gets into trouble and before they get above their head
in hot water, but the truth is that a significant portion of
the problem, perhaps the 70 percent figure, give or take, that
you cited comes from lack of parents and especially our public
education system early on, having people understand things like
the Rule of 72, compound interest of money, what happens to
savings. I mean, America's savings rates is one of the real
problems for our economy. And so are there things that the
Business Roundtable can suggest over time that will help all
Americans avoid unnecessary problems as opposed to people that
just have a horrible misfortune?
Mr. Bartlett. We see it as a shared responsibility. We as
an industry, we have the responsibility to explain the terms
clearly, and we sometimes fall short of that, with all candor,
but we work at it every day. We have the responsibility then to
reach out to consumers that get in trouble, provide counseling,
try to help them refinance if we need to, try to provide some
way that they can get out of trouble, provide for counseling so
that they can make better management decisions. The consumers,
the borrowers, also have a responsibility to avail themselves
of that counseling early to make better management decisions.
Congress has a responsibility to provide oversight of this law,
the courts have a responsibility, the attorneys, the bankruptcy
attorneys have a responsibility to explain clearly what----
Mr. Feeney. I want to ask one more quick one. On balance
you've got $1.1 trillion worth of activity that your companies
represent on an annual basis. On balance are those companies
much better off if we have fewer people get in hot water or
more people get in hot water?
Mr. Bartlett. The companies are better off when the
consumers are better off and the consumers are better off when
the companies are better off, so it's a shared responsibility.
Ms. Sanchez. The time of the gentleman has expired.
Mr. Johnson is recognized for 5 minutes.
Mr. Johnson. Thank you, Madam Chair.
Mr. Bartlett, it wasn't the consumer debtors lobby that was
responsible for causing the passage of this so-called Consumer
Protection Act of 2005, was it? It wasn't the debtors lobby or
the consumers who were itching for a change, was it?
Mr. Bartlett. Well, the consumers are our customers.
Mr. Johnson. Well, no, no, no, no, no. Answer my question.
It wasn't the consumer lobby that was asking for a change in
the Bankruptcy Code?
Mr. Bartlett. Right, I think that is accurate.
Mr. Johnson. It was actually the creditors lobby, those who
extend credit, isn't that correct?
Mr. Bartlett. Congressman, I think it was the Members of
Congress that voted for the bill.
Mr. Johnson. But there was a sustained lobbying effort that
brought about a change in the existing bankruptcy law, and that
effort was led by the creditors lobby, isn't that correct?
Mr. Bartlett. On the lobbying side, yes, sir.
Mr. Johnson. And the creditors, what they wanted to do was
make it more difficult for debtors to be able to file for
relief under the Bankruptcy Code, either 7 or 13, isn't that
true, they wanted to make it more difficult?
Mr. Bartlett. No, sir.
Mr. Johnson. Well, they actually succeeded though in making
it more difficult and onerous for people who were in dire
straits to actually file a successful petition for either 13 or
7, isn't that correct?
Mr. Bartlett. No, sir.
Mr. Johnson. Okay. Well, you disagree and I disagree with
you on that. But a person such as Ms. Burroughs--Ms. Burroughs,
I think you testified that you read some papers, you had to
refinance your home a couple of times because of a job loss and
your husband was deployed to Iraq, he's still serving over
there. You apparently signed some papers to close a loan that
provided for accelerated payments, your mortgage payments were
going up and it was just difficult for you all to be able to
make it under those circumstances, and so you got to the point
where you had no alternative but to declare bankruptcy, is that
correct?
Ms. Burroughs. Right.
Mr. Johnson. And you went in and filed a chapter 13.
Now, how, Mr. Bartlett, has this so-called Consumer
Protection Act of 2005 helped people such as Ms. Shirley Jones
Burroughs?
Mr. Bartlett. It continued to make it possible for her to
file for bankruptcy if she could not pay her debts.
Mr. Johnson. It made it more difficult for her to file,
didn't it?
Mr. Bartlett. No, sir, I don't believe so. That is why she
filed and she successfully filed for chapter 13, because she
can pay some of her debts.
Mr. Johnson. It cost her more to file though, didn't it?
