[Congressional Record (Bound Edition), Volume 155 (2009), Part 8]
[Senate]
[Pages 10850-10853]
[From the U.S. Government Publishing Office, www.gpo.gov]




                         BANKRUPTCY CODE REFORM

  Mr. DURBIN. Madam President, later this week, probably tomorrow or 
Thursday, we will consider an amendment which I will offer relative to 
the Bankruptcy Code. I can remember not that many years ago, when we 
reformed the Bankruptcy Code, I was a member of the Senate Judiciary 
Committee--a new member--and the ranking chairman of the Subcommittee 
on Bankruptcy was Senator Grassley of Iowa. He had worked on this for 
quite some time.
  I looked around the Senate Judiciary Committee and reflected on my 
colleagues, many of whom had served for years in the Senate and on that 
committee. But when it came to the issue of bankruptcy, 10 years ago, I 
realized something that was a little amazing. By virtue of the fact 
that I had taken a course in bankruptcy at Georgetown Law School 30 
years before--a 3-hour, one-semester course--and had been appointed a 
trustee in bankruptcy in the Federal court in Springfield, IL, over a 
bankrupt gas station, I had more experience in bankruptcy than any 
member of the committee.
  Nevertheless, we embarked on this reform of the Bankruptcy Code--a 
massive undertaking. It took years before it was finally accomplished, 
and during the course of that a lot of amendments were offered. Of 
course, I viewed bankruptcy then and now as the last resort of 
desperate people. But, sadly, many millions of Americans have found 
this to be the only thing to which they can turn. They have reached 
such a point in their lives and in their economic experience where they 
have no choice but to turn to bankruptcy court and try to wipe the 
slate clean and to start over.
  The major reasons people go into bankruptcy are pretty obvious--the 
loss of a job; the No. 1 reason, of course, is health care bills. 
People end up with bills that aren't covered by insurance and have no 
place else to turn. Sometimes a bitter divorce will end in bankruptcy 
court. It is rare that people turn to it. I think many of the critics 
of bankruptcy think people are just looking for any opportunity to go 
to bankruptcy court. I don't think that is the case with the majority 
of those petitioners who file for bankruptcy.
  So here I am again, some 10 years later, looking at the Bankruptcy 
Code, but this time in a different context altogether. At this point in 
time, more and more Americans are headed for bankruptcy court for a new 
reason. They are losing their homes. They fell behind in their payments 
on their mortgages, became delinquent, and now face foreclosure. You 
know what I am talking about--people who have lost their jobs, people 
who signed up for mortgages that were very misleading, people who ended 
up in a circumstance where the mortgage they signed ends up triggering 
a new interest rate they can't sustain. So the most important asset 
they have on Earth--their home--is about to be lost, and they are 
headed to bankruptcy court to try to salvage something out of their 
lives.
  Now, if the person headed for bankruptcy court facing foreclosure on 
their home is well off and has other real estate, such as a vacation 
condo in Arizona or Florida, it is interesting what the bankruptcy 
court can do. The person who comes in filing for bankruptcy facing 
foreclosure on two pieces of real estate, the home and the vacation 
condo, finds out that the court treats them totally different.
  When it comes to the vacation condo, the bankruptcy judge sits down, 
takes a look at the assets of the person filing for bankruptcy, and 
tries to determine whether at the end of the day they can ever make 
another mortgage payment. For some, it is hopeless; they have lost a 
job and they are so far behind it will never work. But for others, they 
are right on the edge. So the bankruptcy judge has the power, when it 
comes to the vacation condo, to rewrite the terms of the mortgage that 
is being foreclosed upon because the judge concludes that the person 
can make a mortgage payment, if in fact the person is given a new 
interest rate or a new term for the mortgage.
  That is what they can do with the vacation condo. But what can the 
bankruptcy judge do when you file for bankruptcy facing foreclosure on 
your home? The answer is nothing. There is nothing the court can do. 
There could literally be a circumstance where a person could have a 
restructured mortgage coming out of bankruptcy to save that condo in 
Florida but lose their home. That is the way the law is written.
  The same is true when it comes to farms and ranches. Not long ago 
some of the critics of my amendment were pushing in Congress and in the 
Senate a revision in the bankruptcy law which said, if someone goes 
into bankruptcy facing foreclosure on their farm, then we ought to let 
the bankruptcy judge see if they can rewrite the terms of the mortgage. 
We passed that into law. The same thing applies to ranches--farms, 
ranches, second homes, and vacation condos. The bankruptcy court has 
that power. But when it comes to your home it does not.
  How do you explain that? Why in the world could someone turn to the 
bankruptcy court for relief for every piece of property but the most 
important one in life? The answer is that it is the law, and that is 
what the Durbin amendment would change.
  Of course, there are some who do not like this change--the banks. 
They don't like this change because it means at the end of the day, if 
they will not sit down with someone facing foreclosure to try to work 
out and renegotiate the terms of the mortgage--at the end of the day 
that person may go to bankruptcy court and end up having a

