Bank Interest: Bankruptcy Reform Looms

After five years on Capitol Hill, the bankruptcy reform bill is one compromise away from passage. But consumer groups claim the bill still fails to address the bad habits of the very lenders that have spent millions to get it passed.

"The bill has progressed in fits and starts over the past five years but appears to be entering the homestretch," says David Butler, spokesman for the Consumers Union, which opposes the bill. "Business interests have poured time and money into pushing this bill."

In March 2001, both the House of Representatives and the Senate passed bankruptcy measures by wide margins, 306 to 108 and 83 to 15, respectively. After much delay and months of private negotiation in committee, the House and Senate have come to terms on every issue except one.



The final debate centers around a provision that would bar those convicted of blocking abortion clinics from using bankruptcy to avoid paying their fines. If that issue can be navigated, Bush is likely to sign the bill into law. "President Bush has indicated that he supports this bill," says Butler.

Signed, Sealed and Almost Delivered

Though the Enron mess gave the bill a political boost, consumer groups argue that lenders such as banks and retailers that support the bill have been instrumental in lobbying it through Congress.

"Congress has been overwhelmed by an industry that has spared no expense to pass this bill," says Travis Plunkett, legislative director for the Consumer Federation of America.

Since bankruptcy reform emerged as an issue in 1997, banking groups have increased their lobbying efforts. In 1998, commercial banks contributed $7.5 million to congressional campaigns, and by 2000, this amount was $8.4 million, according to the Center for Responsive Politics, which monitors lobbyists. This year is no different: As of March 11, commercial banks had contributed $3.4 million.

Other groups supporting the bill, such as credit unions, also have increased their lobbying efforts. In 1998, credit unions gave $1.4 million, which rose to nearly $1.8 million in 2000. Like commercial banks, credit unions are on pace to spend more in 2002, donating $823,330 as of March 11, according to the Center for Responsive Politics.

Not everyone thinks Congress has been swayed by contributions. "That's a knee-jerk reaction that isn't supported by reality. It's taken five years to get it this far, and they haven't passed anything. And we're not out of the woods yet," says Sam Gerdano, executive director of the American Bankruptcy Institute.

While consumer groups say the bill hurts consumers, banks and other lenders argue it curbs costly abuses of the bankruptcy system. "We estimate that 10% of bankruptcy filers have the ability to pay their bills back," says Catherine Pulley, spokewoman for the American Bankers Association. "Abuses to the system cost the industry between $3 [billion] to $4 billion a year."

Under the reform bill, all bankruptcy candidates would be tested to ensure that people who have the income necessary to pay back their debts file for Chapter 13 instead of Chapter 7. Under Chapter 13, debtors enter a repayment plan, allowing creditors to recoup losses, while Chapter 7 is much more permissive in the kinds of debts that can be canceled.

More Money, More Problems

But consumer groups claim bankruptcy reform misses a key part of the problem: the lenders themselves. "There is not one check on actually restricting the kind of abusive lending many practice," Plunkett says. "Any time anyone shows up in bankruptcy with 10 credit cards, some lender has made a big mistake. Who gave them that last credit card?"

Supporters disagree. "That has nothing to do with it. According to our delinquency bulletin, more than 90% of Americans pay their bills on time," Pulley says. "The vast majority of Americans are responsible with credit."

Though delinquencies account for a small percentage of total debt, some banks overextend their credit lines. Problem loans, defined as loans that are 90 days past due, have become an issue for all types of lending. In December 2001, the number of problem real estate loans rose 20.7% from the previous year, according to Veribanc. Problem commercial and industrial loans rose 31%, while problem consumer loans rose 11.1% over the same span.

Problem Loans on the Rise Across the board, the number of problem loans has increased in the past year
Problem loan area	Amount past due as of Dec. 2000	Amount past due as of Dec. 2001	Annual change
Real estate	$15.5 billion	$18.7 billion	20.7%
Commercial and industrial	19.7 billion	25.8 billion	30.1%
Consumer	8.6 billion	9.6 billion	11.1%
Source: Veribanc

This trend is evident in the credit card business, where companies aggressively pursue customers. Last year, a record 5 billion credit card solicitations were sent out, crushing 2000's record of 3.5 billion solicitations sent, according to market researcher BAIGlobal.

As the solicitations have increased, so have the number of subprime accounts and overall delinquencies.

"At the end of 1997, there were about 8.5 million active subprime Visa and MasterCard accounts. At the end of 2001, that figure was about 26 million," says David Robertson, president of the Nilson Report, which tracks the credit card industry. "The number of active subprime accounts went from 4% [of the total number of active credit cards] to 15% in just four years."

Along with the increase in subprime accounts came a boom in delinquency. At the end of 1997, Robertson says, $18.75 billion in outstanding credit card debt was delinquent, or 180 days past due. "By the end of 2001, delinquencies totaled $27.84 billion in debt, up 20% from the previous year," he says.

As a result, banks targeting the subprime market have come under fire. Just two weeks ago, the Office of the Comptroller of the Currency, a federal regulatory agency covering national banks, forced subprime issuer Metris (MXT) to reduce the amount of credit it extends to customers.

With just one issue left to settle, Congress is close to enacting the biggest overhaul to the bankruptcy code in 25 years. But in doing so, consumer groups say it's heard only half of the story. "Let's say bankruptcy is a 50-50 problem," Plunkett says. "Does this bill place restrictions on those who lend unwisely? No, all of the restrictions go one way."