[Congressional Record Volume 153, Number 149 (Wednesday, October 3, 2007)]
[Senate]
[Pages S12536-S12538]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. DURBIN (for himself and Mr. Schumer):
  S. 2136. A bill to address the treatment of primary mortgages in 
bankruptcy, and for other purposes; to the Committee on the Judiciary.
  Mr. DURBIN. Mr. President, over 2 million families are going to lose 
their homes in the next few years. Mr. President, 28,000 of those 
families are in Illinois.
  Why?
  Because they are stuck in bad mortgages.
  Homeowners across America don't need to hear from me to know that the 
housing boom has busted. From Wall Street to Main Street, we see the 
spillover effects on the economy.
  I am pleased that in Congress we are now talking about how to tighten 
lending regulations so we don't repeat this type of market meltdown--
and there is certainly more work to be done on that--but in the 
meantime, millions of families are stuck in the current mess. They need 
our help.
  It is true that some families knowingly stretched a bit to buy more 
house than they should have. But many families were sold mortgages they 
couldn't afford by unscrupulous brokers. Some families were given 
faulty appraisals, only to find later that their homes weren't worth as 
much as they thought. Still other families have been hit with a 
mountain of excessive fees that have pushed them over the edge.
  Regardless of the reason, a family pushed into foreclosure is a 
disaster for the homeowner and the surrounding community, and it is a 
bad deal for the banks as well.
  That is why I am introducing the Helping Families Save Their Homes 
Act, which will help around 600,000 families who have nowhere else to 
turn to save their homes.
  I support the constructive efforts of all of my Democratic colleagues 
in both the Senate and the House to deal with this crisis, and with 
this bill I add one more targeted solution to that list.
  Bankruptcy should be the last resort, to be sure, but this change in 
how family homes are treated in bankruptcy will help hundreds of 
thousands of families who would otherwise be out on the street.
  Today, a bankruptcy judge in Chapter 13 can change the structure of 
any secured debt, except for a mortgage on a principal residence. When 
this exception was added to the law in 1978, mortgages were largely 30-
year fixed rate loans that required 20 percent down and were originated 
by a local banker who personally knew the homeowner. In 1978, it was 
rare for the mortgage to be the source of financial difficulty that 
sent a family into bankruptcy.
  The mortgage market has changed since then, to put it mildly. Now, 
unregulated out-of-town mortgage brokers can sell exotic ``no-doc,'' 
``interest-only,'' ``2-28,'' or other mortgages to families, with few 
questions asked. The mortgages are then securitized by big banks and 
sold into the secondary market to investors who have no knowledge of 
the homeowner's financial situation. Risk is dispersed, but so is 
responsibility.
  In 1978, when a family realized it might begin having trouble making 
the house payments, it could go down to the local bank and work out a 
new plan to keep up. Today, families struggle to even get a straight 
answer on the phone.
  As the New York Times documented on Sunday, one homeowner made around 
670 phone calls to her loan servicer over a 3-month period in an 
attempt to work out a modified mortgage that she could pay and that 
would still be profitable to the bank. She spoke to 14 different people 
and received nine different answers on how she should proceed. 
Community activists confirm that this type of struggle is not unusual. 
For millions of families who are nearing foreclosure, this just isn't 
good enough.
  We need another solution for families that aren't being helped by 
their bank.
  If mortgages on vacation homes and family farms can be modified in 
bankruptcy, why can't mortgages on primary homes?
  My bill would allow bankruptcy judges to work out payment plans with 
homeowners and banks and would also protect families from excessive 
fees.
  The bill would help families who are at risk of losing their homes. 
But it also protects property values for every other family on that 
block. In fact, this change in the way mortgages are handled in 
bankruptcy would save an estimated $72.5 billion in existing property 
values for the neighborhood, since each foreclosure on a neighborhood 
block reduces the property value for every other family on that block.
  As for the banks? Foreclosures cost banks around $50,000 to process, 
so every home saved from foreclosure represents a good deal for them 
too. My bill would allow judges to modify mortgages only in ways that 
would still be profitable for the banks and their investors.
  Everybody wins, right? Well, the banks are still opposing this bill, 
so I would like to take a moment to directly address some of the 
primary complaints that I have heard. There are too many families in 
need--and this bill makes too much sense--for the bill to be shot down.
  While everyone seems to agree on the problem--millions of families 
are going to lose their homes when the variable rate loans that were 
originated in 2005 and beyond begin to reset, and fall--some argue that 
we shouldn't do anything to help these families keep their homes in 
bankruptcy. I have heard three main complaints, none of which stand up 
to scrutiny.
  The first complaint is that banks are already helping homeowners with 
their mortgage problems, and so this change is unnecessary.
  In fact, the banks aren't doing nearly enough. A recent study by 
Moody's Investors Service Inc. found that the 16 largest subprime 
servicers, which manage a combined $950 billion of loans, modified just 
1 percent of the loans that were made in 2005 and that reset in 
January, April, and July. Shouldn't we try to help some of the other 99 
percent of homeowners who are at risk of

