[Senate Report 110-514]
[From the U.S. Government Publishing Office]
Calendar No. 911
110th Congress Report
SENATE
2d Session 110-514
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HELPING FAMILIES SAVE THEIR HOMES IN BANKRUPTCY ACT OF 2008
_______
September 26 (legislative day, September 17), 2008.--Ordered to be
printed
_______
Mr. Leahy, from the Committee on the Judiciary, submitted the following
R E P O R T
together with
MINORITY VIEWS
[To accompany S. 2136]
[Including cost estimate of the Congressional Budget Office]
The Committee on the Judiciary, to which was referred the
bill (S. 2136), to address the treatment of primary mortgages
in bankruptcy, and for other purposes, having considered the
same, reports favorably thereon, with an amendment, and
recommends that the bill, as amended, do pass.
CONTENTS
Page
I. Background and Purpose of the Helping Families Save Their Homes in
Bankruptcy Act of 2008...........................................2
II. History of the Bill and Committee Consideration..................7
III. Section-by-Section Summary of the Bill...........................9
IV. Congressional Budget Office Cost Estimate.......................13
V. Regulatory Impact Statement.....................................16
VI. Conclusion......................................................16
VII. Minority Views of Senators Specter, Hatch, Grassley, Kyl,
Brownback, Cornyn and Coburn....................................17
VIII.Changes to Existing Law Made by the Bill, as Reported...........23
I. Background and Purpose of the Helping Families Save Their Homes in
Bankruptcy Act of 2008
As the number of foreclosures in the United States
continues to rise to historic levels--threatening the economy
overall and the families at risk in particular--further
congressional action is required to help as many families as
possible save their homes.
Risky lending practices in the subprime mortgage market
have put nearly two million families in danger of losing their
homes to foreclosure before the end of 2009.\1\ These families
are typically either trapped in ``exploding'' subprime loans
they can no longer afford due to upward adjustments in mortgage
interest rates, or are saddled with mortgage debts that far
exceed the value of their homes due to rapidly declining
housing markets.\2\ The problem is expected to continue to
worsen throughout 2008 and 2009; noted economist Robert
Schiller, who pioneered the Case-Schiller housing index, has
said that housing prices could fall further than the 30%
reduction experienced during the Depression of the 1930s.\3\
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\1\See The Looming Foreclosure Crisis: How To Help Families Save
Their Homes, Hearing before the S. Comm. on the Judiciary, 110th Cong.
(December 5, 2007) (prepared statement of Mark Zandi, Chief Economist
and Co-Founder, Moody's Economy.com) (``I expect approximately 2.8
million mortgage loan defaults (the first step in the foreclosure
process) in 2008 and 2009. Of these, 1.9 million homeowners will go
through the entire foreclosure process and ultimately lose their
homes'').
\2\See Edmund Andrews, Relief for Homeowners Is Given to a Relative
Few, The New York Times, March 4, 2008 (``With housing prices falling,
analysts estimate that about 30 percent of all subprime loans written
in 2005 and 2006 are for more than the current sales value of the homes
that secure them'').
\3\John Christoffersen, U.S. Housing Slump May Exceed Depression:
Shiller, Associated Press, April 22, 2008.
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The foreclosure crisis is threatening the overall economy
at the same time that it strikes every neighborhood in which a
foreclosure occurs. According to the International Monetary
Fund, $565 billion will be lost on investments in U.S. home
mortgages.\4\ The IMF also predicts that the overall credit
crisis, which was instigated by and continues to be fueled by
the rising number of foreclosures, will cause $1 trillion in
worldwide losses.\5\ And in each neighborhood in which any
foreclosures occur, homeowners who have never missed a mortgage
payment will still lose $8,667 on average in the value of their
homes; these 40.6 million homeowners who do not face
foreclosure are expected to lose over $352 billion in value
from their primary store of wealth.\6\
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\4\Neil Irwin, IMF Puts Cost of Crisis Near $1 Trillion, The
Washington Post, April 9, 2008.
\5\Id.
\6\Center for Responsible Lending Issue Brief, Updated Projections
of Subprime Foreclosures in the United States and Their Impact on Home
Values and Communities, August, 2008, available at http://
www.responsiblelending.org/pdfs/updated-foreclosure-and-spillover-
brief-8-18.pdf.
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To respond to this crisis, it is imperative to craft
policies that will avoid home foreclosures. Reducing the
principal owed on mortgages to a level that the homeowners can
afford to repay--without reducing the principal below what the
homes are worth so that the lenders are not left with less
collateral than the value of the debts owed on the underlying
assets--represents one of the most effective ways to avert
foreclosures. Federal Reserve Chairman Ben Bernanke has made
this argument,\7\ and 71 percent of economists who responded to
a Wall Street Journal poll agreed.\8\ A National Association of
Realtors analyst has said that for the homeowners this
assistance ``provides incentive not to walk away.''\9\
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\7\Chairman Ben S. Bernanke, Chairman of the Board of Governors of
the Federal Reserve System, Reducing Preventable Mortgage Foreclosures:
Speech at the Independent Community Bankers of America Annual
Convention, Orlando, Florida, March 4, 2008, available at http://
www.federalreserve.gov/newsevents/speech/bernanke20080304a.htm (``* * *
principal reductions that restore some equity for the homeowner may be
a relatively more effective means of avoiding delinquency and
foreclosure [than interest rate reductions]).''
\8\Phil Izzo, Real Time Economics Blog: Housing Market Has Further
to Fall, The Wall Street Journal, March 13, 2008, available at http://
blogs.wsj.com/economics/2008/03/13/housing-market-has-further-to-fall/
(referring to the then-latest Wall Street Journal forecasting survey
and stating that ``Last week, Federal Reserve Chairman Ben Bernanke
suggested that lenders could aid struggling homeowners by reducing
their principal--the sum of money they borrowed--to lessen the
likelihood of foreclosure. Some 71 percent of respondents agreed with
the suggestion''). See also The Looming Foreclosure Crisis: How To Help
Families Save Their Homes, Hearing before the S. Comm. on the
Judiciary, 110th Cong. (December 5, 2007) (prepared statement of Henry
J. Sommer, President of the National Association of Consumer Bankruptcy
Attorneys) (``Allowing homeowners to file chapter 13 plans that modify
their mortgage debts and reduce their payments would utilize an
existing, efficient, well-established, and predictable template to
prevent foreclosures * * * No other legislative proposal has the
potential to save nearly as many homes'').
\9\Id., (citing Lawrence Yun of the National Association of
Realtors).
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Rather than advocating for proposals that would feature a
reduction in principal where warranted, in response to the
crisis the Bush Administration established the HOPE NOW
program, through which mortgage servicers can volunteer to help
distressed borrowers.\10\ However, meaningful assistance from
the HOPE NOW-affiliated banks has been the exception rather
than the rule, and the scale of the crisis dwarfs the volume of
the voluntary response. According to a HOPE NOW official, only
a very small group of borrowers are likely to get their
mortgage principal reduced outright\11\ and, therefore, most of
the homeowners who are in need of assistance will receive only
minor changes to the mortgage rather than a restructuring that
will help the homeowners continue to make timely payments over
the long term. HOPE NOW refuses to provide detailed data on the
number of loan modifications its servicers make by modification
type; rather, it lumps loan workouts in which the principal is
reduced with other types of workouts (which may only delay
foreclosure rather than prevent it), such as interest rate
changes, changes in the length of the loan, and so on.\12\
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\10\HOPE NOW press release, HOPE NOW Alliance Created to Help
Distressed Homeowners, October 7, 2008, available at http://
www.hopenow.com/media/press_releases/Distressed_Homeowners.html.
\11\David Cho and Renae Merle, Merits of New Mortgage Aid Are
Debated, The Washington Post, March 8, 2008 (citing Bill Longbrake, ``a
veteran mortgage banker who helps run the program,'' as saying ``Only a
very small group of borrowers could get their mortgage principal
reduced outright'').
\12\HOPE NOW Press Release, Mortgage Servicers Set Monthly,
Quarterly Records For Helping Homeowners Avoid Foreclosure, July 30,
2008, available at http://www.hopenow.com/upload/press_release/files/
June%202008%20Data%20Release.pdf (``A modification occurs any time any
term of the original loan contract is permanently altered. This can
involve a reduction in the interest rate, forgiveness of a portion of
principal or extension of the maturity date of the loan'').
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In part, this lack of meaningful loan assistance stems from
the fact that the interests of loan servicers and mortgage
investors are misaligned. As reported in Inside B&C Lending,
``Servicers are generally disincented to do loan modifications
because they don't get paid for them but they do get paid for
foreclosures.''\13\ Moreover, according to a Citigroup managing
director, many loan servicers are ``scared to death'' of being
sued by investors for making loan modifications.\14\ In
addition, the holders of second liens (``piggyback mortgages'')
often refuse to consent to primary mortgage changes even in
situations in which the servicer and the borrower agree to
terms.\15\
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\13\Inside Mortgage Finance's Inside B&C Lending, Subprime Debt
Outstanding Falls, Servicers Pushed on Loan Mods, November 16, 2007.
\14\ARM Workout Calls Trigger Fierce Debate, American Banker,
October 9, 2007 (quoting Tim Bolger, a managing director of Citigroup,
Inc.).
\15\See William Launder, Second Liens Proving Hurdle on More Refis,
American Banker, March 6, 2008.
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Congress has taken meaningful steps to help ease this
crisis, in particular by passing the Housing and Economic
Recovery Act of 2008.\16\ Among its many provisions is a
program in which approximately 400,000 homeowners could
refinance their mortgages through the Federal Housing
Administration, provided that loan servicers volunteer to
reduce the principal on the loans to 85 percent of the homes'
current value. But given how rarely servicers have agreed
voluntarily to reduce loan principals to date, it is unclear
whether many families will be helped by this program. Regarding
this bill, economist Mark Zandi has commented that ``it's not
enough, even in the best of circumstances.''\17\ As the housing
crisis continues to deepen, reports have indicated that the
Bush administration could take until 2009 to fully implement
the new program, even though the legislation specifies that the
program is effective October 1, 2008.\18\
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\16\P.L. 110-289.