[[Page 10851]]

judge do it. That is the court of last resort when one is facing 
foreclosure under my amendment. So that is why many of the banks resist 
it. They don't want to sit down and renegotiate the terms of the 
mortgage.
  Now let's take a look at where we are in America today. This is not 
the first time I offered this amendment. I offered it last year to give 
the bankruptcy court this power. When I offered it, the critics said: 
We don't need it. Mortgage foreclosure is not that big of a problem.
  When I offered this amendment last year, we estimated that 2 million 
American homes would be lost to foreclosure. Since then things have 
changed dramatically. The best estimate now from Moody's, a group that 
most people trust when it comes to making economic forecasts, is that 
instead of losing 2 million homes to foreclosure in America we are 
likely to lose more than 8 million homes to foreclosure in America.
  What would 8 million homes in foreclosure represent? It would 
represent one out of every six home mortgages in America.
  Visualize your own street you live on or the building in which you 
live. Imagine how many people are paying a mortgage payment on that 
street. Now imagine that one out of six loses their home. What impact 
does that have on you as a neighbor? It is not good. The value of your 
home goes down if there is a foreclosure in your neighborhood. Even 
worse, your neighborhood could change.
  A foreclosed home, 99 percent of the time, goes back to the bank. It 
is not sold on the market and reoccupied. It sits there. I have seen 
them. I have seen them in Chicago, and I have seen them in Springfield, 
IL. These are homes that are boarded up with plywood. The lots in front 
of them look like a trash heap. Many times vandals come in and rip out 
the plumbing if they can get some copper pipe out of it, and sometimes 
it ends up becoming a haven for criminal activity and drug trafficking. 
It can literally destroy a neighborhood, and I have seen that happen--
one foreclosed home.
  Why? The banks can't do anything with it. They can't sell it on this 
market. They certainly do not put the time in to maintain the home as 
you would your own home in that same neighborhood. And everybody 
suffers as a result of it.
  In addition, the banks that go through mortgage foreclosure end up 
spending $50,000--that is about the average of what it costs a bank to 
have a home foreclosed upon.
  It looks as if there are a lot of losers in this process I have just 
described. A family loses their home, a neighborhood sees a decline in 
value of all the real estate around it, and there is an eyesore at 
least, and maybe worse, and the bank ends up with a $50,000 debt. One 
would think under those circumstances that banks would be anxious to 
try to figure out if they could keep a person in their home.
  I told a story last night which I think illustrates it. A flight 
attendant on a flight back to Chicago pulled me aside and said: I am a 
single mom with three kids. I have a home in the suburbs. My mortgage 
rate is too high. I can't make the payments anymore. I don't want to 
lose the home. If I could just renegotiate now to the lower interest 
rate I can make the monthly payments, and I could save my home. But 
what am I supposed to do?
  And the answer I had to tell her was, basically: Beg the bank, and if 
they won't go along with renegotiating the mortgage, you are in a 
pretty sorry situation. You are facing delinquency, default, and 
foreclosure in a credit situation that is going to be absolutely 
horrible.
  So we wrote this bill, not just to give the bankruptcy court the 
power to renegotiate the terms of the mortgage but also to set up 
conditions. Here are the conditions: The first one is, if someone is 
anticipating going to bankruptcy court, they are required to present to 
their lender, the bank with their mortgage, at least 45 days in advance 
of filing bankruptcy, the legal documentation of their economic 
circumstances: an indication of their income, a balance sheet on their 
assets and liabilities so the bank can take a look at them and see if 
