Copyright 1999
Federal News Service, Inc.
Federal News Service
MARCH 25, 1999, THURSDAY
SECTION: IN THE NEWS
LENGTH: 3802 words
HEADLINE: PREPARED TESTIMONY OF
BRIAN L. MCDONNELL
PRESIDENT/CEO OF NAVY FEDERAL CREDIT UNION
NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS
BEFORE THE
SENATE BANKING, HOUSING AND URBAN AFFAIRS COMMITTEE
SUBJECT -
BANKRUPTCY REFORM
BODY:
Introduction
The National Association of Federal Credit Unions (NAFCU) is the only national
organization exclusively representing the interests of the nation's federally
chartered credit unions. NAFCU is comprised of approximately 1,100 federal
credit unions--financial cooperatives from across the nation--that collectively
hold approximately 70 percent of total federal credit union assets; NAFCU
represents the interests of approximately 25 million individual credit union
members. NAFCU and the entire credit union community appreciates this
opportunity to participate in the discussion regarding the need for
reform of the nation's
bankruptcy system.
Nature of Credit Unions
Historically, credit unions have served a unique function in the delivery of
financial services to people of modest means. Every credit union is, by statute
and practice, a cooperative association organized
"for the purpose of promoting thrift among its members and creating
a source of credit for provident or productive purposes." (12 USC 1752(1)) While more than 60 years have passed since the Federal Credit
Union Act was signed into law, two fundamental principles regarding the
operation of credit unions remain every bit as important today as they were
when Congress first authorized the establishment of federal credit unions:
- First, credit unions remain totally committed to providing their members with
efficient, low-cost personal service.
- Second, credit unions continue to emphasize traditional cooperative values,
such as democracy and volunteerism.
As members of not-for-profit, cooperative financial institutions united by a
common bond, all credit union members have an equal say in the operation of
their credit union--regardless of the amount they have on account at the credit
union. These singular rights extend all the way from making basic operating
decisions to electing the board of directors. Unlike banks and thrifts, federal
credit union directors, motivated by an altruistic desire to be of service to
others, serve without remuneration--a fact that epitomizes the true
"volunteer spirit" which permeates the credit union community.
Credit unions play an important role in the financial lives of more than 70
million Americans from all walks of life who have chosen the convenient and
low-cost financial services that only credit unions can provide. As the package
of services offered
by various types of financial institutions becomes more and more homogenized,
the emphasis shifts from the type of service offered to the quality and cost of
service provided. Historically, credit unions have been second to none in
providing their members with quality personalized service at the lowest
possible cost. According to an annual survey conducted by the American Banker
newspaper, 1997 was the thirteenth consecutive year in which credit unions have
rated higher than all other financial institutions in overall service quality
and this trend shows no sign of change.
Need For
Bankruptcy Reform
Navy Federal Credit Union (Navy Federal) is the nation's largest credit union.
Navy Federal serves civilian and military employees of the United States
Department of the Navy and their families, serving almost 1.8 million members
around the world through 86 branch offices,
208 proprietary surcharge-free automated teller machines (ATMs),.access to
world-wide ATM networks, and
"24 hour/365 day-a- year" telephone and internet service from its Vienna, Virginia headquarters and
operations center. As with all federal credit unions, Navy Federal is a
not-for-profit cooperative, governed by a volunteer and unpaid board of
directors who are elected by the credit union's member-owners. Navy Federal
operates in the cooperative credit union spirit of"people helping people."
Unfortunately, a small but growing number of consumers are not financially
responsible and abuse the
bankruptcy system at a high cost to the consumers and the national economy. The credit
union community feels strongly that
bankruptcy reform is needed to encourage financial responsibility for debtors and for those
creditors who would mislead or
take advantage of consumers. The
bankruptcy reform issue is not an issue of balancing the pursuits of debtors with the interests
of creditors. It is simply an issue of financial responsibility versus
financial irresponsibility.
The credit union community does not oppose
bankruptcy relief for persons who have encountered extraordinary circumstances in life
and have a bona fide need for relief. Instead, the concern is with those
consumers who use
bankruptcy as a financial planning tool and those who turn to
bankruptcy as the
"easy way out."
Costs of
Bankruptcy
Nationally, consumer
bankruptcies have spiraled upward. In 1998, there was a dramatic rise in the number of
consumers filing for
bankruptcy. From 1993 to 1997, there was an average of 989,000 personal
bankruptcy filings a year. In 1998, there were 1.4 million personal
bankruptcy filings. NAFCU estimates that if this trend continues there will be
2.3 million
bankruptcy filings by the year 2003.