\17\Vikas Bajaj, As Housing Bill Evolves, Crisis Grows Deeper, The
Washington Post, June 29, 2008.
\18\See Ron Scherer, Big Housing Bill: No Rescues Soon, The
Christian Science Monitor, August 1, 2008.
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The Helping Families Save Their Homes in Bankruptcy Act (S.
2136) would complement the Housing and Economic Recovery Act by
providing servicers with much stronger incentives to write down
mortgage principals and keep families in their homes, since
servicers would know that if a loan workout is not completed
then the homeowner could attempt to have the mortgage
restructured by a bankruptcy judge. The Center for Responsible
Lending estimates that the bill could help more than 600,000
financially troubled families keep their homes.\19\
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\19\Center for Responsible Lending, Foreclosure Prevention Act of
2008 (S. 2636): Compromise Bill Permits Court-Supervised Modifications,
Would Save 600,000 Homes, February 27, 2008, available at http://
www.responsiblelending.org/pdfs/senate-bankruptcy-support-brief-
feb27.pdf (referring to title IV of S. 2636, which is the same as the
Committee-reported version of S. 2136).
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To help families save their homes, S. 2136, as reported by
the Committee, would take several steps, which are summarized
below. The bill would:
Eliminate a provision of the bankruptcy law
that prohibits Chapter 13 plans from making
modifications to mortgage loans on a debtor's principal
residence, so that for homeowners who meet strict
income and expense criteria, primary mortgages can be
treated the same as vacation homes and family farms;
extend the time frame debtors are allowed
for repayment, to support long-term mortgage
restructuring;
waive the bankruptcy counseling requirement
for families whose houses are already scheduled for
foreclosure sale, so that precious time is not lost to
futile counseling that cannot help families save their
homes;
reduce the possibility of future uncertainty
in the mortgage market and avoid moral hazard by only
allowing subprime and nontraditional mortgages
originated as of the date of enactment to be modified;
ensure that mortgage modification benefits
lenders more than foreclosure by providing that
bankruptcy judges cannot reduce the principal on a
primary mortgage below the fair market value of the
home and cannot reduce interest rates below the prime
interest rate plus a reasonable premium for risk; and
ensure that lenders are treated equitably
when homes are resold during the life of the bankruptcy
plan by returning any positive difference between the
sale price and the stripped-down mortgage principal to
the lender.
The bill would take several additional steps to further
help families get back on their feet financially as they go
through bankruptcy proceedings. To summarize, the bill would:
Ensure lenders provide proper notice when
assessing fees on debtors in bankruptcy;
require mortgage bankruptcy fees to be
lawful and reasonable;
allow bankruptcy judges to waive prepayment
penalties;
maintain debtors' legal claims against
predatory lenders while in bankruptcy;
confirm that bankruptcy judges can rule on
core issues rather than defer to arbitration;
enact a higher homestead floor for
homeowners over the age of 55, to help older homeowners
who are fighting to keep their homes as they go through
bankruptcy but live in States with low homestead
exemptions; and
reinforce that consumer protection claims
are still available in bankruptcy.
The bill would not rewrite the core tenets of the
Bankruptcy Abuse Prevention and Consumer Protection Act of
2005. Rather, the prohibition on modifying primary mortgages
that the bill would change dates back to 1978, when most
mortgages were 30-year, fixed-rate loans that required a 20
percent down payment.\20\ The bill also would not leave
financial institutions with losses by letting families
completely escape from their financial obligations, since the
bill is structured to encourage families to pay their mortgages
to the greatest extent that they are able.
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\20\As Judge Jacqueline Cox, Bankruptcy Judge for the United States
Bankruptcy Court for the Northern District of Illinois, testified
before the Committee, ``[w]hatever justification there might have been
in 1978 for granting special protection to mortgages on a debtor's
principal residence has evaporated as the marketplace has produced a
baffling array of loans based more on a lender's ability to sell than
on a borrower's ability to repay.'' See The Looming Foreclosure Crisis:
How To Help Families Save Their Homes, Hearing before the S. Comm. on
the Judiciary, 110th Cong. (December 5, 2007) (prepared statement of
Judge Jacqueline P. Cox).
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The bill would ensure that mortgage holders receive at
least the value they would obtain through foreclosure, since a
foreclosure sale can only recover the market value of the home.
Lenders would receive much more than foreclosures would
generate when bankruptcy restructurings are successful and
families are able to continue paying an interest-generating
mortgage. Finally, since foreclosures are expensive to lenders,
keeping the family in the home and paying what they can afford
can provide substantial cost savings to the mortgage holder.
In contrast to other legislation that has been proposed to
address the foreclosure crisis, S. 2136 would not cost the
Federal Government or Federal taxpayers, and, according to the
Congressional Budget Office, would actually increase Federal
revenues and decrease Federal spending.\21\
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\21\See Section IV below (``CBO estimates that enacting S. 2136
would reduce direct spending by $13 million over the 2009-2018 period
and increase revenues by $10 million over the same period'').
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The bill would not raise the cost of credit to future
borrowers. There is no credible evidence to support the
assertion of the Mortgage Bankers Association that the mere
possibility of a small subset of mortgages being changed in
bankruptcy would somehow raise the cost of all mortgages by 1.5
to 2 percentage points.\22\ To the contrary, an empirical study
of previous changes to the treatment of primary mortgages in
bankruptcy indicated that allowing mortgage modification
``would have no or little impact on mortgage markets.''\23\
Moreover, since the bill as reported expressly excludes future
mortgages from eligibility for modification in bankruptcy,
there is no way credibly to claim that these same loans will be
more expensive.
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\22\See e.g., Mortgage Bankers Association, Stop the Bankruptcy
Cram Down Resource Center, available at http://www.mortgagebankers.org/
StopTheCramDown (``If this bill should become law, MBA believes that
mortgage rates would increase by at least one and a half points''). The
basis for the MBA's prediction of a 1.5 to 2 percent cost increase is
the difference in interest rates for mortgages on non-owner-occupied
investment properties, and the rates for mortgages on owner-occupied
primary residences. The MBA attributes this difference to the fact that
the Bankruptcy Code currently permits courts to modify mortgages on
investment properties. The MBA's calculation disregards the widely
acknowledged fact that mortgages on non-owner-occupied investor
properties are riskier for lenders than those on owner-occupied
residences. This is simply because people are more willing to walk away
from an investment property than from the home they live in, and an
investor is subject to risk that the tenant does not pay or damages the
property. People have to live somewhere, so they are more motivated to
do what they can to save their home than they are their investments.
\23\Adam Levitin and Joshua Goodman, The Effect of Bankruptcy
Strip-Down on Mortgage Interest Rates, Georgetown University Law Center
Business, Economics and Regulatory Policy Working Paper Series Research
Paper No 108781, February 6, 2008, available at http://
works.bepress.com/cgi/
viewcontent.cgi?article=1010&context=adam_levitin. From 1978 (when the
current Bankruptcy Code was enacted) until 1993 (when the Supreme Court
decided Nobleman v. American Savings Bank, 508 U.S. 324 (1993)), many
courts across the country believed that bankruptcy judges had the
authority to modify home mortgages (by treating them as secured up to
the value of the property only). Lending experience during this 15-year
period showed that those jurisdictions that permitted strip-downs
experienced no adverse effects on the cost or availability of credit,
either as compared with jurisdictions that did not permit strip-downs,
or as compared with the period after 1993, when strip-downs were no
longer permitted.
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This bill enjoys the support of numerous organizations
including the Credit Union National Association, the National
Association of Federal Credit Unions, AARP, the Leadership
Conference on Civil Rights, the National Association for the
Advancement of Colored People, the National Council of La Raza,
the Consumer Federation of America, the Center for Responsible
Lending, ACORN, AFL-CIO, SEIU, UAW, the Central Illinois
Organizing Project, Consumer Action, the Consumers Union,
DEMOS, the National Association of Consumer Advocates, the
National Association of Consumer Bankruptcy Attorneys, the
National Community Reinvestment Coalition, the National
Consumer Law Center, the National Fair Housing Alliance,
National Neighborworks, the National Urban League, the National
Women's Law Center, and the Opportunity Finance Network.
Several assertions made in the minority views require
clarification.
While the minority argues that ``cram down imposes an
immediate loss on lenders that they cannot recover when home
values later appreciate,'' this argument assumes that there
would still be a mortgage left in the absence of modification.
To the contrary, for the homeowners who would qualify for this
bankruptcy provision, the alternatives are not either paying
the existing mortgage or restructuring it in bankruptcy; the
alternatives are modifying the mortgage or foreclosure. Lenders
would be far better off in the long run with a modified
mortgage from which income can be generated than no mortgage at
all and a property that must be disposed of via a foreclosure
sale.
The minority's claim that ``a consensus exists among
experts that allowing cram down in bankruptcy would increase
the cost of borrowing for future homeowners'' is simply false.
Only one credible statistical analysis has been conducted on
this question, and as cited in this committee report, that
analysis concludes that ``permitting bankruptcy modification of
mortgages would have no or little impact on mortgage markets.''
The Administration's proposal to stabilize the financial
markets does indeed raise the stakes for this provision.
Contrary to the minority's claims, however, allowing judges to
modify mortgages complements the plan because it raises the
value of the mortgage-backed assets that the government might
purchase. If the government begins purchasing $700 billion in
illiquid assets, most of which will be related to underlying
mortgages, the government would be better off if the assets
perform and contribute ongoing revenue, even if that revenue is
slightly lower than the original mortgages might have provided.
This is far better for taxpayers than mortgage failure and
foreclosure, which renders that portion of the mortgage-backed
security worthless.
