LEXIS-NEXIS® Congressional Universe-Document

LEXIS-NEXIS® Congressional

March 16, 1999, Tuesday

SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 2452 words

HEADLINE: TESTIMONY March 16, 1999 JANET KUBICA PRESIDENT POSTMARK CREDIT UNION HOUSE JUDICIARY COMMERCIAL AND ADMINISTRATIVE LAW BANKRUPTCY REVISION

BODY:
Statement of Janet Kubica, President POSTMARK Credit Union Harrisburg, Pennsylvania For Credit Union National Association Before the House Judiciary Commercial and Administrative Law Subcommittee March 16, 1999 Good morning, Chairman Gekas and other members of this subcommittee. I am Janet Kubica, president of POSTMARK Credit Union in Harrisburg, Pennsylvania, and I appreciate the opportunity to be here to tell you about our concerns with the increasing number of bankruptcies and how this is impacting credit unions -- and my credit union in particular. I am speaking on behalf of the Credit Union National Association (CUNA), which represents over 11,000 state and federal credit unions nationwide. We are very pleased that this subcommittee is holding hearings today on bankruptcy reform legislation, H.R. 833 POSTMARK is a $24.5 million state-chartered, federally-insured credit union. Its 4300 members are primarily U.S. Postal Service workers and their families in the Harrisburg area. Currently we have almost $14.5 million in loans to our members --that's over $6 million in car loans, more than $5 million in home-secured loans, and almost $2 million in personal loans. In addition, we have issued about 1,000 credit cards for another $1 million. Nationwide bankruptcy filings exceeded 1.4 million in 1998, which was a 2.7 percent increase from the 1997 filings. In fact, bankruptcy filings have set records in 1996, 1997, and 1998. And it is not anticipated that there will be a decrease to these high numbers for 1999. Consumer bankruptcy filings made up 96.9 percent of those 1998 filings. Credit unions are quite concerned about this steady increase in bankruptcy filings nationwide in the last few years because they have seen a similar increase in the number of credit union members who file. Preliminary data from credit union call reports to the National Credit Union Administration (NCUA) show that credit unions had approximately 253,000 filings in 1998, which is an increase to the 250,000 filings in 1997. The 1997 figures were an increase of 20% over 1996 levels, and the 1996 filings were 35% higher than the 1995 figures. CUNA estimates that almost half of all credit union losses in 1998 were bankruptcy-related and that those losses reached $684 million. In Pennsylvania credit unions are experiencing record highs in bankruptcy filings --they have tripled in the last five years and the 1998 total topped 7,300. Since 1994 the annual increases for bankruptcy filings at credit unions have averaged 24%. While the number of filings is historically high, the rate of filings is also unprecedented --in 1994 the total filings per thousand credit union members was .86, while in 1998 it was 2.30 filings per thousand members. At POSTMARK bankruptcy filings and losses have shown a steady increase since 1994. In 1994 we had 7 members who filed for bankruptcy, in 1995 there was dip to 3, in 1996 it rose again to 9, reached 16 in 1997, and hit 15 in 1998. A significant number of our bankruptcies are chapter 7, which cause the greatest loss to the credit union. As the number of member bankruptcies has increased, so too have the losses to the credit union. Our losses in 1994 due to bankruptcy were only $2,923, but in 1997 these losses had increased to $65,720 --an increase of over 2000%. In 1998 the losses fell to $20,652. This information on the number of bankruptcy filings and on the credit union's bankruptcy losses is attached to my testimony. POSTMARK is a careful lender. We cannot afford to be otherwise. We do a good job with scrutinizing loan applications and carefully determining that the applicant is creditworthy before extending credit. We examine credit reports, verify income, and see that a reasonable debt-to-income ratio is maintained by the borrower. We even look at the applicant's disposable income to determine that the applicant can make the payments. We routinely monitor our credit cards and do not make any across the board increases to the credit limit. Students can apply for a credit card, but we encourage a co-signer and set the credit limit at no more than $500. In an effort to combat the number of bankruptcies at the credit union, POSTMARK has tightened its credit policies. As I said, we do annual reviews of our signature lines of credit, and during our annual review in 1998 we carefully did not reissue the cards to certain members. After making a check of credit reports, we did not reissue cards to those members who were overextended or had a poor repayment history with the credit union. If a member is experiencing financial problems and mentions bankruptcy to us, we immediately notify staff who are trained