Credit union members have not been immune to the rising trend in personal
bankruptcies. In 1998, 250,000 credit union members, who held $1 billion in loans
outstanding at their credit unions, filed for
bankruptcy. On average, nearly half of all loan losses at federally insured credit unions
in 1998 were due to
bankruptcy. Bankruptcy accounted for more than 70 percent of all charge-offs among 27 percent of all
credit unions.
In recent years, Navy Federal has experienced a significant increase in the
number of members seeking relief through the
bankruptcy courts. Each month, Navy Federal charges off $2 to $3 million in loans to
bankrupt members. In 1998, Navy
Federal's charge-offs to bankrupt members totaled $30 million--a figure up from
$1.5 million from 16 years ago. What is particularly significant is that while
the non-
bankruptcy loss ratio increased 35 percent, the
bankruptcy loss ratio increased at a pace 7.5 times that rate: a staggering 264 percent.
As with other credit unions, the costs of
bankruptcy at Navy Federal must be borne by the financially responsible members of the
credit union. In 1998, if Navy Federal had experienced no
bankruptcy losses, consumer loan rates could have been reduced by more than one-half of 1
percentage point. Navy Federal's VISA Classic credit card rate, which is
currently 12.5 percent with no annual fee, could have been reduced 1.3
percentage points. It is important to understand that
bankruptcy is anti-consumer in nature because
responsible consumers pay the debts of the few who elect
bankruptcy as a financial planning tool-- encouraged by the advertising of unscrupulous
attorneys or financial advisors. The seemingly quick
"fix" of filing for
bankruptcy is also harming young consumers as more and more are choosing it as an
alternative. Once a young person chooses
bankruptcy, he or she often has difficulty obtaining credit at reasonable rates from
responsible financial institutions.
Credit Union Response to Consumer
Bankruptcy
Most credit unions have lower operating margins than other types of lenders.
Typically, credit unions pay higher rates on savings and charge lower rates on
loans than other financial institutions. For example, Navy Federal currently
pays 5.39 percent on its most popular share savings certificates, up to 6.18
percent on IRA share
certificates, and charges 7.5 percent on the most popular auto loan. Because of
these smaller margins, credit unions are hit harder than other financial
institutions by escalating
bankruptcy costs. A natural reaction for some institutions is to increase interest rates,
but that is not what credit unions do. Credit unions keep interest rates as low
as possible for the benefit of their members.
Credit unions also do much to promote financial responsibility among their
members. Because credit union members pool their resources for the mutual
benefit of all members, they have traditionally relied heavily on member
education and individual counseling to encourage and promote financial
responsibility. Navy Federal trains its employees in financial counseling,
check book balancing and family budgeting. Employees advise members on the
merits of saving and the consequences of heavy debt loads. Member newsletter
articles are
published and brochures are provided for members to assist in making
responsible financial decisions.
In addition to member education and counseling activities, Navy Federal, like
most credit unions, places an extremely high priority on sound underwriting
practices. Navy Federal is continually upgrading and refining its underwriting
techniques and tools. Automated tools are used in conjunction with traditional
loan officer evaluations for all loans. Navy Federal attempts to reach those
members with limited financial resources who truly need credit by meticulously
scrutinizing all applications. If an applicant's circumstances do not support
the requested amount, Navy Federal may offer to assist by countering with a
lower debt limit offer that the member may be able to repay.
Again, like most credit unions, Navy Federal does an
excellent job of member education and loan underwriting, but at Navy Federal
this is taken one step further. To illustrate, a young husband and wife, both
in the military and Navy Federal members, recently scheduled an appointment to
seek legal advice for
bankruptcy. Before the meeting, they received in their monthly statement from Navy
Federal, a flier entitled
"Bankruptcy, A Problem We All Share." As a result of reading the flier, they contacted Navy Federal's Budgetary
Counseling Staff regarding alternatives to
bankruptcy. The counselors explained the credit union's intensive
"Budgetary Counseling and Debt Management Program" and asked if the family wanted to participate. They agreed. We negotiated with
other creditors for debt adjustments and lowered Navy Federal's payments.
Except for essential family living expenses, they send all their income to Navy
Federal. We actually
pay their monthly bills and make their loan payments to other lenders. We are
counseling this family on the wise use of credit and the responsible use of
their financial resources. In a few months we will begin to return financial
responsibility back to this family as they learn to become financially
responsible consumers. In 1998, Navy Federal assisted nearly 3,000 families who
participated in this program.
Navy Federal's members are charged nothing for this service even though the
annual direct labor and supporting cost for the
"Budgetary Counseling and Debt Management Program" is approximately $800,000 excluding debt and interest adjustments. Often,
interest is reduced or waived to enable members to continue making loan
payments. Currently, over $3.2 million of Navy Federal's consumer loan and
credit card portfolio accrues zero interest at an annual loss to the
credit union of an additional $300,000. However, assisting members to become
financially responsible is a sound investment of credit union resources; Navy
Federal believes it is also a good example of creditor responsibility.