Mr. Bartlett. Congressman, it allowed her to keep her home,
which is what chapter 13 is for. Among other things, it allows
her to keep her home as a secured debt so as she makes her
payments on the home she can keep it. Without the protection of
bankruptcy, of chapter 13, she could not do that.
Ms. Sanchez. Will the gentleman yield for a quick second?
Mr. Johnson. Yes.
Ms. Sanchez. But, Mr. Bartlett, that relief was available
prior to the changes in the act in 2005, is that not correct?
Mr. Bartlett. That's correct. We strengthened the act in
some ways.
Ms. Sanchez. But the ability for a debtor who experiences a
job loss or some loss in income to keep their home was
available prior to the changes in the act? That is the question
I'm asking you. A simple yes or no question.
Mr. Bartlett. Yes, it was.
Ms. Sanchez. I thank the gentleman for yielding.
Mr. Johnson. But basically what this new act did was remove
the ability of persons like Ms. Burroughs to be able to have
the court make an adjustment in the terms of the mortgage on
her principal resident?
Mr. Bartlett. Congressman, I don't believe a bankruptcy
court under the old law was able to adjust to a secured rate, a
secured mortgage. I think that bankruptcy, you can adjust the
unsecured but not the secured. That is what makes it secured
versus unsecured. That is the basic difference. In a secured
mortgage that is why you have the lower rates, is because it's
secured by property, unsecured is not.
Mr. Johnson. All right. Thank you, sir. Let me ask Mr.
Sommer to respond to that also.
Mr. Sommer. The 2005 amendments did make chapter 13 more
difficult in a number of ways. You have the credit counseling,
you have the credit education, you have to file 4 years worth
of tax returns, there are a number of other requirements that
were added which make it more difficult and more expensive to
save a home.
Mr. Johnson. And suppose one does not have the documents
that are required under the act that are prerequisite. What
happens in that case?
Mr. Sommer. There are many cases that have been dismissed
for people not having those documents. Sometimes very minor
defects. People who submitted most of their pay stubs, but not
quite all within the 60 days, the United States Trustee moves
to dismiss those cases. And so the dismissal rate is higher.
And because the cost of bankruptcy is higher more people are
trying to file without a lawyer and running into trouble.
Ms. Sanchez. The time of the gentleman has expired.
The gentlewoman from California, Ms. Lofgren.
Ms. Lofgren. Thank you, Madam Chairwoman, and thank you for
having this hearing, which I think is very important. As
Members know, I thought that our enactment of this so-called
reform bill was a mistake, and I think what we have learned
since then has proven those concerns to be correct.
I would like to just thank Mrs. Burroughs for coming here.
I know it is hard to talk about your own experience, especially
with your husband deployed in Iraq for our country. Your
patriotism is something we want to acknowledge and appreciate.
And to tell your story really I think explains the problem
here.
You and your husband have worked hard to provide for your
home with your two children. It's the American dream. I mean
you are the American dream, and to have what happened to you
occur shows what's wrong here. You have worked hard, you've
actually had a very substantial income because of your hard
work. And yet with this mortgage payment issue coupled with our
Bankruptcy Act and your husband's deployment and your job loss,
which believe me can happen in any family no matter how hard
people work, you've ended up in this very distressing
situation.
As I think about all the things that we were concerned
about in the markups, the years of discussion of the Bankruptcy
Act, I don't know that the credit counseling provision was a
major focus. And yet as it's played out it has had a very
pernicious effect and, from the GAO report, almost no positive
impact because by the time people get to this situation there's
nothing left to manage. I mean they have a very serious
situation.
I'm interested, Mr. Sommer, and again thanks to you because
of your advocacy, I'm from San Jose so I know about the
consumer bankruptcies and their volunteerism, the interplay
between home foreclosures and the credit counseling. Can you
talk about that? People are scrambling to keep their homes and
then all of a sudden there's this new requirement they didn't
know about. Can you just explain that in more detail?
Mr. Sommer. Well, basically first of all, you should
understand that credit counseling cannot stop a mortgage
foreclosure.
Ms. Lofgren. We know that.