This provision will also complement congressional efforts
to respond to the current economic crisis because it will allow
for a quicker assessment of the true value of these illiquid
assets. As mortgages are modified they turn from nonperforming
to performing and therefore clarify the value of the mortgage
and the securities that are derived from it. Since the
underlying logic to the bailout is to reinvigorate the mortgage
and credit markets, anything that aids this price discovery
process is a meaningful addition to the proposal.
The core of the current economic crisis is the record high
level of foreclosures. Until the foreclosure crisis is
addressed, our economy will not recover. The Helping Families
Save Their Homes in Bankruptcy Act will alleviate our
foreclosure crisis to the benefit of our homeowners, our
communities, our economy and our nation.
II. History of the Bill and Committee Consideration
A. INTRODUCTION OF THE BILL
On October 3, 2007, Senator Durbin introduced the Helping
Families Save Their Homes in Bankruptcy Act of 2007 as S. 2136.
It was cosponsored by Senator Schumer (D-NY). After
introduction, Senators Biden (D-DE), Boxer (D-CA), Brown (D-
OH), Clinton (D-NY), Dodd (D-CT), Feinstein (D-CA), Harkin (D-
IA), Kerry (D-MA), Menendez (D-NJ), Obama (D-IL), Reed (D-RI)
and Whitehouse (D-RI) joined as cosponsors.
B. COMMITTEE CONSIDERATION
On December 5, 2007, the Senate Committee on the Judiciary
held a hearing on the bill chaired by Senator Durbin. The
hearing was titled ``The Looming Foreclosure Crisis: How To
Help Families Save Their Homes.'' The hearing was attended by
Senator Durbin, Ranking Member Specter, and Senator Sessions.
The witnesses testifying at the hearing were Nettie McGee, a
homeowner from Chicago, IL; Mark Zandi, Chief Economist of
Moody's Economy.com, Inc.; Professor Joseph Mason of Drexel
University; Professor Mark Scarberry, Professor of Law at
Pepperdine School of Law and Resident Scholar of the American
Bankruptcy Institute; The Honorable Jacqueline P. Cox, United
States Bankruptcy Judge for the United States Bankruptcy Court
for the Northern District of Illinois in Chicago, IL; The
Honorable Thomas Bennett, United States Bankruptcy Judge for
the United States Bankruptcy Court for the Northern District of
Alabama in Birmingham, AL; and Henry J. Sommer, President of
the National Association of Consumer Bankruptcy Attorneys.
The Senate Committee on the Judiciary, with a quorum
present on March 6, 2008, began consideration of S. 2136. On
that date, the Committee adopted without objection a substitute
amendment offered by Senator Durbin. The substitute amendment
modified the bill as introduced to provide that:
Only loans originated prior to the date of
the bill's enactment would be eligible for modification
in bankruptcy;
only subprime and nontraditional loans would
be eligible for modification in bankruptcy;
the maximum revised loan term would equal
the longer of 30 years or the time remaining under the
original mortgage;
if the borrower were to sell the home during
the life of the bankruptcy plan, the lender would
receive any profit derived from the difference between
the marked-down mortgage value and the appreciated sale
price up to the original value of the mortgage; and
no fees could be assessed within bankruptcy
without proper notice by the creditor (this provision
would no longer be contingent on the value of the home
being greater than the principal debt outstanding).
The Committee did not complete consideration of S. 2136 on
March 6. On April 3, 2008, the Committee reconvened and resumed
debate on S. 2136, as amended by the Durbin substitute. The
Committee considered an amendment offered by Senator Specter,
which would have struck the text of S. 2136 and replaced it
with the text of Senator Specter's bill, S. 2133. S. 2133 would
have permitted modification in bankruptcy court of mortgages on
primary residences, but with certain restrictive exclusions and
conditions including the following:
Families would not be eligible for mortgage
modification in bankruptcy court if their income
exceeded certain thresholds linked to state median
income, meaning that families in high-cost of living
areas in many states would likely be excluded from
eligibility;
only mortgages obtained prior to September
26, 2007 would be eligible for modification; and
any modification ordered by the bankruptcy
judge to the principal amount of the mortgage would
have to be agreed upon in writing by the holder of the
mortgage in order to become effective, meaning that
lenders would have effective veto power over any
principal modification ordered by a bankruptcy judge.
Senator Specter's amendment was rejected on a roll call
vote.
The vote record is as follows:
TALLY: 9 YEAS, 10 NAYS
Yeas (9): Brownback (R-KS), Coburn (R-OK), Cornyn (R-TX),
Graham (R-SC), Grassley (R-IA), Hatch (R-UT), Kyl (R-AZ),
Sessions, (R-AL), Specter (R-PA).
Nays (10): Biden (D-DE), Cardin (D-MD), Durbin (D-IL),
Feingold (D-WI), Feinstein (D-CA), Kennedy (D-MA), Kohl (D-WI),
Leahy (D-VT), Schumer (D-NY), Whitehouse (D-RI).
The Committee then voted to report the Helping Families
Save Their Homes in Bankruptcy Act, as amended, favorably to
the Senate. The Committee proceeded by roll call vote as
follows:
TALLY: 10 YEAS, 9 NAYS
Yeas (10): Biden (D-DE), Cardin (D-MD), Durbin (D-IL),
Feingold (D-WI), Feinstein (D-CA), Kennedy (D-MA), Kohl (D-WI),
Leahy (D-VT), Schumer (D-NY), Whitehouse (D-RI).
Nays (9): Brownback (R-KS), Coburn (R-OK), Cornyn (R-TX),
Graham (R-SC), Grassley (R-IA), Hatch (R-UT), Kyl (R-AZ),
Sessions, (R-AL), Specter (R-PA).
On April 3, 2008, with a quorum present, the Committee
ratified without objection the vote to pass S. 2136, as
amended.
III. Section-by-Section Summary of the Bill
Section 1. Short title
This section provides that the legislation may be cited as
the Helping Families Save Their Homes in Bankruptcy Act of
2008.
TITLE I--MINIMIZING FORECLOSURES
Section 101
This section amends title 11, section 101 of the U.S. Code
to provide definitions for the terms ``nontraditional
mortgage'' and ``subprime mortgage''.
``Nontraditional mortgage'' is defined as a security
interest in the debtor's principal residence that secures a
debt for a loan that at any period during the term of the loan
provides for the deferral of payment of principal or interest
through permitting periodic payments that do not cover the full
amount of interest due or that cover only the interest due. The
term is defined to exclude the following: (A) A loan that at
any period during the term of the loan provides for the
deferral of payment of principal through permitting periodic
payments that cover only the interest due, if the creditor
demonstrates that it determined in good faith at the time the
loan was consummated, after undergoing a full underwriting
process based on verified and documented information, that the
debtor had a reasonable ability to repay at the full interest
and principal payment amount (assuming an initial 30-year full
amortization), and payments under the loan resulted in a debt-
to-income ratio of the debtor in an amount equal to or less
than that which would have been permitted under guidelines and
directives established by the Secretary of Housing and Urban
Development pursuant to section 203.33 of title 24, Code of
Federal Regulations, for loans subject to such section; (B) a
home equity line of credit that is in a subordinate lien
position; and (C) a reverse mortgage.
``Subprime mortgage'' is defined as a security interest in
the debtor's principal residence that secures a debt for a loan
that has an annual percentage rate that is greater than: (A)
the sum of 3 percent plus the yield on United States Treasury
securities having comparable periods of maturity, if the loan
is secured by a first mortgage or first deed of trust; or (B)
the sum of 5 percent plus the yield on United States Treasury
securities having comparable periods of maturity, if the loan
is secured by a subordinate mortgage or subordinate deed of
trust.
The definition of ``subprime mortgage'' also provides that
regardless of whether such loan is subject to or reportable
under the Home Mortgage Disclosure Act, the difference between
the annual percentage rate of such loan and the yield on United
States Treasury securities having comparable periods of
maturity shall be determined using the procedures and
calculation methods applicable to loans that are subject to the
reporting requirements of such Act, except that such yield
shall be determined as of the 15th day of the month preceding
the month in which a completed application is submitted for
such loan. The definition further states that if such loan
provides for a fixed interest rate for an introductory period
and then resets or adjusts to a variable interest rate, the
determination of the annual percentage rate shall be based on
the greater of the introductory rate and the fully indexed
rate. For purposes of this definition, the term ``fully indexed
rate'' is defined as the prevailing index rate on a residential
mortgage loan at the time the loan is made plus the margin that
will apply after the expiration of an introductory interest
rate.
Section 102
This section amends title 11, section 1322(b) of the U.S.
Code to create special rules for the modification of loans
secured by primary residences.
Section 1322(b)(2) of the bankruptcy code provides an
exception to the general bankruptcy principle that secured
debts can be modified. Under 1322(b)(2), a bankruptcy plan may
modify the rights of holders of secured claims ``other than a
claim secured only by a security interest in real property that
is the debtor's principal residence''. This 1322(b)(2)
exception has prevented mortgages on principal residences from
being treated like virtually all other secured debts.
Section 102(a) of S. 2136 would create a new 1322(b)(11)
providing that notwithstanding Sec. 1322(b)(2) and otherwise
applicable nonbankruptcy law, a bankruptcy plan may modify an
allowed secured claim for certain debts secured by a
nontraditional mortgage or a subprime mortgage (or secured by a
lien subordinate to such claims) on the debtor's principal
residence. Such modification is permitted only for secured
claims for debts that were incurred prior to the effective date
of S. 2136, meaning that such modification would not be
available for debts incurred after the effective date. Also,
such modification is permitted only if the debtor's current
monthly income (after subtracting the expenses permitted for
debtors under title 11, section 1325(b)(3), other than amounts
contractually due to creditors holding such allowed secured
claims and additional payments as are necessary to maintain
possession of the residence) is insufficient to enable the
debtor to retain possession of the principal residence by
curing a default and maintaining payments while the case is
pending. This means that only debtors who, after allowance for
expenses permitted by the means test established by the
Bankruptcy Abuse Prevention and Consumer Protection Act of
2005, cannot afford to use the traditional bankruptcy cure
remedy would be eligible for such modification.
