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Public Statements

Bankruptcy Code Reform

Floor Speech

Location: Washington, DC

Mr. DURBIN. Madam President, later this week, probably tomorrow or Thursday, we will consider an amendment which I will offer relative to the Bankruptcy Code. I can remember not that many years ago, when we reformed the Bankruptcy Code, I was a member of the Senate Judiciary Committee--a new member--and the ranking chairman of the Subcommittee on Bankruptcy was Senator Grassley of Iowa. He had worked on this for quite some time.

I looked around the Senate Judiciary Committee and reflected on my colleagues, many of whom had served for years in the Senate and on that committee. But when it came to the issue of bankruptcy, 10 years ago, I realized something that was a little amazing. By virtue of the fact that I had taken a course in bankruptcy at Georgetown Law School 30 years before--a 3-hour, one-semester course--and had been appointed a trustee in bankruptcy in the Federal court in Springfield, IL, over a bankrupt gas station, I had more experience in bankruptcy than any member of the committee.

Nevertheless, we embarked on this reform of the Bankruptcy Code--a massive undertaking. It took years before it was finally accomplished, and during the course of that a lot of amendments were offered. Of course, I viewed bankruptcy then and now as the last resort of desperate people. But, sadly, many millions of Americans have found this to be the only thing to which they can turn. They have reached such a point in their lives and in their economic experience where they have no choice but to turn to bankruptcy court and try to wipe the slate clean and to start over.

The major reasons people go into bankruptcy are pretty obvious--the loss of a job; the No. 1 reason, of course, is health care bills. People end up with bills that aren't covered by insurance and have no place else to turn. Sometimes a bitter divorce will end in bankruptcy court. It is rare that people turn to it. I think many of the critics of bankruptcy think people are just looking for any opportunity to go to bankruptcy court. I don't think that is the case with the majority of those petitioners who file for bankruptcy.

So here I am again, some 10 years later, looking at the Bankruptcy Code, but this time in a different context altogether. At this point in time, more and more Americans are headed for bankruptcy court for a new reason. They are losing their homes. They fell behind in their payments on their mortgages, became delinquent, and now face foreclosure. You know what I am talking about--people who have lost their jobs, people who signed up for mortgages that were very misleading, people who ended up in a circumstance where the mortgage they signed ends up triggering a new interest rate they can't sustain. So the most important asset they have on Earth--their home--is about to be lost, and they are headed to bankruptcy court to try to salvage something out of their lives.

Now, if the person headed for bankruptcy court facing foreclosure on their home is well off and has other real estate, such as a vacation condo in Arizona or Florida, it is interesting what the bankruptcy court can do. The person who comes in filing for bankruptcy facing foreclosure on two pieces of real estate, the home and the vacation condo, finds out that the court treats them totally different.

When it comes to the vacation condo, the bankruptcy judge sits down, takes a look at the assets of the person filing for bankruptcy, and tries to determine whether at the end of the day they can ever make another mortgage payment. For some, it is hopeless; they have lost a job and they are so far behind it will never work. But for others, they are right on the edge. So the bankruptcy judge has the power, when it comes to the vacation condo, to rewrite the terms of the mortgage that is being foreclosed upon because the judge concludes that the person can make a mortgage payment, if in fact the person is given a new interest rate or a new term for the mortgage.

That is what they can do with the vacation condo. But what can the bankruptcy judge do when you file for bankruptcy facing foreclosure on your home? The answer is nothing. There is nothing the court can do. There could literally be a circumstance where a person could have a restructured mortgage coming out of bankruptcy to save that condo in Florida but lose their home. That is the way the law is written.

The same is true when it comes to farms and ranches. Not long ago some of the critics of my amendment were pushing in Congress and in the Senate a revision in the bankruptcy law which said, if someone goes into bankruptcy facing foreclosure on their farm, then we ought to let the bankruptcy judge see if they can rewrite the terms of the mortgage. We passed that into law. The same thing applies to ranches--farms, ranches, second homes, and vacation condos. The bankruptcy court has that power. But when it comes to your home it does not.