Mr. Sommer. A debt management plan deals typically with
credit card debts and not with mortgage debts. What happens
very often is that people are attempting to negotiate with
their mortgage company. And a lot of the mortgage companies say
they offer these loan modifications, people are negotiating,
but at the same time the foreclosure is going full speed ahead.
And it's not until the brink of the sale that they figure out
that this loan modification isn't going to happen, I'm going to
have to do something else. They come in at the last minute to
file a chapter 13 to stop a foreclosure and then they find out
they have to get the credit counseling. And sometimes it's just
one more barrier. Usually they can get it, usually it's not a
problem. There are a few courts that have held you can't get it
on the same day you file the petition, which I think is wrong.
But it's one more obstacle in their way at a time when they're
absolutely frantic. And any educational purpose would be much
better served by the education they would get later in the
bankruptcy case.
Ms. Lofgren. Well, here's a question I have. I mean, there
are certainly the individual human tragedies that we care
about, and Mrs. Burroughs and her family have outlined them. A
family that earned $97,000 a year in 2005 and yet because of
this mortgage problem and the interest rates and the
compounding--it looks to me illegal compounding--they have been
put in this situation. But then there's the macro situation.
And we are concerned about what is happening to the American
economy because of the level of foreclosures and what that
might do to the entire liquidity of the American economy.
Can you draw a connection between the foreclosure rate,
this credit counseling provision, and the whole macro American
economy that is such a concern to us?
Mr. Sommer. What happened to Ms. Burroughs is very typical
of people who have been subjected to these kinds of loans. She
probably would have qualified for a market rate loan based on
her income, but she was steered to somebody who gave her a
subprime loan and then encouraged to refinance a number of
times where she got nothing from the loans other than a much
higher loan balance.
I think it's symptomatic of the lack of regulation in that
industry and probably the tilt policy wise in our banking
regulators toward the private industry.
Ms. Lofgren. If I may, my time has expired. I will just
note that the foreclosure rate is causing certain parts of the
country to panic because it's going to have an impact, not just
on those who are suffering, but on the entire real estate
market that is then going to have an impact on the entire
economy of the United States. And sometimes when you have the
little nail in the horseshoe, you can find something as simple
as this that helped cause those problems. And I yield back.
Ms. Sanchez. Thank you. The time of the gentlewoman is
expired.
The gentleman from Massachusetts, Mr. Delahunt, is
recognized for 5 minutes.
Mr. Delahunt. Mr. Bartlett, you in your testimony indicate
that bankruptcy filings are down?
Mr. Bartlett. Consumer bankruptcy filings are down by about
half of what it had been for every year.
Mr. Delahunt. Has there been a study in terms of causal
relationship between the bankruptcy law and the fact that the
bankruptcy filings are down?
Mr. Bartlett. I don't know of a specific study on point. I
don't know of anyone that believes it's for any other reason.
Mr. Delahunt. But there hasn't been any scientific study?
Mr. Bartlett. I would have to search my mind. I don't know
of one. I hadn't heard the question asked before. I believe
most people believe it was directly from this law.
Mr. Delahunt. With all due respect, most people believe--
you know, when I was a kid I believed in Santa Claus.
Mr. Bartlett. Most people believe in Santa Claus, too, Mr.
Delahunt.
Mr. Delahunt. And Santa Claus can be good. But to suggest
that there's a proximate cause between filings and the passage
of the bankruptcy law in 2005 and the fact that it's down, I
would respectfully suggest that there are multiple, there are
most likely multiple reasons other than the bankruptcy law that
filings, consumer bankruptcy filings are down by 50 percent.
Mr. Bartlett. Congressman, that well could be. I do have
some statistics as I'm now searching around.
Mr. Delahunt. Okay. Search a little and tell us what the
search discovers?
Mr. Bartlett. We hired a statistician and did some
statistical tracking of the bankruptcy filings. And what we
discovered is that the law was enacted, as I recall, in April
of 2005, and I'm going by memory, with an effective date in
October of 2005, as I recall.
Mr. Delahunt. Correct.
Mr. Bartlett. And so bankruptcy filings, as I said earlier,
had been analyzed.