Section 102(a) would permit reduction of the principal of
subprime or nontraditional mortgage on primary residences only
to the fair market value of the residence, by making that value
the value of the secured portion of the allowed claim.
Section 102(a) would also permit Chapter 13 debtors to
modify the length of subprime and nontraditional mortgages on
primary residences. Specifically, 102(a) would permit a Chapter
13 bankruptcy plan to provide for the payment of a secured
claim described in Sec. 1322(b)(11) for a period that is the
longer of 30 years (reduced by the period for which the loan
has been outstanding) or the remaining term of the existing
mortgage as of the date of the order for bankruptcy relief.
Section 102(a) would further provide that a Chapter 13
bankruptcy plan may provide for payment of a subprime or
nontraditional mortgage on a primary residence at an interest
rate equal to the interest rate for conventional mortgages plus
a reasonable premium for risk. Specifically, Sec. 102(a) would
permit a Chapter 13 bankruptcy plan to provide for the payment
of a secured claim described in Sec. 1322(b)(11) at a rate of
interest accruing after such date calculated at a fixed annual
percentage rate in an amount to the Federal Reserve System's
conventional mortgage rate plus a reasonable premium for risk.
Section 102(a) also would ensure that if a claim has been
modified to an amount below the original principal of the loan
and the debtor's principal residence is sold during the term of
the plan, the creditor would be entitled to receive, in
addition to the unpaid portion of the allowed secured claim,
the net proceeds of the sale or the amount of the creditor's
allowed unsecured claim, whichever is less.
Section 102(b) makes a conforming change to section
1325(a)(5).
Section 103
This section amends title 11, section 109(h) to waive the
pre-bankruptcy credit counseling briefing requirement where a
foreclosure sale has been scheduled against the debtor's
principal residence. The requirement of a pre-bankruptcy credit
counseling briefing often causes a delay that borrowers facing
bankruptcy cannot afford, and because credit counseling can do
nothing to prevent an impending foreclosure, the purpose of the
requirement--to give debtors information on alternatives that
might address their problems--simply does not apply. Since
mortgages on primary residences could not be modified in
bankruptcy when the credit counseling requirement was added by
the Bankruptcy Abuse Prevention and Consumer Protection Act of
2005, it is clear that the requirement was not intended to
prohibit debtors from responding to imminent foreclosure.
Debtors facing foreclosure would remain subject to the
requirements of title 11, sections 727(a)(11) and 1328(g),
which require that they complete an instructional course in
personal financial management.
TITLE II--PROVIDING OTHER DEBTOR PROTECTIONS
Section 201
This section amends title 11, section 1322(c) to give
bankruptcy judges greater flexibility in reviewing fees
assessed by the creditor in connection with a claim secured by
the debtor's principal residence. Mortgage companies frequently
charge unauthorized or excessive fees to debtors before and
during Chapter 13 filings, sometimes failing to disclose the
fees until the debtor is no longer in bankruptcy after having
successfully completed the Chapter 13 case, or until the debtor
seeks to pay off the mortgage balance. These fees and charges
further impede the debtor's effort to stabilize financially.
The bill revises section 1322(c) to provide that with regard to
bankruptcy fees, costs or charges that arise in connection with
a claim secured by the debtor's principal residence, the debtor
shall not be liable for such fees unless the creditor has filed
notice of the fee with the court and served notice on the
debtor and the trustee, and has done so before the earlier of
either 1 year after the event that gives rise to the fee or 60
days before the closing of the case. The bill further requires
that, in order for the debtor to be liable for such fees, the
fees must be lawful, reasonable, and provided for in the
agreement under which the claim or security interest arose.
These provisions will enable debtors or trustees to object to
fees in bankruptcy court if the fees are unlawful, undisclosed
or unreasonable. It is anticipated that the Federal Rules of
Bankruptcy Procedure would be amended to delay the closing of a
Chapter 13 case until a time after the discharge that would
permit a final notice of fees to be filed shortly after the
discharge and then an opportunity to object to those fees.
This section also allows judges to waive prepayment
penalties on claims secured by the principal residence of the
debtor. Prepayment penalties exist in many subprime and other
mortgage contracts, and restrict many lower-income families
from completing a loan modification.
Section 202
This section amends title 11, section 554(e) to deal with
the problem of consumers who are sometimes inadvertently
deprived of the legal claims they have against predatory
lenders or others because they are not aware that such claims
are considered assets of the bankruptcy estate and therefore do
not list them among their scheduled assets when the bankruptcy
case is filed. The amendment protects the bankruptcy estate and
creditors by affording the bankruptcy trustee an opportunity to
request joinder or substitution as the real party in interest
in an action with respect to a claim or defense asserted by an
individual debtor. If the trustee does not request joinder or
substitution, this section permits the debtor to proceed as the
real party in interest in the action but prevents a defendant
from using theories of judicial estoppel or standing to obtain
a windfall defense to the claim.
Section 203
This section amends title 28, section 1334 to confirm the
longstanding practice whereby bankruptcy judges can rule on
core proceedings rather than referring them to arbitration,
even when mortgage contracts contain mandatory arbitration
clauses. Two recent court rulings had brought this practice
into question, and so this addition to section 1334 in title 28
would reconfirm the normal practice.
Section 204
This section enacts a bankruptcy homestead exemption floor
for homeowners 55 years of age or older by adding a new title
11, section 522(b)(3)(D) and amending title 11, section
522(d)(1). A significant number of debtors facing foreclosure
are elderly and have nonexempt equity in their properties
because of low homestead exemptions in some States. They cannot
save their homes, which often represent their life savings,
under Chapter 13 because current law requires paying the value
of the nonexempt equity to unsecured creditors. They cannot get
Chapter 7 relief because Chapter 7 would cause them to lose
their homes. This amendment would create a modest homestead
exemption floor of $75,000 for principal residences for all
bankruptcy debtors over age 55.
Section 205
This section amends title 11, section 502(b) to reinforce
and clarify the fact that all protections available under the
Truth in Lending Act and other consumer protection laws are
still available in bankruptcy.
IV. Congressional Budget Office Cost Estimate
The Committee sets forth, with respect to the bill, S.
2136, the following estimate and comparison prepared by the
Director of the Congressional Budget Office under section 402
of the Congressional Budget Act of 1974:
May 2, 2008.
Hon. Patrick J. Leahy,
Chairman, Committee on the Judiciary,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for S. 2136, the Helping
Families Save their Homes in Bankruptcy Act of 2008.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Leigh Angres.
Sincerely,
Peter R. Orszag.
Enclosure.
S. 2136--Helping Families Save their Homes in Bankruptcy Act of 2008
Summary: S. 2136 would authorize bankruptcy courts to
modify the terms of certain nontraditional and subprime
mortgages during Chapter 13 bankruptcy proceedings. CBO
estimates that enacting S. 2136 would reduce direct spending by
$13 million over the 2009-2018 period and increase revenues by
$10 million over the same period. Although CBO estimates that
the bill would add to court costs to adjudicate bankruptcies,
we expect that such costs would not be significant and would be
subject to the availability of appropriated funds.
S. 2136 contains no intergovernmental mandates as defined
in the Unfunded Mandates Reform Act (UMRA) and would impose no
costs on state, local, or tribal governments.
S. 2136 would impose private-sector mandates, as defined in
UMRA, on some creditors in bankruptcy proceedings. Because of
uncertainty about the number of bankruptcy plans that would be
modified and how those changes would affect holders of secured
claims, CBO cannot determine whether the aggregate cost of
complying with the mandates would exceed the annual threshold
specified in UMRA ($136 million in 2008, adjusted annually for
inflation).
Estimated cost to the Federal Government: The estimated
budgetary impact of S. 2136 is shown in the following table.
The costs of this legislation fall within budget function 750
(administration of justice).
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
-------------------------------------------------------------------------------------------
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009-2013 2009-2018
--------------------------------------------------------------------------------------------------------------------------------------------------------
CHANGES IN DIRECT SPENDING
Estimated Budget Authority.................................. -2 -2 -2 -1 -1 -1 -1 -1 -1 -1 -8 -13
Estimated Outlays........................................... -2 -2 -2 -1 -1 -1 -1 -1 -1 -1 -8 -13
CHANGES IN REVENUES
Estimated Revenues.......................................... 1 1 1 1 1 1 1 1 1 1 5 10
--------------------------------------------------------------------------------------------------------------------------------------------------------
Basis of estimate: CBO assumes that S. 2136 will be enacted
near the end of 2008.
Direct spending
S. 2136 would allow bankruptcy courts to modify the terms
of certain nontraditional and subprime mortgages (as defined in
the bill) for a primary residence during Chapter 13 bankruptcy
proceedings. Generally, the bill would apply to debtors whose
income, after several deductions, is insufficient to pay their
mortgage and maintain all other debt payments. Under current
law, bankruptcy courts can establish a payment plan for overdue
mortgage payments but cannot change the amount, timing, or
interest rate terms of mortgage payments. In 2007, around
310,000 individuals filed for bankruptcy under Chapter 13.
Information from the Administrative Office of the United
States Courts (AOUSC) indicates that a significant portion of
the individuals who are delinquent in their mortgage payments
seek bankruptcy protection under Chapter 13. CBO expects this
pattern to continue for individuals with all types of
mortgages, including those that are subprime and
nontraditional. We also expect that the bill could encourage
some individuals to file for Chapter 13 bankruptcy who
otherwise would not seek such protection, resulting in a small
percentage increase (about 5 percent) in annual filings over
the number expected under current law.
Fees collected for bankruptcy filings ($235 per Chapter 13
filing) are distributed among several government entities.