Reform Efforts: Credit Union Perspective
Because of the rising number of personal
bankruptcy filings, the credit union community believes that legislative action is
necessary to improve the current
bankruptcy system. To support Congress in that effort, NAFCU established an ad hoc
Bankruptcy Committee in 1997. After extensive study and bolstered with the input of a
nationwide survey of credit unions, NAFCU's ad hoc
Bankruptcy Committee approved a formal
"Proposal to Improve the
Bankruptcy System" (see Appendix 1). The product is a genuine effort to improve the nation's
bankruptcy laws and procedures.
To better understand how the nation's credit unions are affected
by
bankruptcy, NAFCU's ad hoc
Bankruptcy Committee surveyed over 1,050 federally chartered credit unions. The survey
revealed three issues at the forefront of credit unions' agenda regarding
bankruptcy reform.
First is requiring Chapter 13 consideration before establishing eligibility for
Chapter 7.
Bankruptcy courts do not require any showing of need or minimum level of debt. The
bankruptcy court simply accepts the debtor's assertion that
bankruptcy is necessary. As a result, Chapter 7 often gives more relief than is truly
necessary. The full discharge of debts provided by Chapter 7 is a carryover
from the last century, when most credit was secured by tangible assets. Today's
consumer-based economy is built on unsecured revolving credit with the promise
that debtors will pay from future income. Approximately 97 percent of the
respondents support a
bankruptcy system that is needs- based. This would help to increase debtor
accountability, create a fairer
bankruptcy system, and more fairly distribute payments among all creditors.
Second is mandatory financial education for all
bankruptcy filers. Credit unions have a long history of educating their members in
financial matters. The wise use of credit as well as the value of systematic
savings are basic credit union principles. Most credit unions attempt to
provide the best possible education for their members. Of those surveyed by
NAFCU, 84 percent support a requirement that would require debtors to
participate in credit counseling before filing
bankruptcy.
Third is strengthening the right of reaffirmation for credit union members.
Credit unions traditionally have higher reaffirmation rates than other lenders,
partly because their members realize that credit unions
offer them lower interest rates on loans, higher dividend rates on savings and
minimal fees. The higher credit union reaffirmation rates also reflect
characteristics of the credit union cooperative philosophy such as the
knowledge that fellow credit union members will bear the costs of any debt
discharged in
bankruptcy. Credit unions believe that their members should be assured that they can
retain their relationship with their credit union by voluntarily reaffirming
their loans at reasonable rates, rather than being at the mercy of other
lenders who will charge higher rates and greater fees. Seventy- six percent of
those surveyed believe that the
bankruptcy code should not include any limitations on the right to reaffirm.
As reflected in NAFCU's ad hoc
Bankruptcy Committee's proposal, credit unions throughout the country advocate meaningful
reform of the bankruptcy system. NAFCU's proposal
includes these recommendations:
- The
Bankruptcy Code should require that debtors who are able to pay a portion of their debts
file a repayment plan under Chapter 13;
- The Code should establish uniform rules and procedures for processing
creditors' claims and payments;
- The Code should establish uniform federal exemptions;
- Debtors should be required to complete a basic financial education course
prior to receiving discharge;
- A debtor should be required to notify secured creditors, within ten days of
filing
bankruptcy, whether the debtor intends to surrender, redeem, or reaffirm the collateral;
and,
- For creditors seeking to recover collateral, the automatic stay should expire
at the end of the notification period.
NAFCU also recommends establishing a
Bankruptcy Advisory Council that includes debtor and creditor representatives. The
council should be charged with studying
bankruptcy and bankruptcy reform. This council could be established under the auspices of the U.S. Department of
Justice. Alternatively, the Federal
Reserve Board's existing Consumer Advisory Council should be required to submit
an annual report to Congress on
bankruptcy and bankruptcy reform.
Reform Efforts: Congressional Action
Despite all of the efforts to educate, to make sound loans, and to assist those
in trouble,
bankruptcy reform is needed and is needed now to encourage financial responsibility. A critical
component of
bankruptcy reform must be a debtor's right to reaffirm those debts that enable him or her to
continue to meet basic family living needs by maintaining access to essential
and low cost financial services. Unfortunately,
bankruptcy reform bills introduced in the 105th Congress were later amended to greatly diminish
a debtor's right to reaffirm. We believe those amendments were ill-advised.
They would have required judicial review and approval of reaffirmation
agreements as is the case with S. 625, The
Bankruptcy Act of 1999. We believe judicial reviews are unnecessary and
will serve to increase burdens on the
bankruptcy system (burdens that would likely lead to non-uniform treatment by the various
courts), increase court costs, reduce debtors' choices and ultimately work to
the disadvantage and detriment of debtors. An exemption to the judicial review
requirements for federally insured credit unions was inserted in the 1998
conference report for H.R. 3150 (H. Report 105794) and included in H.R. 833,
The
Bankruptcy Reform Act of 1999. If it is not possible to amend S. 625 to exempt federally insured
credit unions, we would strongly urge Congress to permit the current law to
stand.