How do you explain that? Why in the world could someone turn to the bankruptcy court for relief for every piece of property but the most important one in life? The answer is that it is the law, and that is what the Durbin amendment would change.

Of course, there are some who do not like this change--the banks. They don't like this change because it means at the end of the day, if they will not sit down with someone facing foreclosure to try to work out and renegotiate the terms of the mortgage--at the end of the day that person may go to bankruptcy court and end up having a judge do it. That is the court of last resort when one is facing foreclosure under my amendment. So that is why many of the banks resist it. They don't want to sit down and renegotiate the terms of the mortgage.

Now let's take a look at where we are in America today. This is not the first time I offered this amendment. I offered it last year to give the bankruptcy court this power. When I offered it, the critics said: We don't need it. Mortgage foreclosure is not that big of a problem.

When I offered this amendment last year, we estimated that 2 million American homes would be lost to foreclosure. Since then things have changed dramatically. The best estimate now from Moody's, a group that most people trust when it comes to making economic forecasts, is that instead of losing 2 million homes to foreclosure in America we are likely to lose more than 8 million homes to foreclosure in America.

What would 8 million homes in foreclosure represent? It would represent one out of every six home mortgages in America.

Visualize your own street you live on or the building in which you live. Imagine how many people are paying a mortgage payment on that street. Now imagine that one out of six loses their home. What impact does that have on you as a neighbor? It is not good. The value of your home goes down if there is a foreclosure in your neighborhood. Even worse, your neighborhood could change.

A foreclosed home, 99 percent of the time, goes back to the bank. It is not sold on the market and reoccupied. It sits there. I have seen them. I have seen them in Chicago, and I have seen them in Springfield, IL. These are homes that are boarded up with plywood. The lots in front of them look like a trash heap. Many times vandals come in and rip out the plumbing if they can get some copper pipe out of it, and sometimes it ends up becoming a haven for criminal activity and drug trafficking. It can literally destroy a neighborhood, and I have seen that happen--one foreclosed home.

Why? The banks can't do anything with it. They can't sell it on this market. They certainly do not put the time in to maintain the home as you would your own home in that same neighborhood. And everybody suffers as a result of it.

In addition, the banks that go through mortgage foreclosure end up spending $50,000--that is about the average of what it costs a bank to have a home foreclosed upon.

It looks as if there are a lot of losers in this process I have just described. A family loses their home, a neighborhood sees a decline in value of all the real estate around it, and there is an eyesore at least, and maybe worse, and the bank ends up with a $50,000 debt. One would think under those circumstances that banks would be anxious to try to figure out if they could keep a person in their home.

I told a story last night which I think illustrates it. A flight attendant on a flight back to Chicago pulled me aside and said: I am a single mom with three kids. I have a home in the suburbs. My mortgage rate is too high. I can't make the payments anymore. I don't want to lose the home. If I could just renegotiate now to the lower interest rate I can make the monthly payments, and I could save my home. But what am I supposed to do?

And the answer I had to tell her was, basically: Beg the bank, and if they won't go along with renegotiating the mortgage, you are in a pretty sorry situation. You are facing delinquency, default, and foreclosure in a credit situation that is going to be absolutely horrible.

So we wrote this bill, not just to give the bankruptcy court the power to renegotiate the terms of the mortgage but also to set up conditions. Here are the conditions: The first one is, if someone is anticipating going to bankruptcy court, they are required to present to their lender, the bank with their mortgage, at least 45 days in advance of filing bankruptcy, the legal documentation of their economic circumstances: an indication of their income, a balance sheet on their assets and liabilities so the bank can take a look at them and see if there is a way to save this person who might otherwise face foreclosure.