About half of the amounts collected are used to cover the
judiciary's and U.S. Trustees's costs, and thus have no net
effect on federal spending. A portion of those filing fees,
however, is recorded as an offsetting receipt (a credit against
direct spending) in the federal budget and deposited into a
special fund in the Treasury; those amounts are not available
for spending unless provided in an appropriation act. CBO
estimates that enacting the legislation would increase such
offsetting receipts by $13 million over the 2009-2018 period.
(In 2007, $135 million was collected from all bankruptcy filing
fees.)
Revenues
Another portion of Chapter 13 filing fees is deposited into
the general fund of the Treasury and recorded as revenues. CBO
estimates that enacting S. 2136 would increase such revenues
from additional Chapter 13 bankruptcy filing fees by $10
million over the 2009-2018 period.
Spending subject to appropriation
Based on information from the AOUSC, CBO expects that
enacting the bill could increase the workload of court staff;
spending for that purpose would be subject to the availability
of appropriated sums, and we estimate that any increase in such
spending would be insignificant. Similarly, the bill could
increase the workload of the United States Trustees; CBO
estimates that cost also would be insignificant.
Estimated impact on State, Local, and Tribal Governments:
S. 2136 contains no intergovernmental mandates as defined in
UMRA and would impose no costs on State, Local, or Tribal
Governments.
Estimated impact on the private sector: S. 2136 would
impose private-sector mandates, as defined in UMRA, on certain
creditors in bankruptcy proceedings. The bill would allow
bankruptcy judges to modify the rights of holders of certain
claims on mortgage debt by making changes to the terms of home
mortgage agreements during bankruptcy proceedings. The bill
also would require such claimholders to give timely notice to
both the debtor and the bankruptcy trustee before adding fees,
costs, or charges while a bankruptcy case is pending. In
addition, if a debtor is age 55 or older, the bill would exempt
from the estate in bankruptcy up to $75,000 of the debtor's
aggregate equity in his or her principal residence in states
that allow such exemptions. This provision would impose a
mandate on some creditors by limiting the amount of a debtor's
assets available to creditors under bankruptcy.
The cost of those mandates would depend on the number of
Chapter 13 bankruptcy plans that judges would choose to modify,
how changes in home mortgage agreements would affect holders of
secured claims, and the number of claims affected by the higher
exemption. The amount recovered by a claimholder through a
bankruptcy proceeding relative to the amount that can be
recovered through foreclosure would vary depending on market
conditions. In some cases, claimholders might not incur
incremental costs compared with those under current law from
changes that would aid debtors in preventing foreclosure on
their homes. Because of those uncertainties, CBO cannot
determine whether the aggregate cost of complying with all of
the mandates in the bill would exceed the annual threshold
($136 million in 2008, adjusted annually for inflation).
Previous CBO estimate: On February 5, 2008, CBO transmitted
a cost estimate for H.R. 3609, the Emergency Home Ownership and
Mortgage Equity Protection Act of 2007, as ordered reported by
the House Committee on the Judiciary on December 12, 2007. The
two bills are similar; however, the provision of S. 2136 that
would allow bankruptcy judges to modify mortgages would be in
effect indefinitely. (Under H.R. 3609, that provision would
sunset seven years after enactment). CBO's cost estimate for S.
2136 reflects that difference.
CBO determined that H.R. 3609 contained new private-sector
mandates but could not determine whether the costs would exceed
the annual threshold. The two bills contain the same mandates
regarding modifying the rights of claimholders by making
changes to the terms of certain home mortgage agreements during
bankruptcy proceedings and requiring claimholders to give
timely notice to both the debtor and the bankruptcy trustee
before adding fees.
Estimate prepared by: Federal Costs: Leigh Angres. Impact
on State, Local, and Tribal Governments: Melissa Merrell.
Impact on the Private Sector: Paige Piper/Bach.
Estimate approved by: Theresa Gullo, Deputy Assistant
Director for Budget Analysis.
V. Regulatory Impact Statement
In compliance with rule XXVI of the Standing Rules of the
Senate, the Committee finds that no significant regulatory
impact will result from the enactment of S. 2136.
VI. Conclusion
The foreclosure crisis our country faces threatens
America's families, communities, financial institutions, and
overall economic strength. As a result of the foreclosure
crisis, our nation faces an economic crisis as severe as any we
have seen since the Great Depression. Until the foreclosure
crisis is addressed, our economy will not begin to recover.
In light of our nation's economic circumstances, the need
to provide homeowners with means to effectively save their
homes is urgent. The Helping Families Save Their Homes in
Bankruptcy Act would help approximately 600,000 families save
their homes from foreclosure, help neighboring homeowners and
communities avoid massive economic losses, and help mortgage
lenders avoid significant foreclosure-related costs and fees--
all without imposing any burden on American taxpayers. The
Committee-reported version of the bill would take a significant
step toward alleviating the foreclosure crisis and its harmful
impact on our Nation.
VII. MINORITY VIEWS
----------
Minority Views From Senators Specter, Hatch, Grassley, Kyl, Brownback,
Cornyn and Coburn
In 1978, President Carter and a Congress under Democratic
control enacted significant bankruptcy reforms. In doing so,
the Congress allowed bankruptcy judges to modify certain
secured claims in bankruptcy. However, Congress specifically
retained a bar on bankruptcy judges modifying mortgages on
principal residences. Congress did so to encourage home
mortgage lending. Justice Stevens explained this in his
concurrence in Nobleman v. American Savings,\1\ a case in which
the Supreme Court reaffirmed that Chapter 13 prohibited
modification of mortgages on principal residences:
---------------------------------------------------------------------------
\1\508 U.S. 324 (1993).
At first blush it seems somewhat strange that the
Bankruptcy code should provide less protection to an
individual's interest in retaining possession of his or
her home than of other assets. The anomaly is, however,
explained by the legislative history indicating that
favorable treatment of residential mortgagees was
intended to encourage the flow of capital into the home
lending market.\2\
---------------------------------------------------------------------------
\2\Id. at 332 (citing Grubbs v. Houston First American Sav. Ass'n,
30 F.2d 236 (C.A.Tex., 1984)).
Justice Stevens and the 95th Congress knew that giving
bankruptcy judges free rein to re-write mortgages would only
increase the risk that lenders take on when they issue
mortgages. Lenders would respond to increased risk by insisting
on higher rates of return. That would only make it more
difficult for Americans who wished to become homeowners in the
future. Although a multitude of factors affect interest rates,
we would note that, in the years following the decision in
Nobleman clarifying that bankruptcy judges could not modify
mortgages on principal residences, interest rates declined.\3\
---------------------------------------------------------------------------
\3\Freddie Mac Primary Mortgage Market Survey, available at http://
www.freddiemac.com/pmms/pmms15.htm.
---------------------------------------------------------------------------
No one would deny that U.S. housing markets are in the
midst of a crisis. The number of Americans who are past due on
their mortgages is higher than it has been in a generation.
Many homeowners who can no longer afford their mortgages--due
in many cases to rapidly increasing monthly payments--face
foreclosure. Some argue that the ability to securitize large
numbers of mortgages led lenders to offer new types of loans to
riskier borrowers. Pressure from Fannie Mae during the late
1990s to ease credit requirements on loans in order to help
increase home ownership rates among minorities and low-income
consumers may also have led banks to issue such mortgages.\4\
These new loans were often designed to keep monthly payments
low or to make an expensive home affordable--at least in the
short term. Frequently, lenders issued adjustable rate
mortgages (``ARMs'') with low introductory ``teaser'' interest
rates that later increase substantially. Among these new types
of loans were no-down-payment and interest-only mortgages,
which also feature low initial payments that later increase. In
at least some cases, lenders made inadequate disclosures
warning borrowers that their monthly payments could increase.
---------------------------------------------------------------------------
\4\Steven A. Holmes, Fannie Mae Eases Credit To Aid Mortgage
Lending, N.Y. Times, Sept. 30, 1999.
---------------------------------------------------------------------------
In the face of this crisis, Congress should take, and has
taken, affirmative steps to provide relief to distressed
homeowners. However, S. 2136, the Helping Families Save Their
Homes in Bankruptcy Act, takes a broad approach that will only
further destabilize the housing market as well as the financial
markets by reducing predictability and transparency. Most
importantly, the bill would allow bankruptcy judges to reduce,
or ``cram down'' the principal value of a mortgage. Cram down
imposes an immediate loss on lenders that they cannot recover
when home values later appreciate. And, historically speaking,
home values generally have increased over time.\5\ Obviously,
this potential loss adds to the risk mortgage lenders face when
considering whether to issue a mortgage. To account for such
increased risk, mortgage lenders charge higher interest rates
and issue mortgages on more restrictive terms.
---------------------------------------------------------------------------
\5\See Office of Federal Housing Oversight, House Price Index
Quarterly Data (2008) accessed at http://www.ofheo.gov/
hpi_download.aspx (select 2Q 2008 Manipulatable Data) (showing
consistent increases in the sale price of single family homes over the
last three decades).
---------------------------------------------------------------------------
A consensus exists among experts that allowing cram down in
bankruptcy would increase the cost of borrowing for future
homeowners. In a hearing before the Senate Judiciary Committee,
Professor Joseph Mason of Drexel University testified that ``it
is straightforward to conclude'' that cram downs will increase
the cost of mortgage credit.\6\ In its analysis of economic
stimulus options earlier this year, the Congressional Budget
Office noted that one of the costs of cram down proposals
``could be higher mortgage interest rates.''\7\ Even the
experts that have advocated in favor of the bill acknowledge
that cram down will increase the cost of borrowing: In their
paper, The Effect of Bankruptcy Strip-Down on Mortgage Interest
Rates, Georgetown law professor Adam Levitin and Columbia
University Ph.D. candidate Joshua Goodman acknowledged that
permitting bankruptcy judges to cram down mortgage payments
will increase mortgage interest rates. Even the Federal Reserve
Chairman, who does not normally opine on legislation, has
acknowledged that allowing bankruptcy judges to modify
mortgages could restrict the credit available for mortgages.\8\
---------------------------------------------------------------------------
\6\The Looming Foreclosure Crisis: Hearing Before the S. Comm. On
the Judiciary, 110th Congress (2007) (statement of Joseph R. Mason,
Associate Professor, Drexel University) accessed at http://
judiciary.senate.gov/hearings/testimony.cfm?id=3046&wit_id=6812.