in credit counseling to contact that member and let the member know that the credit union is there to help them through the financial difficulty. We started doing this because otherwise the member may file for bankruptcy even in cases where there is an ability to repay. When a member files for bankruptcy, we attend the 341 hearing, where creditors are permitted to question the debtor. Credit Unions Support Financial Education Credit unions clearly recognize the value of financial counseling for their members. According to a recent CUNA bankruptcy survey, 70% of credit unions counsel financially troubled members at the credit union. A similar percentage of credit unions may also refer members to an outside financial counseling organization, such as the Consumer Credit Counseling Service (CCCS), and many do both. At POSTMARK we refer those members who are experiencing financial difficulties to the local CCCS and have found that beneficial for the members and their families. We also try to educate our members about alternatives to bankruptcy. We offer credit counseling to all our members at any time and encourage them to come to the credit union for help if they are experiencing financial difficulties. We tell the members about this service in our newsletter and other publications. However, even with financial counseling, we certainly recognize that there are some instances in which bankruptcy may be the only alternative for members, the way for them to get the needed "fresh start." Credit unions want to help their members avoid financial difficulty through learning to manage their credit. We believe that more emphasis should be placed on consumer financial education so people can learn how to manage credit and what the alternatives to bankruptcy are. The CUNA Bankruptcy Subcommittee recently reported that " e ducation was found as one of the most promising strategies to consider in attempting to reverse the trends in bankruptcy." Credit unions have found that educating their members about credit and how to use it can be an effective deterrent to filing for bankruptcy. Therefore, CUNA strongly supports the provision in H.R. 833, the House bankruptcy reform legislation, that requires the debtor to receive credit counseling prior to filing for bankruptcy and prohibits the chapter 7 or 13 debtor from receiving a discharge if the debtor does not complete a course in personal financial responsibility. Recognizing that consumers need to know more about alternatives to bankruptcy so they can make a more informed decision, we also support the provision in the bill that requires a consumer debtor to be given a notice about bankruptcy and a description of services from trustee-approved credit counseling services. Any sensible bankruptcy reform should include education provisions to give debtors the tools they need to make wise decisions about filing for bankruptcy and to succeed financially after bankruptcy. In addition, credit unions recognize that financial education needs to be made available early on and before consumers experience financial problems. Therefore, we support the sense of Congress that each of the states should develop curriculum on personal finance for elementary and secondary schools. Credit unions are currently going into their local schools and teaching students about money management. In addition, the National Youth Involvement Board (NYIB), a national network of credit union volunteer professionals, helps credit unions to educate young members. During the 1997-1998 school year more than 5,000 credit union speakers visited classrooms across the country, and as a result, more than I 10,000 students heard about the wise use of credit, savings options, budgeting, and careers. Many credit unions also devote office space for consumer libraries that enable members to use a wide range of financial periodicals, manuals, and books to learn more about money management and to research buying decisions, retirement plans, and a host of other issues relating to personal finance. And, through various new initiatives, CLJNA is developing an even more aggressive strategy to promote consumer financial education. Credit Unions Support Reaffirmations as a Benefit Both to the Member and to the Credit Union Because we are a not-for profit cooperative financial institution, losses to the credit union have a direct impact on the entire membership due to a potential increase to loan rates or decrease in interest on savings accounts. Therefore, we have a policy that if a member causes a loss to the credit union, services to that member, aside from maintaining a share account, will be withheld. Most credit union members take this seriously and continue to reaffirm on their credit union loans. However, we are beginning to see that some members do not care if they cause a loss and are denied service because they believe they can get it elsewhere --even though it may be at a higher rate. We continue to see more "surprise" bankruptcies, where