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Ralph Nader > In the Public Interest > Lender’s Relief Act Weakens Citizen’s Rights

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.

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 affluent can be certain that they will escape the possibility of 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.

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.