\7\Congressional Budget Office, Options for Responding to Short-
Term Economic Weakness at 24 (2008).
\8\The Economic Outlook: Hearing Before the Joint Economic Comm.,
110th Cong. (In response to question posed by Sen. Brownback, Member,
Joint Economic Comm.).
---------------------------------------------------------------------------
While the provision in S. 2136 allowing cram down would
only apply to mortgages issued prior to the effective date, the
probability that Congress would eventually eliminate that
limitation would be calculated into the price of every mortgage
issued to future homebuyers. Furthermore, allowing cram down
would only exacerbate instability in the broader financial
markets. The credit markets that are the lifeblood of American
businesses large and small have almost ceased functioning
because lenders cannot place a value on the mortgage-backed
securities they hold. Allowing cram down will only make it more
difficult for the financial markets to assess their losses and
begin extending credit again.
Furthermore, while allowing cram down would make it more
difficult for homeowners and businessmen alike to get credit,
it goes far beyond the core of the current problem. Of those
homeowners threatened with foreclosure, most have an adjustable
rate mortgage that has reset and which they can no longer
afford. Delinquencies and foreclosures among homeowners with
ARMs have risen dramatically. The percentage of homeowners with
subprime ARMs who are seriously delinquent--those who are
either more than 90 days past due or in foreclosure--more than
quadrupled, from 6.5 percent in the second quarter of 2006 to
26.7 percent in the second quarter of 2008.\9\ Among homeowners
with prime ARMs, the percentage who are seriously delinquent
has grown sevenfold.\10\ As a result, while ARMs only represent
about 20 percent of outstanding mortgages, they represent a
majority of foreclosures.\11\ Thus, the bulk of the foreclosure
problem appears to be mortgages with increasing monthly
payments. Allowing cram down goes far beyond that problem.
---------------------------------------------------------------------------
\9\Mortgage Bankers Association, National Delinquency Survey:
Second Quarter 2008 11 (Sept. 2008).
\10\Id. at 10.
\11\Id. at 4-9.
---------------------------------------------------------------------------
The current debate regarding the Administration's
proposal--that the federal government acquire securities backed
by distressed mortgages at taxpayer expense--raises the stakes
even higher. If a bankruptcy judge crams down a mortgage,
American taxpayers suffer an immediate loss in the value of the
asset they have acquired. In addition, if the home recovers its
value after a bankruptcy judge crams down a mortgage--which
happens eventually in most cases--that appreciation inures to
the benefit of the homeowner without any compensation to
taxpayers. If the Administration's proposal moves forward, the
federal government would appear to be in a better position than
a bankruptcy judge to balance the interests of homeowners
against those of taxpayers when making modifications.
Proponents of the bill have argued that primary residences
should be crammed down in bankruptcy just as second homes,
family farms and boats are. But there are good reasons why
principal residences are treated differently. Interest rates
and down payments for vacation homes are significantly higher
than for primary homes--if we start treating primary homes the
same as vacation homes, then interest rates will rise to the
levels of those offered for mortgages on second homes. With
respect to farms, cram down applies only to very small
commercial farming and ranching operations, not all farms and
ranches--there are very specific requirements that need to be
met. Moreover, it took Congress over two decades to make
Chapter 12 a permanent part of the Bankruptcy Code. Because
people were concerned about possible negative consequences to
allowing cram down for family farms, Chapter 12 was initially
only enacted as a temporary provision.\12\ Finally, cram down
is allowed for boats because boats are like cars--their value
diminishes rather than increases, which is very different than
real property, where values are expected to rise in the long
term.
---------------------------------------------------------------------------
\12\For example, one study by the United States Department of
Agriculture estimated that cram downs raise the interest rates on farm
real estate loans by 25 basis points to 100 basis points. See ``Do
farmers Need a Separate Chapter in the Bankruptcy Code?'' Issues in
Agricultural and Rural Finance, United States Department of
Agriculture, Economic Research Service, October 1997.
---------------------------------------------------------------------------
The majority also argues that bankruptcy judges should have
the power to modify mortgages, and particularly the power to
reduce the principal value of a mortgage, because mortgage
servicers have not provided meaningful assistance in the form
of mortgage modifications. However, in cases where it makes
sense, mortgage servicers are modifying mortgages and allowing
homeowners to stay in their homes. In the second quarter of
2008 alone, mortgage servicers participating in the
Administration's HOPE NOW program modified in excess of 155,000
mortgages.\13\ As the chart below demonstrates, that number
only continues to grow.
---------------------------------------------------------------------------
\13\Hope Now Alliance, July State Data 2008, http://
www.hopenow.com/site_tools/data.php (select ``July State Data 2008''
hyperlink).
Modifications include a reduction in interest rate,
forgiveness of a portion of principal or extension of the
maturity date of the loan. All of these modifications
permanently reduce the amount that homeowners pay each month on
their mortgages. While the majority argues that the only
meaningful modification is a reduction in principal, the
results belie that argument. Since the inception of HOPE NOW,
servicers have modified over 450,000 mortgages.\14\ Taken
together, modifications and repayment plans offered by
servicers have saved over two million homeowners from
foreclosure.\15\
---------------------------------------------------------------------------
\14\Id.
\15\Press Release, Hope Now Alliance, Over 2 Million Foreclosures
Prevented In Past Year By Hope Now Alliance Members (August 27, 2008)
(http://www.hopenow.com/media/press_release.php, select ``July 2008
Data Release'' hyperlink).
---------------------------------------------------------------------------
Recent action by Congress will only increase the assistance
provided to homeowners. Although the majority contends that
loan servicers are ``scared to death'' of being sued by
investors for making loan modifications, Congress has already
taken action to eliminate this concern. On July 30, 2008, the
President signed into law the Housing and Economic Recovery Act
of 2008, which provides lenders that modify mortgages immunity
from liability in suits brought by investors.\16\ This new law
should eliminate servicer concerns about liability to investors
and increase the number of modifications, keeping even more
homeowners in their homes.
---------------------------------------------------------------------------
\16\Pub. L. No. 110-140 Sec. 1403.
---------------------------------------------------------------------------
In addition to these overly broad amendments to the
bankruptcy code that would harm more borrowers than it helps,
the bill would make harmful changes to other areas of the law
as well. For example, the bill would vitiate existing
agreements to arbitrate and instead allow a bankruptcy court to
resolve any dispute involving a debtor's consumer debt. Under
current law, most courts have concluded a bankruptcy court has
no discretion to refuse to enforce an arbitration agreement
unless arbitration would ``seriously jeopardize'' the
objectives of the Bankruptcy Code.\17\ The bill would permit
bankruptcy courts to decide disputes involving consumer debt
even when arbitration would not conflict with the purposes of
the Bankruptcy Code. This provision represents yet another
attempt by special interests in the plaintiffs bar to eliminate
arbitration in a piecemeal manner and prevent private parties
from entering into enforceable agreements to arbitrate. For
over 80 years--since Congress enacted the Federal Arbitration
Act in 1925--federal law has encouraged the use of arbitration
as a fair, efficient, and effective alternative to our
overburdened court system. There are significant benefits for
individuals who just want a solution to their problems without
spending months in bankruptcy court or thousands of dollars on
attorneys' fees.
---------------------------------------------------------------------------
\17\Cooley v. Wells Fargo Financial (In re Cooley), 362 B.R. 514,
519-20 (Bankr. N.D. Ala. 2007).
---------------------------------------------------------------------------
Another provision of the bill would increase the cost of
borrowing for consumers by significantly increasing risk
associated with lending, particularly home lending. In essence,
the bill would wipe out any debt where the creditor has
violated a state or federal consumer protection law and is
subject to damages. Even where the violation is less serious
and the damages are minimal, the lender would be prevented from
asserting a claim in bankruptcy to recover the debt. And, this
is despite the fact that consumer protection laws already
provide significant penalties for violations.
In sum, S. 2136, as passed by the Committee, represents
public policy that will exacerbate the current crisis in the
housing and credit markets. As witnesses testifying before the
Committee made clear, increased risk leads to increases in
borrowing costs. This economic reality is ignored by proponents
of the current legislation. This bill proposes the wrong
solutions for the nation. The Committee should instead
concentrate its efforts on measures that will preserve access
to credit for consumers and ensure that terms of such credit
are fully and honestly disclosed.
Arlen Specter.
Orrin G. Hatch.
Chuck Grassley.
Jon Kyl.
Sam Brownback.
John Cornyn.
Tom Coburn.
VIII. Changes in Existing Law
In compliance with paragraph 12 of rule XXVI of the
Standing Rules of the Senate, changes in existing law made by
S. 2136, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in brackets, new matter is
printed in italic, and existing law in which no change is
proposed is shown in roman):
UNITED STATES CODE
TITLE 11--BANKRUPTCY
CHAPTER 1--GENERAL PROVISIONS
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Sec. 101. Definitions
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(40) The term ``municipality'' means political subdivision
or public agency or instrumentality of a State.
