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From The Nader Letter

Jan. 1998

In recent years, banks, credit card companies and others in the financial industry have been pushing high-cost credit on consumers in a reckless reach for bigger profits.

Ed Furash, a banking consultant in Washington, told the New York Times that the entire consumer credit business has been engaged in “risk warfare.” As a result, he says, there has been an expansion of credit across the board “for people who wouldn’t have gotten credit under the old models.”

Some lenders have lured new customers by offering low introductory interest rates. For example, a few years ago Chevy Chase Bank of Maryland offered customers a low introductory interest rate of 5.9 percent if they signed up for the bank’s credit card. Now, the introductory rate has disappeared and some customers are paying as high as 27.5 percent interest on the same card.

Last year, more than four billion unsolicited credit card applications were shipped to customers across the nation. Millions of other consumers are being offered higher and higher credit limits on existing cards. And many of these card holders — including students and working families — are unable to meet more than the minimum payments, leaving big balances on which double digit interest charges pile up month after month.

To no one’s surprise, the aggressive credit merchants are helping to push many consumers over the edge and into bankruptcy courts.

These go-for-broke marketing tactics are producing some sad stories for unsophisticated borrowers. Take the case of the 68-year old former cleaning woman who was coaxed into refinancing her small home in Atlanta, Georgia six times. She finally was forced to default on the loan when the escalating payments took more than 60 percent of her monthly social security pension.

A 59-year old disabled Air Force veteran in Washington fell into $65,000 of debt and faced loss of his home after a series of refinancings that stemmed from a simple effort to pay for new carpeting and kitchen cabinets.

The credit pushers, one attorney says, appear to prey on homeowners with limited income and a lot of equity, making them loans that they can barely afford.

So, is the consumer credit industry waking up and coming up with saner marketing policies, better disclosures, reasonable fees and lower interest charges on credit cards and other consumer credit?

No. Instead of reforming their practices, the credit pushers have launched a huge and extremely well financed lobbying campaign designed to rush Congress into a rewrite of the nation’s bankruptcy laws. They want to make it easier, quicker and more certain that they can extract the last dollar from hard pressed debtors who have trouble even putting food on the table for their families.

The lenders’ legislation — HR 3150 — would create a bankruptcy system which would be more expensive, more intimidating, and leave participants still overloaded with debt.

Many, if not all debtors, would be forced to litigate to prove their right to be in the Chapter 7 bankruptcy system. They would be subject to expensive audits, new filing and service requirements. Many more debts would be non-dischargeable. Dismissal even on technical grounds would require that debtors pay new litigation costs to get a second chance — costs that may be impossible for debtors already on survival budgets.

Creditors could pursue family members even if a debt was being repaid through the bankruptcy process.

Debtors would be required to stay in repayment plans for five to seven years, delaying the opportunity to return to a more normal and manageable financial condition. Under present bankruptcy law, debtors can be out of the repayment plan in three to five years. The longer period under the yoke of a difficult repayment plan, bankruptcy experts say, increases the chance of a total financial failure — something that would serve the interests of neither the lending industry nor the debtor.

For many, a car is a necessity to maintain a job. Similarly, retaining a home is paramount in the basic survival of a family. But, the legislation would endanger these essential needs by placing requirements for repayment of unsecured debt like credit cards on a par with secured debt on critically important items like a home mortgage or a car loan.

The bill is based on the theory that all debtors are dishonest deadbeats, trying to beat the system by filing for bankruptcy. Through the legislation, the credit pushers hope to establish a “virtual debtors prison” from which families — facing impossible problems — can never escape.

But, the American system has always provided for a bankruptcy process which allows citizens a chance at a fresh start. Article I of the U. S. Constitution, for example, specifically mandates a bankruptcy process.

In a time of record corporate profits and steady downsizing, large uninsured medical costs, two wage-earner families, rising credit costs and skyrocketing outlays for education, millions of American families are at risk of unmanageable financial crisis. And such a crisis may lead to a mass of unpaid bills, utility shutoffs, home foreclosure, wage garnishment, and collection harassment. Few but the most affluent can be certain that they will not face such a crisis during their lives.