[[Page S12537]]

foreclosure but who could make payments on a different mortgage that is 
still profitable for the banks?
  The second argument is that Congress shouldn't modify the bankruptcy 
code again so soon after the 2005 amendments were implemented.
  However, the changes made to the bankruptcy code in 2005 had nothing 
to do with mortgages on primary residences. My bill would change 
elements of the code that date from 1978.
  Would the banks argue that the tax code shouldn't be changed in 2007 
because a completely unrelated area of the tax code was modified in 
2005? Not if they don't want to get laughed out of the Finance 
Committee room, they wouldn't.
  Finally, I have heard that allowing mortgages on principal residences 
to be modified in bankruptcy would introduce ``uncertainty'' in the 
market and would cause the market for loans for low-income families to 
dry up.
  But mortgage lending is a hypercompetitive market. There is no 
evidence to suggest that a full-scale exodus will occur because of a 
change to the bankruptcy law. Banks are still willing to lend for 
vacation homes and family farms and those mortgages can be modified in 
bankruptcy, so this argument has no basis in fact.
  As a spokesman from JP Morgan Chase said in the American Banker: ``It 
is always in the best interest of the servicer, the borrower, and the 
investors if we can modify a loan, because foreclosure means there's no 
chance the investor is going to recoup their money.'' It should make no 
difference if a modification is agreed to outside of the context of 
bankruptcy or within it, if the modification itself is identical.
  I would like to conclude by noting that only families that 
desperately need this help will file for bankruptcy, and only 
reasonable mortgages will result. My bill has been carefully 
constructed to avoid unintended consequences in several ways:
  First, families that are helped by these changes to the law have to 
live within the strict IRS spending guidelines for Chapter 13 filers. 
Families that don't desperately need the help will be very unlikely to 
try to take advantage of this provision.
  Second, every mortgage restructured by a bankruptcy judge will be a 
better deal for the banks and investors than foreclosure. The minimum 
value of the mortgage in a restructured deal would be the fair market 
value of the home, which is the same price the bank would earn if it 
sold the house after a foreclosure. Plus, the banks will avoid the 
average of $50,000 in foreclosure fees.
  Finally, giving bankruptcy judges the flexibility to restructure 
mortgages should provide an incentive for banks and investors to do 
more to restructure mortgages outside of bankruptcy, which is in 
everyone's best interest.
  I repeat that quote from a major bank: ``It is always in the best 
interest of the servicer, the borrower, and the investors if we can 
modify a loan, because foreclosure means there's no chance the investor 
is going to recoup their money.''
  I agree. It shouldn't be so hard for customers to modify their loans 
outside of bankruptcy since it's in everyone's best interest to do so. 
But allowing families to modify loans within bankruptcy as a last 
resort so they can keep their homes is the right thing to do.
  This bill is supported by the AARP, ACORN, AFL-CIO and SEIU, the 
Center for Responsible Lending, the Consumer Federation of America, 
NAACP and La Raza, the National Association of Consumer Bankruptcy 
Attorneys, the National Community Reinvestment Coalition, and many 
others.
  I urge my colleagues to support this bill, and I look forward to 
helping families save their homes. Over the next few years, hundreds of 
thousands of families will desperately need it.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the text of the bill was ordered to be 
printed in the Record, as follows:

                                S. 2136

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Helping Families Save Their 
     Homes in Bankruptcy Act of 2007''.

                    TITLE I--MINIMIZING FORECLOSURES

     SEC. 101. SPECIAL RULES FOR MODIFICATION OF LOANS SECURED BY 
                   RESIDENCES.

       (a) In General.--Section 1322(b) of title 11, United States 
     Code, is amended--
       (1) in paragraph (10), by striking ``and'' at the end;
       (2) by redesignating paragraph (11) as paragraph (12); and
       (3) by inserting after paragraph (10) the following:
       ``(11) notwithstanding paragraph (2) and otherwise 
     applicable nonbankruptcy law--
       ``(A) modify an allowed secured claim secured by the 
     debtor's principal residence, as described in subparagraph 
     (B), if, after deduction from the debtor's current monthly 
     income of the expenses permitted for debtors described in 
     section 1325(b)(3) of this title (other than amounts 
     contractually due to creditors holding such allowed secured 
     claims and additional payments necessary to maintain 
     possession of that residence), the debtor has insufficient 
     remaining income to retain possession of the residence by 
     curing a default and maintaining payments while the case is 
     pending, as provided under paragraph (5); and
       ``(B) provide for payment of such claim--
       ``(i) for a period not to exceed 30 years (reduced by the 
     period for which the loan has been outstanding) from the date 
     of the order for relief under this chapter; and
       ``(ii) at a rate of interest accruing after such date 
     calculated at a fixed annual percentage rate, in an amount 
     equal to the most recently published annual yield on 
     conventional mortgages published by the Board of Governors of 
     the Federal Reserve System, as of the applicable time set 
     forth in the rules of the Board, plus a reasonable premium 
     for risk; and''.
       (b) Conforming Amendment.--Section 1325(a)(5) of title 11, 
     United States Code, is amended by inserting before ``with 
     respect'' the following: ``except as otherwise provided in 
     section 1322(b)(11) of this title,''.