there is a way to save this person who might otherwise face 
foreclosure.
  I think about that flight attendant. She could prove that she has a 
steady job. She goes to work every day. She has been a model citizen, 
but she got caught in a bad mortgage, and when the ARM reset she 
couldn't keep up with it. At that point, if the bank offers her a 
renegotiated mortgage where she is paying at least 31 percent of her 
gross income as the mortgage payment--if the bank makes that offer, 
then this flight attendant and others, if they do not take the offer, 
cannot ask for the bankruptcy court to change the terms of the 
mortgage.
  It is pretty basic. We put a limit on how much of a house someone can 
take into this process. It is about $729,000. We also say that only 
loans that originated before January 1 of this year are eligible for 
modification. The loans must be at least 60 days delinquent before they 
are eligible for modification, and only loans for which a foreclosure 
notice has been sent are eligible. So it is an emergency, a pretty 
drastic circumstance before a person would exercise these rights, go to 
a bank, put their documentation on the table and see if they could get 
a renegotiation of their mortgage.
  I think it is a reasonable way to stop some of the mortgage 
foreclosures, and I think this is essential if we are going to turn 
this economy around. This recession started in the mortgage market, and 
it will not end until we straighten out that same market.
  Unfortunately, there were a lot of smooth operators out there. Let me 
tell you the story of one woman in Chicago, and I think this is such a 
classic illustration. This lady had worked her whole life at a little 
factory, and she had saved up a little bit of money but she was 
counting on Social Security. She had basically paid off the house in 
which she lived and she was in retirement. She had the Social Security 
checks coming in and, of course, she believed she was in a secure 
situation.
  A knock comes on the door, and a person says: Mrs. So-and-So, I just 
wanted to let you know you aren't living on one lot, you are living on 
two lots. You see, it turns out there are two parcels here. Your 
backyard is a separate real estate parcel and you have failed to pay 
the taxes on it and it has been sold at a tax sale.
  This is a woman, a wonderful woman who worked her whole life. She 
wasn't a lawyer or an accountant or a real estate expert, and she went 
into a panic, to think that somebody was going to build something in 
her backyard.
  She said: What can I do?
  They said: You have to come up with money to buy back from the tax 
sale for the real estate taxes that went unpaid.
  It turned out they had been mailing the notices of the taxes to 
another address. She wasn't aware of it.
  So she looked around and saw on television an offer for a home 
refinancing. She called the 800 number, and the next day somebody 
showed up at her house and said: We can take care of this. This poor 
lady, 48 hours later, was brought into an office of a mortgage broker 
in Chicago. This is all happening in 72 hours. They sat her down at a 
table without asking for any evidence of her income or her net worth 
and handed her a stack of papers and said: Just sign these papers.
  If you have ever been through a real estate closing, have you ever 
felt so hopeless in your life as with that stack of papers? As a lawyer 
I used to sit there and think: I hope I have looked through everything 
that is in there because it is page after page of small print, most of 
it in terms most people wouldn't understand.
  She signed all of these documents. They gave her the money to buy the 
lot back from the tax sale, and they said we will give you a little 
extra money on the side. She thought everything worked out. The monthly 
payment was something she could handle.
  Then came the reset. In a matter of a year or two the reset on the 
mortgage, this adjustable rate mortgage, drove the monthly payment up 
to the point where they were taking 80 percent of her Social Security 
check. She