Mr. Delahunt. And there was a real spike going up to
October 2005.
Mr. Bartlett. Right. And then it dropped like a rock to
where bankruptcy filings were almost nonexistent. There are a
lot of reasons for that.
Mr. Delahunt. So after October 2005 we entered into the age
of good times again?
Mr. Bartlett. No, sir. The filings were premature. Many of
the filings were premature. It is clear that that spike in
filings was caused by the anticipation of the October effective
date. And then the filings came back up and leveled out
beginning around April of 2006 and have trended up slightly
since then, but by and large stayed about the same with some
slight trend up.
Mr. Delahunt. Thank you for the statistics, but going back
to my original question, there's absolutely no evidence to
support a causal relationship other than surmise between the
dramatic decline over the past, well, past year or so in terms
of bankruptcy filings. Having said that, I guess today is about
how it's benefited the consumer. I remember sitting here--how
much of the--what's the average decline in terms of the
interest rate charged by credit card issuers since the
bankruptcy bill has been, since the effective date of the
bankruptcy bill?
Mr. Bartlett. I don't know because I don't think it could
track exactly that precisely. Interest rates are charged for a
lot of reasons of which the costs of bankruptcies that
shouldn't have been filed is one of them, but most of it is
monetary policy set.
Mr. Delahunt. It was represented to us that we would
witness a decline in the interest rates by credit card issuers
because the losses that they were experiencing as a result of
bankruptcies was in the billions of dollars. But I would
challenge you to go back to the Roundtable and come back to us
with a statistic that shows that there has been any decline
whatsoever in terms of credit card issuers in terms of a real
benefit to the consumer. If you would do that for me, I would
be--if you would just shake your head, even up and down
nodding.
Mr. Bartlett. Congressman, I don't believe with your
premise that you can have that exact a connection. I do believe
if there are 700,000 fewer bankruptcies that had been occurring
and are not occurring, those costs then are not absorbed as a
dead weight by the economy and so therefore those costs are not
spread back into the economy.
Mr. Delahunt. Are you trying to tell me then that over some
time we can expect those savings that have been achieved to
result in lower interest rates to the consumer?
Mr. Bartlett. Not in a way in which you can write it down
on a statement, as you asked the question, but in a way of
700,000 times the cost of each bankruptcy that is a lesser dead
weight cost to the economy.
Mr. Delahunt. I'm not talking about the economy in a macro
level. I'm talking about real people like Mrs. Burroughs. You
know, all the Mrs. Burroughses and the Congressman Delahunts
and the Mr. Bartletts, are we going to finally see a reduction
in credit card interest rates because of this bill?
Ms. Sanchez. The time of the gentleman has expired, but I
will allow the witness to answer briefly.
Mr. Bartlett. Congressman, I don't believe we are going to
agree on the context of your question. I'm trying here, but I
believe it's a cost to the economy which is spread out to all
consumers. I don't think that----
Mr. Delahunt. I think you really have answered my question.
Thank you.
Ms. Sanchez. The time of the gentleman has expired. Thank
you, Mr. Delahunt.
Mr. Watt is recognized for 5 minutes.
Mr. Watt. Thank you, Madam Chair, and thank you for
conducting the hearing. Actually this gives me an opportunity
to bring together service on two different Committees, the
Financial Services Committee and this Subcommittee, in a way
that I don't often have an opportunity to do.
Let me first deal with this counseling thing. Obviously
people are getting more counseling, credit counseling at some
point. And one of the things that Ms. Jones said is that it's
likely to be too late in the process. I think everybody agrees
with that.
Mr. Bartlett, you're familiar with the Homeownership Equity
Protection Act. We've been dealing with possible amendments to
it in Financial Services to deal with predatory lending. And
one of the things in that act, one of the questions we've been
trying to resolve, is whether some kind of mandatory credit
counseling before a borrower could obtain a subprime loan would
be appropriate. The current HOEPA Law has no provision in it.
North Carolina's HOEPA law does have a provision in it that
requires mandatory loan counseling before one can get a
subprime loan.
What is the Roundtable's position on whether we should
carry that North Carolina standard into the Federal HOEPA Law?