Reform Efforts: Disclosures
Included in both
bankruptcy reform bills in the 105th Congress, the Consumer
Bankruptcy Reform Act of 1997, S. 1301 and the
Bankruptcy Reform Act of 1998, H.R. 3150, and also in
H.R. 833, are disclosure requirements that would amend the Truth in Lending Act
(TILA). Generally, disclosures are essential to protect consumers from those
who would use inaccurate and incomplete information to their advantage. Also,
disclosures that aid consumers in making informed decisions are necessary.
Unfortunately, all mandatory disclosures increase the regulatory burden and the
costs of delivering financial services. These are costs that must be passed on
to the credit unions' member owners and to the customers of other financial
institutions.
The Consumer
Bankruptcy Reform Act of 1997, S. 1301, as passed by the Senate in 1998, would have amended TILA
to require additional disclosures regarding the income tax treatment of
interest payments on certain real estate loans. In the absence of convincing
information to the contrary, the effectiveness of such disclosures could be
questioned because many consumers believe they are already inundated with
information. They simply do not take the time to read existing
disclosures.
However, H.R. 833 would direct the Federal Reserve Board to conduct a study
concerning the adequacy of consumer information regarding the income tax
treatment of interest payments on real estate loans. NAFCU does not oppose an
impartial study. If a thorough analysis indicates additional disclosures would
benefit credit union members, NAFCU and the credit union community would
welcome a reasonable approach to providing that information to its members. The
implementing regulations for any required disclosures should acknowledge a
history that indicates tax rules are subject to change and sometimes with short
notice.
Unplanned changes in disclosures can be disruptive, costly and place excessive
burdens on credit unions. It would be especially hard for small credit unions
to handle the increased cost and burden. Just last week, at the National Credit
Union Administration's (NCUA) regular Board meeting, Board Member Dennis Dollar, in a discussion of the
agency's new small credit union program related that at a small credit union,
an employee, in a single day, might be called upon to take deposits, approve a
loan and complete reports to the NCUA. Dollar said he knew about a credit union
employee's responsibilities because he had been that employee. The members of
the Committee should thoroughly consider all of the consequences, especially
those on small credit unions with limited resources, of requiring tax planning
information in loan disclosures.
With respect to the proposed disclosures in H.R. 833 relating to minimum
monthly payments on credit card debt, their usefulness to consumers could be
questioned. NAFCU and member credit unions would not be opposed to the specific
disclosures if an impartial study determined they would be in the
best interest of the credit union members. Experience demonstrates that most
members want to know the card's annual interest rate, the amount of any fees,
and, most importantly, the amount of their monthly payment.
Last year's S. 1301 contained a provision that would have required monthly
disclosures of the payoff period for credit card debt if the consumer paid the
minimum payment shown on the statement. This information could be a useful tool
to assist credit union members in making payments decisions. However, before
Congress adopts such requirements, it should direct the Federal Reserve Board
to make an impartial study to determine how useful the information would be to
consumers and the additional burden that it would impose on financial
institutions. If the disclosures would be useful to consumers, sufficient time
should be given to implement computer systems in an orderly manner to hold down
the implementation costs that
must be passed on to our members. Conceptually, the proposal to annually send
a worksheet to each credit card borrower to assist in determining his or her
household income and debt obligation has merit. However, the practical value of
the requirement comes into question. It would require a considerable amount of
the consumer's time to read, understand, and complete the document. Without the
continual effort of the consumer's financial institution, the worksheet would
likely fall into the trash can.
Conclusion
NAFCU believes the consumer information and disclosure studies proposed in H.R.
833 would be useful to determine whether additional information should be
disclosed to consumers. Congress should consider impartial studies of the
practices of lenders to determine the extent to which certain practices may
contribute to the over indulgence of credit by consumers that results in
bankruptcy. Congress should consider a wide range of issues to foster responsibility and
accountability among all persons involved in the
personal financial services arena. These issues include strengthening the
educational system, thoroughly evaluating lending practices, enacting
needs-based
bankruptcy system that retains a credit union members' right to reaffirm their debts and
streamlines uniform administrative procedures.
NAFCU recognizes the need for
reform and is grateful that Congress is focused on the problem and is determined to
implement
reforms. On behalf of NAFCU, thank you for considering the credit union perspective.
NAFCU applauds the efforts of the Committee and hopes to continue to work with
you to resolve this and other challenging issues.
END
LOAD-DATE: March 26, 1999