the member is a long-time member and is current on his or her debt at the time the bankruptcy petition is received. Credit unions believe that reaffirmations are a benefit both to the credit union, which does not suffer a loss, and to the member, who by reaffirming with the credit union continues to have access to financial services and to reasonably priced credit. We are aware of concerns of abusive creditor practices, recently highlighted in high profile press coverage, but note that the current Bankruptcy Code, in fact, caught the violators. The size of the penalties imposed will undoubtedly act as a deterrent to others. The ability of credit unions to enter into reaffirmation agreements with their members is so important that if reaffirmations were severely limited or made not usable, CUNA would strongly oppose bankruptcy reform legislation regardless of what the rest of the bill might contain. As I said, reaffirmations are very important to credit unions, and they can be vital to the credit union member. For example, a married couple, who are long-time members of the credit union, get into financial difficulties and ultimately file for bankruptcy. They reaffirmed their credit card debt with the credit union so they could continue to have access to reasonably priced future credit. Later they came back to the credit union with an application for a new auto loan. Because they had been making timely payments on their credit card, we did approve the car loan --at the same rate as we offer it to all our members. And, these members have continued to make timely payments on both loans --the credit card and the new car. Credit Unions Support Needs-Based Bankruptcy Credit unions are very anxious to see Congress enact meaningful bankruptcy reform and believe that "needs-based bankruptcy" presents the best opportunity to achieve this important public policy goal. Credit unions believe that consumers who have the ability to repay all or some part of their debts should be required to file a chapter 13, rather than have all their debt erased in chapter 7. Therefore, CUNA supports the needs-based provision that is contained in H.R. 833. This provision was a compromise developed out of the bankruptcy reform bills that received overwhelming support in the 105th Congress. Let me tell you about two cases that illustrate why needs-based bankruptcy and its provisions are needed. In one case, a working couple, who are credit union members, filed a chapter 13 in November 1996. However, they did not show on their schedule that one of them was earning significant overtime. They even denied any overtime during a sworn deposition --even though the subpoenaed payroll records showed overtime and a joint monthly income of $4,500. These members owed $30,000 of unsecured and secured debt to the credit union. An unsecured amount of $14,000 was discharged, and the secured vehicle was crammed down to $13,000 in the plan. The debtors only made a few payments through the plan and then stopped. The trustee dismissed the case. We started to repossess the car, but were then notified that the debtors are refiling bankruptcy. So, two and a half years have passed, the car is depreciating, the balance on the car loan is almost $ 10,000, and it will be quite some time before we see another payment. In another case, again we challenged a plan where we believed the debtor could make more payments, and we did ultimately obtain a favorable decision from the judge. However, we still have not received any payments from the plan. Our attorney fees for these two cases are over $12,000 --and yet the credit union still has not received any payment from one debtor's plan and only a few payments from the other. Challenging a debtor's plan can be costly and delay payment from the plan. This is a reason why we support the provision in H.R. 833 that the debtor provide accurate schedules with tax returns, pay stubs, and other proof of income. Certainly that overtime would have been shown on the pay stub! In addition, we support the random audit provision which would ensure that the debtor does provide accurate documentation of income and thus, those who can repay some part of their debts would be required to do so. Again, let me say that I am pleased you are holding this hearing today. Credit unions are very anxious to see Congress enact meaningful bankruptcy reform and believe that "needs-based bankruptcy" presents the best opportunity to achieve this important public policy goal. The 105th Congress strongly supported needs-based bankruptcy, and CUNA supported these efforts. These hearing that are being held on H.R. 833 show that the 106th Congress is continuing to move toward passage of bankruptcy reform legislation. We encourage Congress to push for passage of this reform before Congress' fall recess. Thank you for the opportunity to testify today before the committee on CUNA's support for H.R. 833. I will be happy to answer any questions.

LOAD-DATE: March 17, 1999