I think about that flight attendant. She could prove that she has a steady job. She goes to work every day. She has been a model citizen, but she got caught in a bad mortgage, and when the ARM reset she couldn't keep up with it. At that point, if the bank offers her a renegotiated mortgage where she is paying at least 31 percent of her gross income as the mortgage payment--if the bank makes that offer, then this flight attendant and others, if they do not take the offer, cannot ask for the bankruptcy court to change the terms of the mortgage.

It is pretty basic. We put a limit on how much of a house someone can take into this process. It is about $729,000. We also say that only loans that originated before January 1 of this year are eligible for modification. The loans must be at least 60 days delinquent before they are eligible for modification, and only loans for which a foreclosure notice has been sent are eligible. So it is an emergency, a pretty drastic circumstance before a person would exercise these rights, go to a bank, put their documentation on the table and see if they could get a renegotiation of their mortgage.

I think it is a reasonable way to stop some of the mortgage foreclosures, and I think this is essential if we are going to turn this economy around. This recession started in the mortgage market, and it will not end until we straighten out that same market.

Unfortunately, there were a lot of smooth operators out there. Let me tell you the story of one woman in Chicago, and I think this is such a classic illustration. This lady had worked her whole life at a little factory, and she had saved up a little bit of money but she was counting on Social Security. She had basically paid off the house in which she lived and she was in retirement. She had the Social Security checks coming in and, of course, she believed she was in a secure situation.

A knock comes on the door, and a person says: Mrs. So-and-So, I just wanted to let you know you aren't living on one lot, you are living on two lots. You see, it turns out there are two parcels here. Your backyard is a separate real estate parcel and you have failed to pay the taxes on it and it has been sold at a tax sale.

This is a woman, a wonderful woman who worked her whole life. She wasn't a lawyer or an accountant or a real estate expert, and she went into a panic, to think that somebody was going to build something in her backyard.

She said: What can I do?

They said: You have to come up with money to buy back from the tax sale for the real estate taxes that went unpaid.

It turned out they had been mailing the notices of the taxes to another address. She wasn't aware of it.

So she looked around and saw on television an offer for a home refinancing. She called the 800 number, and the next day somebody showed up at her house and said: We can take care of this. This poor lady, 48 hours later, was brought into an office of a mortgage broker in Chicago. This is all happening in 72 hours. They sat her down at a table without asking for any evidence of her income or her net worth and handed her a stack of papers and said: Just sign these papers.

If you have ever been through a real estate closing, have you ever felt so hopeless in your life as with that stack of papers? As a lawyer I used to sit there and think: I hope I have looked through everything that is in there because it is page after page of small print, most of it in terms most people wouldn't understand.

She signed all of these documents. They gave her the money to buy the lot back from the tax sale, and they said we will give you a little extra money on the side. She thought everything worked out. The monthly payment was something she could handle.

Then came the reset. In a matter of a year or two the reset on the mortgage, this adjustable rate mortgage, drove the monthly payment up to the point where they were taking 80 percent of her Social Security check. She was about to lose her home, the whole thing now, because of what she had signed up for.

That is when I met her in this desperate circumstance, where she turned to people and said: Is there anybody who can help me out of this mess? She was in her late sixties and just beside herself to think that she would have to give up this home that she had hoped to live in for the rest of her life.

Thank goodness a bank did step forward, refinanced the whole project at a reasonable interest rate, and she was able to stay in the home. But her story is not unlike a lot of others where people got into a circumstance with a mortgage broker and a bank and ended up signing up for a mortgage they couldn't handle. It happened to a lot of people.

These mortgage brokers--incidentally, many of them were engaged in predatory lending; that is breaking the law--fraud, misleading people because it was a hot market. Boy, if you could move a mortgage as quickly as possible, the next thing you knew it was part of a big security arrangement off with some big bank somewhere.

When I talked to the banks about giving people a second chance facing mortgage foreclosure, the banks told me: These people made a big mistake. Why should we bail them out of their mistake? Why should we feel any responsibility to them for the mistakes they made?