Mr. Bartlett. Congressman, first, let me say we appreciate
your leadership on the Financial Services Committee in the area
of subprime. We have a lot of work to do in that area, as you
know, and we're all sharing the responsibility to do it.
On mandatory credit counseling, we have not endorsed that
yet. We've thought about it, we've talked about it and we may
end up.
Mr. Watt. Wouldn't that be one element, one means by which
you can advance the counseling--I mean it would be a little bit
different, obviously, but if the problem, if the real problem
is that people are waiting too late to get credit counseling,
this would provide some means of advancing it to an earlier
stage. And one of those opportunities would be in a context
where people are getting into these high risk loans which are
not. We're not indicting subprime loans in general but they
generally tend to be more risky than prime loans. That is why
they're called subprime loans. So that would be one
opportunity. Do you think that is a good idea personally, not
speaking for the Roundtable?
Mr. Bartlett. Let me suggest what I think is a good idea
which comes pretty close to what you're asking. One is we've
set up a whole series of voluntary counseling services in a
project, as you know.
Mr. Watt. But that is not working. I mean it's working at
some level. I don't mean to suggest it's not working at all,
but it's not achieving the uniform result that I think
everybody at this table indicates. Better education and
counseling would help in this area in some respects, isn't that
right?
Mr. Bartlett. We are for earlier counseling, better
counseling and----
Mr. Watt. All right. We'll take that up in another context.
Let me go to the second question which has been raised by
Mr. Sommer here, because the current Bankruptcy Code really
doesn't allow for any revisions to be made to a mortgage loan
as it does with consumer loans. What do you say about Mr.
Sommer now, I know that you're going to point out the problems
that some of them are securitized, they are sold to other
financing people. But wouldn't that be a good idea to give the
bankruptcy court some flexibility in the area dealing with at
least exploding adjustable rate mortgages and subprime loans,
extending it to that extent?
Mr. Bartlett. Mortgage lenders will refinance, will
reservice, will modify loan agreements and were very willing to
do so, and we work it out with the borrower and with the
counselor and I suppose sometimes with the attorney. But to
give a bankruptcy judge the right to make an unsecured loan, to
make a secured loan as if it were unsecured, we think would
disrupt mortgage availability for everyone. So we think that is
the wrong answer. But modifying the loan so that people can
afford them and work it through we think is the right answer,
and that is what's happening now.
Mr. Watt. You mean you don't want the assistance of a
bankruptcy court in working through this process? You think
it's actually better only if it can be done on a volunteer
basis?
Mr. Bartlett. We think you ought to be careful what you
pray for. You may get it. And if you give bankruptcy judges the
right to turn a secured loan into an unsecured loan after the
fact, you will drive up the home mortgage market.
Mr. Watt. Can I just hear Mr. Sommer's response, Madam
Chair, and I ask unanimous consent for whatever time it takes
for him to respond?
Ms. Sanchez. Without objection.
Mr. Sommer.
Mr. Sommer. Well, our proposal is basically to have the
bankruptcy court do what the mortgage companies say they are
very willing to do, but in practice people have found them a
lot less willing to do, which is the kind of loan modification
that does reset the payments, not turn the loan into an
unsecured loan, but reduce it to the value of the actual
property, reduce the interest rate to a fixed rate, which can
be done with virtually every other kind of secured loan in
bankruptcy other than a mortgage on a principal residence.
So we are really asking for amendments that simply put into
practice what the mortgage companies say they want to do. And
incidentally, a number of bankers have told me that they would
like this because about half of the securitized trusts prohibit
loan modification. So when they want to do the modifications,
which is better both for them and the borrower, they are
prohibited from doing it by the securitized trust, and this
would solve that problem.
Mr. Watt. Madam Chair, could I ask for unanimous consent
from one additional minute?
Ms. Sanchez. Without objection, the gentleman is recognized
for 1 minute.
Mr. Watt. Just to ask Mr. Bartlett, wouldn't the effect of
that be to make lenders a lot more careful about overextending
credit in home mortgage situations? I mean basically what he's
proposing would allow a court just to bring it down to the
value of the actual property. It will still be, it would still
be a secured loan. What would be the problem with that?
