Bankruptcy in the Senate, December 4

I'm in Providence, Rhode Island, for a field hearing of the Senate Judiciary Committee. The hearing is "Credit Cards and Bankruptcy: Opportunities for Reform." The other witness are former Credit Slips guest blogger and attorney for the National Consumer Law Center John Rao, Bankruptcy Judge Thomas Small of the Eastern District for North Carolina, and Professor John Chung of the Roger WIlliams University School of Law. The cab driver from the airport was among the most friendliest I've encountered and was pointing out the many fine features of Providence as we drove in. It's always nice to have your first contact with a place be with someone who is proud of their town.

One of the topics will be S. 3259, the Consumer Credit Fairness Act introduced by Senators Whitehouse and Durbin. This bill defines a "high cost consumer credit transaction" as one in which the interest and fees create an interest more than 15% higher than the rate on 30-year U.S. Treasury obligations (up to a maximum of 36%). Right now, that would be a credit transaction with an interest rate a little over 18% 19%. The bill then would subordinate to all other claims in a consumer bankruptcy any "high cost consumer credit transaction" and would excuse from the means test any bankruptcy caused by a "high cost consumer credit transaction."

Comments

[mark]

S3259 sounds like an excellent law.

[Jason Kilborn]

Awesome--France has a rule like this, which I believe would be a nice addition to our law. See http://students.law.umich.edu/mjil/article-pdfs/v26n2-kilborn.pdf (pp. 669-71).

[F. Javier Arias Varona]

What Jason pointed out is right, but I'd like to add a comment. The way France makes the calculation seems a bit different to what Bob wrote, I wonder whether the final result would be the same or not, although the limit in France seems to be lower. On the other hand, does the limited interest rates include costs, charges and so, as the French law? And, what would you think about the intervention of a somehow public institution in the process, as the French law foresees, if I am not wrong?

Article L313-3
Any contractual loan granted at an annual percentage rate which, at the time of its granting, is more than one third higher than the average percentage rate applied by the credit institutions during the previous quarter for loans of the same type presenting a similar risk factor, as defined by the administrative authority after consulting the Conseil national du crédit, constitutes a usurious loan.
Full text here: http://195.83.177.9/code/liste.phtml?lang=uk&c=61&r=2202

Another possibility is to use flexible margins using a general prohibition clause for usury loans, letting the courts decide on every case, as we do in Spain (if self citing is allowed here, let me link here to a previous post: http://www.creditslips.org/creditslips/2007/07/spanish-usury-l.html#more)

Javier

[Raymond Bell]

S 3259 language looks good, sounds good, and has received positive endorsements. This isn't one. The definition of high cost credit leaves interpretation, while even within reason, will create a burden of 'what is high cost'. Supporters suggest that interest rates, added fees and charges is a major contributor to consumer filings.If true, and repeated if true, then what happens to the 95% of consumer who have revolving debt but do not file bankruptcy? Should these be deemed 'high cost credit'? Since consumer bankruptcy cases can be dismissed what or how should 'high cost credit' be treated?

[Morbo]

How do you define a bankruptcy petition that "results from" a high cost consumer credit transaction? And what if the credit card had a reasonable (for a credit card) interest rate like 13% until the debtor defaulted, at which time the interest rate shot up to 30%?

Take a hypothetical debtor with three credit cards, an ARM mortgage that is 2 months past due and a last-minute $1000 loan from the debtor's sister at 10%. What is causing the debtor's bankrupty? What if the defendant took out a large cash advance from a credit card six months ago to get his mortgage current?

What would this law accomplish? If this law is passed, all debtors would have to do is swear, "Your Honor, it was those credit cards that done me in," and they escape the means test. The alternative is many more contested hearings held by already overburdened courts on this issue.

Don't get me wrong - I am by no means a fan of means testing or high interest rates. But I would rather not adopt a plan that rewards those debtors who try to live beyond their means on credit cards, and also creates added burdens on the court.