[[Page 10852]]

was about to lose her home, the whole thing now, because of what she 
had signed up for.
  That is when I met her in this desperate circumstance, where she 
turned to people and said: Is there anybody who can help me out of this 
mess? She was in her late sixties and just beside herself to think that 
she would have to give up this home that she had hoped to live in for 
the rest of her life.
  Thank goodness a bank did step forward, refinanced the whole project 
at a reasonable interest rate, and she was able to stay in the home. 
But her story is not unlike a lot of others where people got into a 
circumstance with a mortgage broker and a bank and ended up signing up 
for a mortgage they couldn't handle. It happened to a lot of people.
  These mortgage brokers--incidentally, many of them were engaged in 
predatory lending; that is breaking the law--fraud, misleading people 
because it was a hot market. Boy, if you could move a mortgage as 
quickly as possible, the next thing you knew it was part of a big 
security arrangement off with some big bank somewhere.
  When I talked to the banks about giving people a second chance facing 
mortgage foreclosure, the banks told me: These people made a big 
mistake. Why should we bail them out of their mistake? Why should we 
feel any responsibility to them for the mistakes they made?
  It is a pretty heartless argument. It is even worse nowadays because 
the very same banks, such as the American Bankers Association, and the 
community banks--not as many of those, I might add, but the very same 
banks that are saying these people have to pay a price for bad 
decisions, many of these banks were in line to receive millions if not 
billions of Federal dollars because of the same mistakes they made. 
When they made a business mistake, they ended up turning to the 
Government and our taxpayers. All of us ended up trying to help our 
banks get out of the mess they created with these subprime mortgages 
and the instruments that followed.
  So the same banks that made these terrible mistakes, built these 
rotten portfolios, facing bankruptcy themselves, about to go out of 
business, happily took the money in from the Federal Government and 
now, when we say to them: What about the victims on the south side of 
Chicago or Albany Park or near Midway Airport--what about them? Can we 
give them a second chance? No, sir. Don't you understand what a moral 
hazard is? People have to pay the price for bad mistakes.
  Bankers, obviously, don't believe they have to pay the price. Sadly, 
the situation is one that will be manifest in the vote we are about to 
take in just a few hours--maybe in the next day or two--on the Senate 
floor. I have been working on this for 2 years. I thought this was 
unfair at the start, that the bankruptcy court could not sit and rework 
this mortgage as it can for so many other pieces of property. I didn't 
realize when I started this journey that 2 years later we would still 
be talking about millions of homes facing foreclosure and people 
desperate for it.
  America is going to be a different place if 8 million homes face 
foreclosure. Unfortunately, a lot of towns are going to be different 
and a lot of neighborhoods are going to be different and these bankers 
are counting on the fact that at the end of the day, Uncle Sam will 
keep sending them money, trying ways to buy them out because they are 
too big to fail. The banks are too big to fail. These financial 
institutions, they know at the end of the day they are going to get a 
helping hand from this Government. But when we asked them to give a 
helping hand to people facing foreclosure, they walked away from the 
table. They walked away from the table. They would not negotiate with 
us, even though we put in reasonable requirements for people to do the 
right thing. They walked away from it. They feel no responsibility 
toward these people. That is unfortunate. It is unfortunate for the 
victims. It is unfortunate for our Nation.
  This is not the last time we are going to visit the issues involving 
banks. I have learned the hard way that they are a pretty powerful 
lobby. One would think after what we have been through with this real 
estate bubble--the subprime mortgage mess with a lot of these banks, 
people trying to run away with multimillion-dollar bonuses in the midst 
of taking money from the Federal Government--one would think with all 
of that, the bankers wouldn't have the political clout in the Senate, 
but they do.
  It is going to be a real test to see if we can come up with the 60 
votes we need in the Senate to change this law and give these 
homeowners a fighting chance. I am not sure we can, but I think it is 
worth the effort.
  I might say to the bankers, if you beat me this week--I hope you do 
not but if you do--hang on tight; we are coming back at you next week.
  Do you know what we are going to talk about next week? Credit cards. 
We are going to talk about what these banks do with credit cards to 
consumers and families and businesses across America. And you know what 
I am talking about, situations where people face interest rates that 
all of a sudden mushroom overnight for no apparent reason.
  I have had this happen. Send your payment in a day late. Watch what 
happens. You not only get a penalty for being a day late, they charge 
you interest on the penalty, and then interest again the following 
months. It just keeps coming at you.
  You start adding it up and you think to yourself, this is an outrage. 
And it is an outrage. Time and again what these banks have done with 
their credit cards is to put people in a credit trap.
  They had a feature on NOVA that I watched last year analyzing the 
credit card industry. It had this one fellow in there who is considered 
the wizard of credit cards. This man was the greatest mind in the world 
when it came to credit cards. A curious thing about him, though, they 
would not identify where he lived. They made a point of saying, he 
would only agree to an interview if we did not disclose where he lived. 
Very unusual, right.
  Well, this man, in his infinite genius, came up with the following: 
He came up with the idea that the minimum monthly payment, instead of 
being 4 percent, should be 2 percent. Do you know why? Because if you 
pay 2 percent a month you will never, ever get out of debt. You are 
stuck. The minimum monthly payment is a guarantee that the interest is 
going to eat up everything you pay by the next month.
  During the bankruptcy debate here, I had a simple little amendment. 
The amendment said this: If you have on your monthly statement a 
minimum monthly payment on the credit card, the bank issuing the credit 
check has to put below that minimum monthly payment: And if you make 
the minimum monthly payment, it will take you X months to pay off the 
balance and you will pay X dollars in interest.
  The credit card companies refused to put that information on the 
monthly statement. And you know what they said to me: It is impossible 
to calculate that. Sure it is. It is impossible to calculate it, 
because they know if the average borrower, the person with that credit 
card, knew what that monthly minimum payment meant, they would think 
long and hard about whether that is all they are going to send in.
  It is tough love in a way. Some people did get overextended in 
credit. But these credit card companies milked it for every penny it 
was worth. Senator Chris Dodd of Connecticut is going to bring us this 
credit card reform bill. The House of Representatives is about to pass 
one this week.
  So next week, I would say to my friends at the financial institutions 
and the banking industry: Hold on tight. We are coming at you again. 
And this time we are going to try to help out the consumers across the 
country, to help out the families who are being ripped off by credit 
cards every day, every single day.
  In a tough economy, people who turn to these credit cards in 
desperation sometimes are the most helpless victims. I think it ought 
to go beyond that. I would not stop there. I have legislation which 
does something that has not been done in a long time in this country. 
It establishes a usury rate.