Mr. Bartlett. Well, the devil is always in the details. But
if you allow a court to change the terms of the security of a
mortgage then it's no longer a mortgage basically. Having said
that, we want to, we do, we have all kinds of systems as
lenders and as an industry to figure out a way to renegotiate
the loan or the loan--terms of the loan or loan payment, loan
modification. And it happens not just sometimes, it happens a
lot to modify that loan to meet both needs. And that is what we
do and that is what we set out to do. To put it in the hands of
a court I think would make mortgage credit much more expensive
and much less available to lower and moderate income people.
Mr. Watt. I thank the Chair for the time. I did want to
note that there is a very strong interplay between this and
what we're trying to do in the predatory lending area on the
other side. So this is very helpful in trying to tie the two
issues together. And I thank the gentlelady for yielding the
additional time.
Ms. Sanchez. We appreciate your work on both Committees.
And when there's an issue that crosses over like that we
appreciate your expertise on this Subcommittee.
Now I would like to recognize a very patient and very
gracious Ranking Member for 5 minutes.
Mr. Cannon. I'm not sure patience has a lot to do with it.
I have to be here, I think, whereas other Members don't.
I want to thank the gentleman, Mr. Watt, because we've been
conflating a lot of ideas here, and your questions just cut
through to the chase. And it really comes down to what happens
to the cost of mortgages in the end, so I appreciate it.
Ms. Jones, you haven't been asked a lot of questions
because I think your testimony was very clear and we appreciate
that and it's very helpful. And Mr. Bartlett, of course you've
been asked a lot of questions and I appreciate your clarity,
and especially on this last answer, because there's been a lot
of concern here. Ms. Lofgren has left, but I want to associate
myself with her remarks in relation to you, Ms. Burroughs. This
is a very tough thing to come in. We've got all these things
talking about fancy schmancy stuff. You've got to be on the
Financial Services Committee to really get it in some ways. So
we thank Mr. Watt for being here. But you're the person who got
the creepy loan. If I'm reading this right--look, and I have
some sympathy. I've done several mortgages in my life. Always
the closing costs, with two exceptions, were much higher than
anybody expected, and so you're digging deep to try to cover
the costs. And then who knows what all that detail says. And
we've created so many laws at the Federal level requiring
disclosure that there are literally, I suspect, the last time I
did a mortgage, there were probably two dozen pages I had to
sign. I guess you could have read them. I didn't have time to
read them. And frankly I don't have the expertise to do that.
So that leaves us all in a bit of a bollix. But as I understand
it, your biggest problem in life is not so much the bankruptcy
process. In fact you seem relieved about being able to get
through the bankruptcy process. Your problem was the creeps who
probably misrepresented the loans that you entered into?
Ms. Burroughs. Right.
Mr. Cannon. The record should reflect that she's nodding,
saying yes.
Ms. Burroughs. Yes.
Mr. Cannon. Thank you. So we have a problem. And many
people have talked about the issue of the subprime loans. And
our question is how we actually deal with that in the long
term.
Now, Mr. Sommer, you talked about a cost of $500 per family
and spoke in your oral testimony about how that wasn't being
offset by about, I think you said, $100 per payment on average
by that half percent of the people that end up paying into the
system that were unexpected. Is that unfair for me to conflate
those two statements that you made?
Mr. Sommer. I'm not sure exactly what you're saying. But
what I was saying is there's a tremendous cost to every
bankruptcy debtor from all the additional burdens, and the vast
majority of them are nowhere near----
Mr. Cannon. We're talking about there's an anticipated
savings per consumer of $500. And you conflated that with the
payment made by an individual debtor in this very small half of
1 percent that is now paying, the group that is additionally
paying into the system.
Mr. Sommer. I was referring to what some of the other
Members referred to; the promises that were made by the credit
industry about the savings to the economy of $400 to $500. And
the fact is that there's a much larger burden, which is
probably closer to $500 or $1,000 on each consumer bankruptcy
debtor and added cost.
Mr. Cannon. You talked in particular about the payment that
is being made by this one-half of 1 percent that is now being
put into a chapter 13 payment. That on average I think you said
was $100, is that correct?
