Credit-card reform? check; bankruptcy aid? not so much…

April 30th, 2009 by Mike Hinshaw

bankruptcy-nextThis is a case of good news, bad news…and really bad news.

The good news is that the U.S. Senate is finally moving on two crucial pieces of legislation, credit-card reform and the proposal to grant bankruptcy judges the power to modify loans on primary residences–and the credit-card legislation looks to have significant traction.

The bad news is the mortgage-lending lobby seems to have already persuaded enough senators to move against such “cram-down” powers–even though judges do have the exact same power for luxury items. In other words, judges can now modify terms on such items as yachts, snowmobiles, and even vacation homes but do not have the power to modify terms for consumers struggling to save the houses where they live. (Of course, even without the logical improvement, the bankruptcy code remains a powerful tool for providing relief, including saving a home from foreclosure.)

As CNBC.com reports today: “Senate Majority Whip Richard J. Durbin (D-Illinois) has managed to get a vote scheduled today on his controversial plan to help homeowners avoid foreclosure, but the bill’s chances of approval are slim, say congressional and industry sources.”

The article also says consumer groups and the White House believe the legislation is a crucial factor in “the effort to forestall home foreclosures” and that Durbin has been promoting such legislation for more than two years.

But apparently, he’s made a deal with the devil: Lacking the juice to get the measure introduced as a stand-alone item, Durbin has gotten it to the floor as an amendment to a broader proposal “known as the ‘Helping Families Save Their Homes Act of 2009,’ which the Senate is also expected to vote on.” The concern is that, lacking enough support, the so-called “cram-down” measure would be exposed to GOP filibuster.

Hence, the really bad news–apparently Durbin cut a risky deal:

“If the Durbin amendment fails to get 60 votes Thursday, as is expected, it will be withdrawn altogether and no further cramdown amendments will be allowed, according to terms agreed in advance, said one source.”

If that source is correct, it sounds as though the measure would have to succeed as a stand-alone item, flying in the face of concerted opposition from the mortgage industry and its lobbyists.

In a companion piece, an analysis of the two measures’ chances also written by senior features editor Albert Bozzo, the credit-card legislation is described as a  “reform bill with enhanced consumer protections [that] is progressing fairly smoothly. . . .

“The difference [in support for the two measures] may be as simple as the level of pubic support from the White House at a time when relations between the administration and the financial services industry are deteriorating amid tension over TARP money, bank stress tests and executive pay.”

Bozzo also quotes “a veteran banking analyst” who boils the issue to a matter of sheer numbers; in simple terms more consumers are hurt by abusive credit-industry practices than they are by abusive mortgage-industry practices.

“The cramdown is a much tougher one to do, which is part of what is going into the thinking,” says veteran banking analyst Bert Ely of Ely & Co. “There’s a lot of people who don’t have a mortgage. Credit cards are more of a populist issue.”

The bankruptcy proposal is scheduled for vote today at 2:30 ET, preceded by a four-hour debate.

Credit-card reform is scheduled for a House vote on Thursday, with the Senate expected to take it up as early as next week.

Meanwhile, more homes are headed for foreclosure.