It is a pretty heartless argument. It is even worse nowadays because the very same banks, such as the American Bankers Association, and the community banks--not as many of those, I might add, but the very same banks that are saying these people have to pay a price for bad decisions, many of these banks were in line to receive millions if not billions of Federal dollars because of the same mistakes they made. When they made a business mistake, they ended up turning to the Government and our taxpayers. All of us ended up trying to help our banks get out of the mess they created with these subprime mortgages and the instruments that followed.

So the same banks that made these terrible mistakes, built these rotten portfolios, facing bankruptcy themselves, about to go out of business, happily took the money in from the Federal Government and now, when we say to them: What about the victims on the south side of Chicago or Albany Park or near Midway Airport--what about them? Can we give them a second chance? No, sir. Don't you understand what a moral hazard is? People have to pay the price for bad mistakes.

Bankers, obviously, don't believe they have to pay the price. Sadly, the situation is one that will be manifest in the vote we are about to take in just a few hours--maybe in the next day or two--on the Senate floor. I have been working on this for 2 years. I thought this was unfair at the start, that the bankruptcy court could not sit and rework this mortgage as it can for so many other pieces of property. I didn't realize when I started this journey that 2 years later we would still be talking about millions of homes facing foreclosure and people desperate for it.

America is going to be a different place if 8 million homes face foreclosure. Unfortunately, a lot of towns are going to be different and a lot of neighborhoods are going to be different and these bankers are counting on the fact that at the end of the day, Uncle Sam will keep sending them money, trying ways to buy them out because they are too big to fail. The banks are too big to fail. These financial institutions, they know at the end of the day they are going to get a helping hand from this Government. But when we asked them to give a helping hand to people facing foreclosure, they walked away from the table. They walked away from the table. They would not negotiate with us, even though we put in reasonable requirements for people to do the right thing. They walked away from it. They feel no responsibility toward these people. That is unfortunate. It is unfortunate for the victims. It is unfortunate for our Nation.

This is not the last time we are going to visit the issues involving banks. I have learned the hard way that they are a pretty powerful lobby. One would think after what we have been through with this real estate bubble--the subprime mortgage mess with a lot of these banks, people trying to run away with multimillion-dollar bonuses in the midst of taking money from the Federal Government--one would think with all of that, the bankers wouldn't have the political clout in the Senate, but they do.

It is going to be a real test to see if we can come up with the 60 votes we need in the Senate to change this law and give these homeowners a fighting chance. I am not sure we can, but I think it is worth the effort.

I might say to the bankers, if you beat me this week--I hope you do not but if you do--hang on tight; we are coming back at you next week.

Do you know what we are going to talk about next week? Credit cards. We are going to talk about what these banks do with credit cards to consumers and families and businesses across America. And you know what I am talking about, situations where people face interest rates that all of a sudden mushroom overnight for no apparent reason.

I have had this happen. Send your payment in a day late. Watch what happens. You not only get a penalty for being a day late, they charge you interest on the penalty, and then interest again the following months. It just keeps coming at you.

You start adding it up and you think to yourself, this is an outrage. And it is an outrage. Time and again what these banks have done with their credit cards is to put people in a credit trap.

They had a feature on NOVA that I watched last year analyzing the credit card industry. It had this one fellow in there who is considered the wizard of credit cards. This man was the greatest mind in the world when it came to credit cards. A curious thing about him, though, they would not identify where he lived. They made a point of saying, he would only agree to an interview if we did not disclose where he lived. Very unusual, right.

Well, this man, in his infinite genius, came up with the following: He came up with the idea that the minimum monthly payment, instead of being 4 percent, should be 2 percent. Do you know why? Because if you pay 2 percent a month you will never, ever get out of debt. You are stuck. The minimum monthly payment is a guarantee that the interest is going to eat up everything you pay by the next month.