Mr. Sommer. Oh, I know. The $100 is the floor on the means
test formula threshold. In certain circumstances if you're
deemed by the means test to be able to pay $100 a month, then
you are presumed to be abusive and a motion can be filed to
dismiss your chapter 7.
Mr. Cannon. Were you putting those two things together; the
$500 proposed savings? It seemed in your testimony you're not.
Mr. Sommer. No, not really.
Mr. Cannon. Because they're not really joined?
Mr. Sommer. No, they have nothing to do with each other.
Mr. Cannon. I'm concerned. We have the highest rate of home
ownership in America today than we have ever had. We have some
very serious problems now with the marginal lending and the
advantage I think that some lenders are taking, and the perhaps
fraud, in these marginal lendings. But isn't it true that if
you begin to fiddle with the system that the cost for people
who would otherwise be able to get into a home would rise, Mr.
Sommer?
Mr. Sommer. I don't think so. First of all, like Ms.
Burroughs, a lot of people are sold mortgages that are at a
much higher rate than they qualify for.
Mr. Cannon. That is true. But that goes to the fraud of the
lender. And also in Ms. Burroughs' case what she's saying is
that lenders lied to her and she was expected to be a lawyer
for herself and to go through and figure that out. That is a
different issue than the financial system that allows her to
get a mortgage, which one would hope would be a more honest
mortgage.
Mr. Sommer. I guess I assume by fiddling with the system
you included passing consumer protection laws that might
regulate some of those practices. That is fiddling with the
system in a sense.
Mr. Cannon. But we're talking here about bankruptcy.
Mr. Sommer. As far as the bankruptcy system, I think that
allowing people to modify their mortgages in this way would,
number one, get the same benefits that loan modifications get,
which the mortgage companies want and, second of all, would
make lenders more careful, and we probably wouldn't have so
many of these loans. So I'm not sure there would be a bad
effect on the economy. I think it would be a good effect.
Mr. Cannon. Well, if you didn't have so many loans--if the
Chairman would indulge me--if you didn't have so many loans,
obviously it would be nice to get rid of fraudulent loans, but
I suspect that actual credit counseling and education of people
who are going to get loans might actually help that, and there
may be something we could do there.
I appreciate the Chair's indulgence. Let me just say that
this is a very, very important issue. This is not a Republican
or a Democratic, a conservative or a liberal issue. This is an
issue about how we set the rules so that we get the best system
so that we have the fewest kind of sick loans by people who
cheat but, on the other hand, have a market that allows money
to come in and move around adequately and be protected so that
the people who want a mortgage can get it.
Thank you, Madam Chair. I yield back.
Ms. Sanchez. Thank you. I would like to thank all of the
witnesses for their testimony today. Without objection, Members
will have 5 legislative days to submit any additional written
questions which we'll forward to the witnesses and ask that you
answer as promptly as you can, and those answers and questions
will be made part of the record. Without objection, the record
will remain open for 5 legislative days for the submission of
any additional materials.
Again, I thank everyone for their time and their patience.
This hearing of the Subcommittee on Commercial and
Administrative Law is adjourned.
[Whereupon, at 12 p.m., the Subcommittee was adjourned.]
A P P E N D I X
----------
Material Submitted for the Hearing Record
Report on Personal Bankruptcy Statistical Study by SMR Research Corp.,
submitted by the Financial Services Roundtable, to the Honorable Howard
Berman, Chairman, Subcommittee on Courts, the Internet, and
Intellectual Property
Response to Post-Hearing Questions from Steve Bartlett, President and
CEO, Financial Services Roundtable, Washington, DC
Response to Post-Hearing Questions from Henry J. Sommer, President,
National Association of Consumer Bankruptcy Attorneys, Philadelphia, PA
Response to Post-Hearing Questions from Yvonne D. Jones, Director,
Financial Markets and Community Investment, U.S. Government
Accountability Office, Washington, DC
Documents of personal bankruptcy filing of Shirley Jones Burroughs,
Gastonia, NC
Prepared Statement of David C. Jones, President, Association of
Independent Consumer Credit Counseling Agencies