[[Page 10853]]

Usury used to be the established ceiling, the maximum, that you can 
charge for interest. We got away from that a long time ago. We said, we 
will let the market decide.
  Well, I put in a bill that said: The maximum you can charge for 
interest for any 1-year period is 36 percent. That would be for 
mortgages, that would be for credit cards, basic loans. The reason I 
picked that number was that a few years ago we decided that members of 
the U.S. military and their families were being exploited so badly by 
the pay-day loans and title loans and installment loan operations that 
we put a limit on the interest rate that can be charged to our military 
and their families of 36 percent. Why? Because a lot of soldiers 
borrowing money, their family borrowing money, got so deeply in debt 
and could not get out of it, they had to leave the military service. 
After being trained and ready to serve our country, they could not 
continue. So we put this protection in of 36 percent.
  If that is good enough to protect our military, why is it not good 
enough to protect every American? I think 36 percent is reasonable. But 
I learned something as soon as I introduced that bill. It is amazing 
that this industry, like the title loan business, and the pay-day loan 
business, it is amazing what they will come in, sit down in your office 
and say to you with a straight face. I said to this group in Chicago: 
Well, how much do you charge in interest at these pay-day loans and 
title loans?
  The fellow said: Senator, you know it is the circumstance.
  I said: How much do you charge?
  Well, you know, on an annual basis somewhere between 58 and 358 
percent.
  What--58 and 358 percent?
  Yes, but those are circumstances.
  It gets down to the bottom line. Those people should not be in 
business. These poor people who think they are borrowing money are 
never going to get out of that hole. And we make it legal in this 
country. If you did it as part of some gangland activity, it would be 
extortion, and it might lead to criminal prosecution. But if you do it 
with a certain sign in front of your business, it is considered the 
free market at work. Well, I think it is the free market run amok. That 
is why I think it needs to be changed.
  So we are going to face this vote this coming week. It is a very 
important one. It is one I hope will change the landscape. I hope that 
more homes will be spared from foreclosure. And I hope we can start 
stabilizing the real estate market.
  I think when we do, we are going to find our way out of this 
recession. Until we do, we are going to keep looking for the bottom. 
How many homes will go in foreclosure? How many will sit vacant? And 
how low can the value of our homes go for those of us paying our 
mortgages every month?
  That is what we are up against. We have not found that bottom yet, 
because the banks are not prepared to step forward and support any 
legislation that gives those people a fighting chance. They will have 
their opportunity this week in the Senate to speak.
  Members of the Senate, tomorrow, I will go through State by State and 
show you what some of these States are facing. Mortgage foreclosures 
are bad in Illinois. Some parts of Chicago are horrible. But in some 
States it is devastating.
  I think Nevada is a classic example of a State where mortgage 
foreclosures are out of hand at this point. We have got to do 
something. We have got to step forward. The President supports this 
proposal I am bringing to the floor. I hope we can find some Members on 
both sides of the aisle, particularly on the Republican side of the 
aisle, who will join us.
  I yield the floor.

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