During the bankruptcy debate here, I had a simple little amendment. The amendment said this: If you have on your monthly statement a minimum monthly payment on the credit card, the bank issuing the credit check has to put below that minimum monthly payment: And if you make the minimum monthly payment, it will take you X months to pay off the balance and you will pay X dollars in interest.

The credit card companies refused to put that information on the monthly statement. And you know what they said to me: It is impossible to calculate that. Sure it is. It is impossible to calculate it, because they know if the average borrower, the person with that credit card, knew what that monthly minimum payment meant, they would think long and hard about whether that is all they are going to send in.

It is tough love in a way. Some people did get overextended in credit. But these credit card companies milked it for every penny it was worth. Senator Chris Dodd of Connecticut is going to bring us this credit card reform bill. The House of Representatives is about to pass one this week.

So next week, I would say to my friends at the financial institutions and the banking industry: Hold on tight. We are coming at you again. And this time we are going to try to help out the consumers across the country, to help out the families who are being ripped off by credit cards every day, every single day.

In a tough economy, people who turn to these credit cards in desperation sometimes are the most helpless victims. I think it ought to go beyond that. I would not stop there. I have legislation which does something that has not been done in a long time in this country. It establishes a usury rate. Usury used to be the established ceiling, the maximum, that you can charge for interest. We got away from that a long time ago. We said, we will let the market decide.

Well, I put in a bill that said: The maximum you can charge for interest for any 1-year period is 36 percent. That would be for mortgages, that would be for credit cards, basic loans. The reason I picked that number was that a few years ago we decided that members of the U.S. military and their families were being exploited so badly by the pay-day loans and title loans and installment loan operations that we put a limit on the interest rate that can be charged to our military and their families of 36 percent. Why? Because a lot of soldiers borrowing money, their family borrowing money, got so deeply in debt and could not get out of it, they had to leave the military service. After being trained and ready to serve our country, they could not continue. So we put this protection in of 36 percent.

If that is good enough to protect our military, why is it not good enough to protect every American? I think 36 percent is reasonable. But I learned something as soon as I introduced that bill. It is amazing that this industry, like the title loan business, and the pay-day loan business, it is amazing what they will come in, sit down in your office and say to you with a straight face. I said to this group in Chicago: Well, how much do you charge in interest at these pay-day loans and title loans?

The fellow said: Senator, you know it is the circumstance.

I said: How much do you charge?

Well, you know, on an annual basis somewhere between 58 and 358 percent.

What--58 and 358 percent?

Yes, but those are circumstances.

It gets down to the bottom line. Those people should not be in business. These poor people who think they are borrowing money are never going to get out of that hole. And we make it legal in this country. If you did it as part of some gangland activity, it would be extortion, and it might lead to criminal prosecution. But if you do it with a certain sign in front of your business, it is considered the free market at work. Well, I think it is the free market run amok. That is why I think it needs to be changed.

So we are going to face this vote this coming week. It is a very important one. It is one I hope will change the landscape. I hope that more homes will be spared from foreclosure. And I hope we can start stabilizing the real estate market.

I think when we do, we are going to find our way out of this recession. Until we do, we are going to keep looking for the bottom. How many homes will go in foreclosure? How many will sit vacant? And how low can the value of our homes go for those of us paying our mortgages every month?

That is what we are up against. We have not found that bottom yet, because the banks are not prepared to step forward and support any legislation that gives those people a fighting chance. They will have their opportunity this week in the Senate to speak.

Members of the Senate, tomorrow, I will go through State by State and show you what some of these States are facing. Mortgage foreclosures are bad in Illinois. Some parts of Chicago are horrible. But in some States it is devastating.

I think Nevada is a classic example of a State where mortgage foreclosures are out of hand at this point. We have got to do something. We have got to step forward. The President supports this proposal I am bringing to the floor. I hope we can find some Members on both sides of the aisle, particularly on the Republican side of the aisle, who will join us.

I yield the floor.

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