     SEC. 102. WAIVER OF COUNSELING REQUIREMENT WHEN HOMES ARE IN 
                   FORECLOSURE.

       Section 109(h) of title 11, United States Code, is amended 
     by adding at the end the following:
       ``(5) Paragraph (1) shall not apply with respect to a 
     debtor who files with the court a certification that a 
     foreclosure sale of the debtor's principal residence has been 
     scheduled.''.

              TITLE II--PROVIDING OTHER DEBTOR PROTECTIONS

     SEC. 201. COMBATING EXCESSIVE FEES.

       Section 1322(c) of title 11, the United States Code, is 
     amended--
       (1) in paragraph (1), by striking ``and'' at the end;
       (2) in paragraph (2), by striking the period at the end and 
     inserting ``; and''; and
       (3) by adding at the end the following:
       ``(3) to the extent that an allowed secured claim is 
     secured by the debtor's principal residence, the value of 
     which is greater than the amount of such claim, fees, costs, 
     or charges arising during the pendency of the case may be 
     added to secured debt provided for by the plan only if--
       ``(A) notice of such fees, costs or charges is filed with 
     the court before the expiration of the earlier of --
       ``(i) 1 year after the time at which they are incurred; or
       ``(ii) 60 days before the conclusion of the case; and
       ``(B) such fees, costs, or charges are lawful, reasonable, 
     and provided for in the underlying contract;
       ``(4) the failure of a party to give notice described in 
     paragraph (3) shall be deemed a waiver of any claim for fees, 
     costs, or charges described in paragraph (3) for all 
     purposes, and any attempt to collect such fees, costs, or 
     charges shall constitute a violation of section 524(a)(2) of 
     this title or, if the violation occurs before the date of 
     discharge, of section 362(a) of this title; and
       ``(5) a plan may provide for the waiver of any prepayment 
     penalty on a claim secured by the principal residence of the 
     debtor.''.

     SEC. 202. MAINTAINING DEBTORS' LEGAL CLAIMS.

       Section 554(e) of title 11, United States Code, is amended 
     by adding at the end the following:
       ``(e) In any action in State or Federal court with respect 
     to a claim or defense asserted by an individual debtor in 
     such action that was not scheduled under section 521(a)(1) of 
     this title, the trustee shall be allowed a reasonable time to 
     request joinder or substitution as the real party in 
     interest. If the trustee does not request joinder or 
     substitution in such action, the debtor may proceed as the 
     real party in interest, and no such action shall be dismissed 
     on the ground that it is not prosecuted in the name of the 
     real party in interest or on the ground that the debtor's 
     claims were not properly scheduled in a case under this 
     title.''.

     SEC. 203. RESOLVING DISPUTES.

       Section 1334 of title 28, United States Code, is amended by 
     adding at the end the following: ``Notwithstanding any 
     agreement for arbitration that is subject to chapter 1 of 
     title 9, in any core proceeding under section 157(b) of this 
     title involving an individual debtor whose debts are 
     primarily consumer debts, the court may hear and determine 
     the proceeding, and enter appropriate orders and judgments, 
     in lieu of referral to arbitration.''.

[[Page S12538]]

     SEC. 204. ENACTING A HOMESTEAD FLOOR FOR DEBTORS OVER 55 
                   YEARS OF AGE.

       (a) In General.--Section 522(b)(3) of title 11, United 
     States Code, is amended--
       (1) in subparagraph (B), by striking ``and'' at the end; 
     and
       (2) in subparagraph (C), by striking the period at the end 
     and inserting ``; and''; and
       (3) by adding at the end and inserting the following:
       ``(D) if the debtor, as of the date of the filing of the 
     petition, is 55 years old or older, the debtor's aggregate 
     interest, not to exceed $75,000 in value, in real property or 
     personal property that the debtor or a dependent of the 
     debtor uses as a principal residence, or in a cooperative 
     that owns property that the debtor or a dependent of the 
     debtor uses as a principal residence.''.
       (b) Exemption Authority.--Section 522(d)(1) of title 11, 
     United States Code, is amended by inserting ``or, if the 
     debtor is 55 years of age or older, $75,000 in value,'' 
     before ``in real property''.

     SEC. 205. DISALLOWING CLAIMS FROM VIOLATIONS OF CONSUMER 
                   PROTECTION LAWS.

       Section 502(b) of title 11, United States Code, is 
     amended--
       (1) in paragraph (8), by striking ``or'' at the end;
       (2) in paragraph (9), by striking the period at the end and 
     inserting ``; or''; and
       (3) by adding at the end the following:
       ``(10) the claim is subject to any remedy for damages or 
     rescission due to failure to comply with any applicable 
     requirement under the Truth in Lending Act (15 U.S.C. 1601 et 
     seq.), or any other provision of applicable State or Federal 
     consumer protection law that was in force when the 
     noncompliance took place, notwithstanding the prior entry of 
     a foreclosure judgment.''.

                          ____________________