The House is on the verge of taking up a mortgage aid proposal that would, for the first time, allow judges to modify the terms of primary mortgages for individuals facing bankruptcy — a reform known as the “cram-down.”
The bankruptcy law change is backed by the Obama administration as well as Citigroup (which is increasingly looking like a ward of the Obama administration). But the American Bankers Association, the Mortgage Bankers Association, and other K Street players are no fans of the cram-downs plan.
In a letter sent today to every House member, a group of financial lobbying giants urges Congress to reject the cram-downs bill. Lobbyists are especially concerned about language in the bill “provid[ing] that even minor violations of the Truth-in-Lending Act (TILA) could result in a home equity loan or even a mortgage being disallowed in bankruptcy.”
You read that right: K Street is asking Congress to permit lenders to get away with minor violations of the TILA, a 40-year-old law that was passed to protect consumers from banks that hide punitive terms in the fine print of loans.
The TILA has allowed a growing number of mortgage-holders to win “rescissions” of their loans in court — requiring that the principal balance be repaid, but preventing banks from foreclosing — by finding minor violations of the law.
As the Journal reported last month, Citigroup put a major condition on its support for the cram-downs plan:
In a concession to lenders, a mortgage debt could be forgiven entirely only if the lender was found to have committed a major violation of the Truth in Lending Act. Under the bill’s original language, the entire mortgage debt could be wiped away based on a violation of any number of state and federal consumer lending laws.
Citigroup has not yet pulled its support from the House bill, despite the TILA language that banking lobbyists dislike. But it’s worth noting that K Street is marshaling opposition to this bill by claiming a right to commit “minor violations” of the law. It’s not the best public relations strategy.