(40A) The term ``nontraditional mortgage'' means a security
interest in the debtor's principal residence that secures a
debt for a loan that at any period during the term of the loan
provides for the deferral of payment of principal or interest
through permitting periodic payments that do not cover the full
amount of interest due or that cover only the interest due,
except that such term excludes--
(A) a loan that at any period during the term of the
loan provides for the deferral of payment of principal
through permitting periodic payments that cover only
the interest due, if the creditor demonstrates that it
determined in good faith at the time the loan was
consummated, after undergoing a full underwriting
process based on verified and documented information,
that the debtor had a reasonable ability to repay at
the full interest and principal payment amount
(assuming an initial 30 year full amortization), and
payments under the loan resulted in a debt-to-income
ratio of the debtor in an amount equal to or less than
that which would have been permitted under guidelines
and directives established by the Secretary of Housing
and Urban Development pursuant to section 203.33 of
title 24, Code of Federal Regulations, for loans
subject to such section;
(B) a home equity line of credit that is in a
subordinate lien position; and
(C) a reverse mortgage.
[(40A)] (40B) The term ``patient'' means any individual who
obtains or receives services from a health care business.
[(40B)] (40C) The term ``patient records'' means any
written document relating to a patient or a record recorded in
a magnetic, optical, or other form of electronic medium.
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(53) The term ``statutory lien'' means lien arising solely
by force of a statute on specified circumstances or conditions,
or lien of distress for rent, whether or not statutory, but
does not include security interest or judicial lien, whether or
not such interest or lien is provided by or is dependent on a
statute and whether or not such interest or lien is made fully
effective by statute.
(53A) The term ``stockbroker'' means person--
(A) with respect to which there is a customer, as
defined in section 741 of this title; and
(B) that is engaged in the business of effecting
transactions in securities--
(i) for the account of others; or
(ii) with members of the general public, from
or for such person's own account.
(53B) The term ``subprime mortgage'' means a security
interest in the debtor's principal residence that secures a
debt for a loan that has an annual percentage rate that is
greater than--
(A) the sum of 3 percent plus the yield on United
States Treasury securities having comparable periods of
maturity, if the loan is secured by a first mortgage or
first deed of trust; or
(B) the sum of 5 percent plus the yield on United
States Treasury securities having comparable periods of
maturity, if the loan is secured by a subordinate
mortgage or subordinate deed of trust.
Without regard to whether such loan is subject to or reportable
under the Home Mortgage Disclosure Act, the difference between
the annual percentage rate of such loan and the yield on United
States Treasury securities having comparable periods of
maturity shall be determined using the procedures and
calculation methods applicable to loans that are subject to the
reporting requirements of such Act, except that such yield
shall be determined as of the 15th day of the month preceding
the month in which a completed application is submitted for
such loan. If such loan provides for a fixed interest rate for
an introductory period and then resets or adjusts to a variable
interest rate, the determination of the annual percentage rate
shall be based on the greater of the introductory rate and the
fully indexed rate. For purposes of this paragraph, the term
``fully indexed rate'' means the prevailing index rate on a
residential mortgage loan at the time at which the loan is
made, plus the margin that will apply after the expiration of
an introductory interest rate.
[(53B)] (53C) The term ``swap agreement''--
(A) means--
(i) any agreement, including the terms and
conditions incorporated by reference in such
agreement, which is--
(I) an interest rate swap, option,
future, or forward agreement, including
a rate floor, rate cap, rate collar,
cross-currency rate swap, and basis
swap;
(II) a spot, same day-tomorrow,
tomorrow-next, forward, or other
foreign exchange, precious metals, or
other commodity agreement;
(III) a currency swap, option,
future, or forward agreement;
(IV) an equity index or equity swap,
option, future, or forward agreement;
(V) a debt index or debt swap,
option, future, or forward agreement;
(VI) a total return, credit spread or
credit swap, option, future, or forward
agreement;
(VII) a commodity index or a
commodity swap, option, future, or
forward agreement; or
(VIII) a weather swap, option,
future, or forward agreement;
(IX) an emissions swap, option,
future, or forward agreement; or
(X) an inflation swap, option,
future, or forward agreement;
(ii) any agreement or transaction that is
similar to any other agreement or transaction
referred to in this paragraph and that--
(I) is of a type that has been, is
presently, or in the future becomes,
the subject of recurrent dealings in
the swap or other derivatives markets
(including terms and conditions
incorporated by reference therein); and
(II) is a forward, swap, future,
option or spot transaction on one or
more rates, currencies, commodities,
equity securities, or other equity
instruments, debt securities or other
debt instruments, quantitative measures
associated with an occurrence, extent
of an occurrence, or contingency
associated with a financial,
commercial, or economic consequence, or
economic or financial indices or
measures of economic or financial risk
or value;
(iii) any combination of agreements or
transactions referred to in this subparagraph;
(iv) any option to enter into an agreement or
transaction referred to in this subparagraph;
(v) a master agreement that provides for an
agreement or transaction referred to in clause
(i), (ii), (iii), or (iv), together with all
supplements to any such master agreement, and
without regard to whether the master agreement
contains an agreement or transaction that is
not a swap agreement under this paragraph,
except that the master agreement shall be
considered to be a swap agreement under this
paragraph only with respect to each agreement
or transaction under the master agreement that
is referred to in clause (i), (ii), (iii), or
(iv); or
(vi) any security agreement or arrangement or
other credit enhancement related to any
agreements or transactions referred to in
clause (i) through (v), including any guarantee
or reimbursement obligation by or to a swap
participant or financial participant in
connection with any agreement or transaction
referred to in any such clause, but not to
exceed the damages in connection with any such
agreement or transaction, measured in
accordance with section 562; and
(B) is applicable for purposes of this title only,
and shall not be construed or applied so as to
challenge or affect the characterization, definition,
or treatment of any swap agreement under any other
statute, regulation, or rule, including the Gramm-
Leach-Bliley Act, the Legal Certainty for Bank Products
Act of 2000, the securities laws (as such term is
defined in section 3(a)(47) of the Securities Exchange
Act of 1934) and the Commodity Exchange Act.
[(53C)] (53D) The term ``swap participant'' means an entity
that, at any time before the filing of the petition, has an
outstanding swap agreement with the debtor.
[(56A)] (53E) The term ``term overriding royalty'' means an
interest in liquid or gaseous hydrocarbons in place or to be
produced from particular real property that entitles the owner
thereof to a share of production, or the value thereof, for a
term limited by time, quantity, or value realized.
[(53D)] (53F) The term ``timeshare plan'' means and shall
include that interest purchased in any arrangement, plan,
scheme, or similar device, but not including exchange programs,
whether by membership, agreement, tenancy in common, sale,
lease, deed, rental agreement, license, right to use agreement,
or by any other means, whereby a purchaser, in exchange for
consideration, receives a right to use accommodations,
facilities, or recreational sites, whether improved or
unimproved, for a specific period of time less than a full year
during any given year, but not necessarily for consecutive
years, and which extends for a period of more than three years.
A ``timeshare interest'' is that interest purchased in a
timeshare plan which grants the purchaser the right to use and
occupy accommodations, facilities, or recreational sites,
whether improved or unimproved, pursuant to a timeshare plan.
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Sec. 109. Who may be a debtor
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(h)(1) Subject to paragraphs (2) and (3), and
notwithstanding any other provision of this section, an
individual may not be a debtor under this title unless such
individual has, during the 180-day period preceding the date of
filing of the petition by such individual, received from an
approved nonprofit budget and credit counseling agency
described in section 111(a) an individual or group briefing
(including a briefing conducted by telephone or on the
Internet) that outlined the opportunities for available credit
counseling and assisted such individual in performing a related
budget analysis.
(2)(A) Paragraph (1) shall not apply with respect to a
debtor who resides in a district for which the United States
trustee (or the bankruptcy administrator, if any) determines
that the approved nonprofit budget and credit counseling
agencies for such district are not reasonably able to provide
adequate services to the additional individuals who would
otherwise seek credit counseling from such agencies by reason
of the requirements of paragraph (1).
(B) The United States trustee (or the bankruptcy
administrator, if any) who makes a determination described in
subparagraph (A) shall review such determination not later than
1 year after the date of such determination, and not less
frequently than annually thereafter. Notwithstanding the
preceding sentence, a nonprofit budget and credit counseling
agency may be disapproved by the United States trustee (or the
bankruptcy administrator, if any) at any time.
(3)(A) Subject to subparagraph (B), the requirements of
paragraph (1) shall not apply with respect to a debtor who
submits to the court a certification that--
(i) describes exigent circumstances that merit a
waiver of the requirements of paragraph (1);
(ii) states that the debtor requested credit
counseling services from an approved nonprofit budget
and credit counseling agency, but was unable to obtain
the services referred to in paragraph (1) during the 5-
day period beginning on the date on which the debtor
made that request; and
(iii) is satisfactory to the court.
(B) With respect to a debtor, an exemption under
subparagraph (A) shall cease to apply to that debtor on the
date on which the debtor meets the requirements of paragraph
(1), but in no case may the exemption apply to that debtor
after the date that is 30 days after the debtor files a
petition, except that the court, for cause, may order an
additional 15 days.
(4) The requirements of paragraph (1) shall not apply with
respect to a debtor whom the court determines, after notice and
hearing, is unable to complete those requirements because of
incapacity, disability, or active military duty in a military
combat zone. For the purposes of this paragraph, incapacity
means that the debtor is impaired by reason of mental illness
or mental deficiency so that he is incapable of realizing and
making rational decisions with respect to his financial
responsibilities; and ``disability'' means that the debtor is
so physically impaired as to be unable, after reasonable
effort, to participate in an in-person, telephone, or Internet
briefing required under paragraph (1).
(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.