There comes a point where there has to be a reasonable chance for a new start through bankruptcy. Without a fair and practical bankruptcy system, not only would entire families be crushed, but the costs to a society — that abhors welfare — would be large. Throwing people on the trash heap of debt with no recourse is morally, economically and politically bankrupt. A bankruptcy system that allows individuals and families to resume their roles as productive citizens is clearly advantageous to society.

The credit pushers have produced a study that suggests that Chapter 7 bankruptcy, as presently written, allows debtors to hold too many assets. More could be recovered if Congress will tighten the screws, they say.

But, the General Accounting Office (GAO) had its financial experts examine the study and they questioned the conclusions and the methodology under which the study had been conducted.

Even without the GAO efforts, income statistics would indicate that persons filing for bankruptcy are not stuffing cash in their mattresses. The National Consumer Law Center cites studies which show that the income of bankruptcy debtors is at least 40 percent lower than average Americans.

Similarly, the propaganda peddled by the credit pushers’ lobbyists on Capitol Hill is designed to suggest that the current bankruptcy laws are riddled with loopholes that allow fraud and deceit.

The claim is absurd.

The existing bankruptcy code has abundant tools to prevent fraud — trustee oversight and investigation of every debtor’s affairs based on comprehensive schedules submitted under penalty of perjury. In addition, there are criminal sanctions for bankruptcy fraud and judges have the authority to dismiss cases for abuse, lack of good faith or failing to meet Bankruptcy Code requirements. The code provides for complete denial of a discharge of debts for deliberate efforts to hinder, delay or defraud creditors or for providing the court with misinformation.

The financial industry — led by the American Financial Services Association, the American Bankers Association and credit card companies — has assembled one of the biggest lobbying campaigns of the 105th Congress.

Big time, big buck lobbyists like former Republican National Committee Chairman Haley Barbour and Lloyd Bentsen, former Democratic Senator and Secretary of the Treasury in the Clinton Administration, are heading up the campaign.

Others lobbying for the lenders’ legislation are Timmons and Company which includes Tom Korologos and Bryce Harlow of past Republican Administrations and William Cable, a former aide to Democratic President Jimmy Carter.

This all-powerful lineup of Washington’s best known influence peddlers illustrates just how lopsided the bankruptcy battle is going to be in the second session of the 105th Congress. On one side are major Washington lobbying law firms and the most powerful trade associations representing the nation’s financial industry. On the other side are persons facing financial troubles, the poor, and those seeking a new start as productive citizens.

In the first session, more than 150 Members of the House of Representatives signed as co-sponsors — none apparently asking first whether the financial industry might be held accountable for its excesses in pushing credit on unsophisticated borrowers with limited means to repay.

Leading the charge for the credit pushers is Representative Bill McCollum (R. Florida), second ranking on the House Judiciary Committee. Well he should be. He received $311,000 in contributions from the financial industry in the 1995-1996 election cycle.

McCollum introduced the original bill — HR 2500 — in the first session. He has now joined Representative George Gekas (R. Pennsylvania), Chairman of the Commercial and Administrative Law Subcommittee of the House Judiciary Committee, in a new version (HR 3150) which will be the hearing and markup vehicle.

Gekas’s campaign chest of $97,000 in the last election cycle was considerably smaller than McCollum’s, but a quarter of it came from Political Action Committees in the finance field.

There is no need to rush through another layer of protection for the lending industry in the form of tougher bankruptcy laws.

Management of risk is part of the business of banks, credit card companies and other financial firms. Already much of the financial risk is assumed or softened by the federal government through deposit insurance, loan guarantees, access to cheap loans from the Federal Reserve, and a paternalistic regulatory system. On top of that the industry, reporting record profits, sets its prices at sky high levels knowing full well that the Congress has consistently demonstrated a lack of the necessary courage to protect consumers from being gouged through excessive interest rates and fees.

Now, this industry is back asking Congress to give it yet another level of privilege by weakening the rights of citizens to be protected when faced with unmanageable financial problems created by loss of jobs, unforeseen medical costs, death or illness of a wage earning family member and other personal tragedies — or by the unconscionable practices of credit merchants preying on the poor and the unsophisticated.

HR 3150 — the lenders’ relief act — should be defeated.