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CHAPTER 5--CREDITORS, THE DEBTOR, AND THE ESTATE
Subchapter I--Creditors and Claims
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Sec. 502. Allowance of claims or interests
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(b) Except as provided in subsections (e)(2), (f), (g), (h)
and (i) of this section, if such objection to a claim is made,
the court, after notice and a hearing, shall determine the
amount of such claim in lawful currency of the United States as
of the date of the filing of the petition, and shall allow such
claim in such amount, except to the extent that--
(1) such claim is unenforceable against the debtor
and property of the debtor, under any agreement or
applicable law for a reason other than because such
claim is contingent or unmatured;
(2) such claim is for unmatured interest;
(3) if such claim is for a tax assessed against
property of the estate, such claim exceeds the value of
the interest of the estate in such property;
(4) if such claim is for services of an insider or
attorney of the debtor, such claim exceeds the
reasonable value of such services;
(5) such claim is for a debt that is unmatured on the
date of the filing of the petition and that is excepted
from discharge under section 523(a)(5) of this title;
(6) if such claim is the claim of a lessor for
damages resulting from the termination of a lease of
real property, such claim exceeds--
(A) the rent reserved by such lease, without
acceleration, for the greater of one year, or
15 percent, not to exceed three years, of the
remaining term of such lease, following the
earlier of--
(i) the date of the filing of the
petition; and
(ii) the date on which such lessor
repossessed, or the lessee surrendered,
the leased property; plus
(B) any unpaid rent due under such lease,
without acceleration, on the earlier of such
dates;
(7) if such claim is the claim of an employee for
damages resulting from the termination of an employment
contract, such claim exceeds--
(A) the compensation provided by such
contract, without acceleration, for one year
following the earlier of--
(i) the date of the filing of the
petition; or
(ii) the date on which the employer
directed the employee to terminate, or
such employee terminated, performance
under such contract; plus
(B) any unpaid compensation due under such
contract, without acceleration, on the earlier
of such dates;
(8) such claim results from a reduction, due to late
payment, in the amount of an otherwise applicable
credit available to the debtor in connection with an
employment tax on wages, salaries, or commissions
earned from the debtor; [or]
(9) proof of such claim is not timely filed, except
to the extent tardily filed as permitted under
paragraph (1), (2), or (3) of section 726(a) of this
title or under the Federal Rules of Bankruptcy
Procedure, except that a claim of a governmental unit
shall be timely filed if it is filed before 180 days
after the date of the order for relief or such later
time as the Federal Rules of Bankruptcy Procedure may
provide, and except that in a case under chapter 13, a
claim of a governmental unit for a tax with respect to
a return filed under section 1308 shall be timely if
the claim is filed on or before the date that is 60
days after the date on which such return was filed as
required[.]; or
(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.
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Subchapter II--Debtor's Duties and Benefits
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Sec. 522. Exemptions
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(b)(1) Notwithstanding section 541 of this title, an
individual debtor may exempt from property of the estate the
property listed in either paragraph (2) or, in the alternative,
paragraph (3) of this subsection. In joint cases filed under
section 302 of this title and individual cases filed under
section 301 or 303 of this title by or against debtors who are
husband and wife, and whose estates are ordered to be jointly
administered under rule 1015(b) of the Federal Rules of
Bankruptcy Procedure, one debtor may not elect to exempt
property listed in paragraph (2) and the other debtor elect to
exempt property listed in paragraph (3) of this subsection. If
the parties cannot agree on the alternative to be elected, they
shall be deemed to elect paragraph (2), where such election is
permitted under the law of the jurisdiction where the case is
filed.
(2) Property listed in this paragraph is property that is
specified under subsection (d), unless the State law that is
applicable to the debtor under paragraph (3)(A) specifically
does not so authorize.
(3) Property listed in this paragraph is--
(A) subject to subsections (o) and (p), any property
that is exempt under Federal law, other than subsection
(d) of this section, or State or local law that is
applicable on the date of the filing of the petition at
the place in which the debtor's domicile has been
located for the 730 days immediately preceding the date
of the filing of the petition or if the debtor's
domicile has not been located at a single State for
such 730-day period, the place in which the debtor's
domicile was located for 180 days immediately preceding
the 730-day period or for a longer portion of such 180-
day period than in any other place;
(B) any interest in property in which the debtor had,
immediately before the commencement of the case, an
interest as a tenant by the entirety or joint tenant to
the extent that such interest as a tenant by the
entirety or joint tenant is exempt from process under
applicable nonbankruptcy law; [and]
(C) retirement funds to the extent that those funds
are in a fund or account that is exempt from taxation
under section 401, 403, 408, 408A, 414, 457, or 501(a)
of the Internal Revenue Code of 1986[.]; and
(D) if the debtor, as of the date of the filing of
the petition, is 55 years 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.
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(d) The following property may be exempted under subsection
(b)(2) of this section:
(1) The debtor's aggregate interest, not to exceed
$15,000 in value, or, if the debtor is 55 years of age
or older, $75,000 in value, in real property or
personal property that the debtor or a dependent of the
debtor uses as a residence, in a cooperative that owns
property that the debtor or a dependent of the debtor
uses as a residence, or in a burial plot for the debtor
or a dependent of the debtor.
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Subchapter III--The Estate
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Sec. 554. Abandonment of property of the estate
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(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.
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CHAPTER 13--ADJUSTMENT OF DEBTS OF AN INDIVIDUAL WITH REGULAR INCOME
Subchapter II--The Plan
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Sec. 1322. Contents of Plan
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(b) Subject to subsections (a) and (c) of this section, the
plan may--
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(10) provide for the payment of interest accruing
after the date of the filing of the petition on
unsecured claims that are nondischargeable under
section 1328(a), except that such interest may be paid
only to the extent that the debtor has disposable
income available to pay such interest after making
provision for full payment of all allowed claims; [and]
(11) notwithstanding paragraph (2) and otherwise
applicable nonbankruptcy law--
(A) modify an allowed secured claim for a
debt incurred prior to the effective date of
this paragraph secured by a nontraditional
mortgage, or a subprime mortgage, and any lien
subordinate to such claim, on 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)
(B) provide for payment of such claim--
(i) in an amount equal to the amount
of the allowed secured claim;
(ii) for a period that is the longer
of 30 years (reduced by the period for
which the loan has been outstanding) or
the remaining term of such loan,
beginning on the date of the order for
relief under this chapter; and
(iii) 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
(C) if a claim has been modified to an amount
below the original principal of the loan
pursuant to paragraph (B)(i) and the debtor's
principal residence is sold during the term of
the plan, the holder of the claim shall be
entitled to receive, in addition to the unpaid
portion of the allowed secured claim, the net
proceeds of the sale, or the amount of the
holder's allowed unsecured claim, whichever is
less; and
[(11)] (12) include any other appropriate provision
not inconsistent with this title.
* * * * * * *
(c) Notwithstanding subsection (b)(2) and applicable
nonbankruptcy law--
(1) a default with respect to, or that gave rise to,
a lien on the debtor's principal residence may be cured
under paragraph (3) or (5) of subsection (b) until such
residence is sold at a foreclosure sale that is
conducted in accordance with applicable nonbankruptcy
law; [and]
(2) in a case in which the last payment on the
original payment schedule for a claim secured only by a
security interest in real property that is the debtor's
principal residence is due before the date on which the
final payment under the plan is due, the plan may
provide for the payment of the claim as modified
pursuant to section 1325(a)(5) of this title[.];
(3) the plan need not provide for the payment of, and
the debtor, the debtor's property, and property of the
estate shall not be liable for, any fee, cost, or
charge, notwithstanding section 506(b), that arises in
connection with a claim secured by the debtor's
principal residence if the event that gives rise to
such fee, cost, or charge occurs while the case is
pending but before the discharge order, except to the
extent that--
(A) notice of such fees, costs or charges is
filed with the court, and served on the debtor
and the trustee, before the expiration of the
earlier of
(i) 1 year after the event that gives
rise to such fee, cost, or charge
occurs; or
(ii) 60 days before the closing of
the case; and
(B) such fees, costs, or charges are lawful,
reasonable, and provided for in the agreement
under which such claim or security interest
arose;
(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. 1325. Confirmation of plan
(a) Except as provided in subsection (b), the court shall
confirm a plan if--
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(5) except as otherwise provided in section
1322(b)(11) of this title, with respect to each allowed
secured claim provided for by the plan--
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TITLE 28--JUDICIARY AND JUDICIAL PROCEDURE
PART IV--URISDICTION AND VENUE
CHAPTER 85--DISTRICT COURTS; JURISDICTION
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Sec. 1334. Bankruptcy cases and proceedings
(a) Except as provided in subsection (b) of this section,
the district courts shall have original and exclusive
jurisdiction of all cases under title 11.
(b) Except as provided in subsection (e)(2), and
notwithstanding any Act of Congress that confers exclusive
jurisdiction on a court or courts other than the district
courts, the district courts shall have original but not
exclusive jurisdiction of all civil proceedings arising under
title 11, or arising in or related to cases under title 11.
(c)(1) Except with respect to a case under chapter 15 of
title 11, nothing in this section prevents a district court in
the interest of justice, or in the interest of comity with
State courts or respect for State law, from abstaining from
hearing a particular proceeding arising under title 11 or
arising in or related to a case under title 11.
(2) Upon timely motion of a party in a proceeding based
upon a State law claim or State law cause of action, related to
a case under title 11 but not arising under title 11 or arising
in a case under title 11, with respect to which an action could
not have been commenced in a court of the United States absent
jurisdiction under this section, the district court shall
abstain from hearing such proceeding if an action is commenced,
and can be timely adjudicated, in a State forum of appropriate
jurisdiction.
(d) Any decision to abstain or not to abstain made under
subsection (c) (other than a decision not to abstain in a
proceeding described in subsection (c)(2)) is not reviewable by
appeal or otherwise by the court of appeals under section
158(d), 1291, or 1292 of this title or by the Supreme Court of
the United States under section 1254 of this title. Subsection
(c) and this subsection shall not be construed to limit the
applicability of the stay provided for by section 362 of title
11, United States Code, as such section applies to an action
affecting the property of the estate in bankruptcy.
(e) The district court in which a case under title 11 is
commenced or is pending shall have exclusive jurisdiction--
(1) of all the property, wherever located, of the
debtor as of the commencement of such case, and of
property of the estate; and
(2) over all claims or causes of action that involve
construction of section 327 of title 11, United States
Code, or rules relating to disclosure requirements
under section 327.
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.