Hearing on Bankruptcy Reform and Financial Services Issues

Prepared Testimony of Mr. Terry McCormick
Plains Bell Federal Credit Union

9:30 a.m., Thursday, March 25, 1999

Good morning, Chairman Gramm and other members of the Committee. I am Terry McCormick, President of Plains Bell Federal Credit Union in Amarillo, Texas, and I appreciate the opportunity to be here to tell you about our concerns with the increasing number of bankruptcies and how this is impacting credit unions -- and my credit union in particular. I am speaking on behalf of the Credit Union National Association (CUNA), which represents over 11,000 state and federal credit unions nationwide. We are very pleased that this committee is holding hearings today on financial services issues related to bankruptcy reform.

Plains Bell is a $17.7 million federally-chartered and insured credit union. Its 5,500 members are primarily workers and families of Southwestern Bell Telephone, AT&T, and rural electric and telephone co-ops in Texas, New Mexico, and Arizona. In 1998, we made about $14 million in loans to our members ­that's over $10 million in car loans and over $2.5 million in unsecured signature loans. We have issued about 1,000 credit cards for another $1 million.

Nationwide bankruptcy filings exceeded 1.4 million in 1998, which was a 2.7 percent increase from the 1997 filings. In fact, bankruptcy filings have set records in 1996, 1997, and 1998. And it is not anticipated that there will be a decrease to these high numbers for 1999. Consumer bankruptcy filings made up 96.9 percent of those 1998 filings. Credit unions are quite concerned about this steady increase in bankruptcy filings nationwide in the last few years because they have seen a similar increase in the number of credit union members who file. Preliminary data from credit union call reports to the National Credit Union Administration (NCUA) show that credit unions had approximately 253,000 filings in 1998, which is an increase from the 250,000 filings in 1997. The 1997 figures were an increase of 20 percent over 1996 levels, and the 1996 filings were 35 percent higher than the 1995 figures. CUNA estimates that almost half of all credit union losses in 1998 were bankruptcy-related and that those losses reached $684 million.

In Texas, credit unions are experiencing record highs in bankruptcy filings --they have doubled in the last five years, with the 1998 total topping 16,800. Since 1994 the annual increases for bankruptcy filings at credit unions have averaged 15 percent with the increase most pronounced in chapter 7 filings. Chapter 13 filings have grown 83 percent since 1993, but chapter 7 filings have jumped 122 percent during that period.

At Plains Bell, bankruptcy filings and losses have shown a steady increase since 1995. In 1995, we had 8 members who filed for bankruptcy, in 1996 the filings jumped to 13, in 1997 there was a dip to 11, and they hit 18 in 1998. A majority of our bankruptcies are chapter 7, which cause the greatest loss to the credit union.

As the number of member bankruptcies has increased, so too have the losses to the credit union. Our losses from 1995 to 1998 due to charge-offs were $177,592; the losses due to bankruptcy were almost $60,000, which represents about 33 percent of our total loan losses. Our losses due to bankruptcy have been less because of the reaffirmations. The information on the number of bankruptcy filings and on the losses to the credit union is attached to my testimony.

Plains Bell is a careful lender. We cannot afford to be otherwise. We do a good job with scrutinizing loan applications and carefully determining that the applicant is creditworthy before extending credit. We examine credit reports, verify income, and see that a reasonable debt-to-income ratio is maintained by the borrower. We even look at the applicant=s disposable income to determine that the applicant can make the payments. We routinely monitor our credit cards, and although we do not automatically make any across the board increases to the credit limit, we may make a $500 increase to the line of credit for a member whose credit is good. However, the maximum limit on all lines of credit is $5,000. Students can apply for a credit card, but we often encourage a co-signer and set the credit limit at from $300-$500 in most cases.

In an effort to combat the number of bankruptcies at the credit union, Plains Bell has tightened its credit policies. As I said, we do annual reviews of our signature lines of credit, and during our annual review in 1998 we carefully did not reissue the cards to certain members. After making a check of credit reports, we did not reissue cards to those members who were overextended or had a poor repayment history with the credit union.

If a member is experiencing financial problems, we try to help. When a member applies for a loan and we see that the member is carrying too much debt to qualify for the loan, we turn down the loan, and then sit down with the member to discuss the problem and work with them to improve their financial situation. We advise the member how to budget and correct excessive expenses. If the member's credit report has an error, we recommend that it be cleared up. In some cases we recommend that the member go to the local Consumer Credit Counseling Service (CCCS) for additional assistance.

It is difficult to pinpoint the reasons for the dramatic increases in bankruptcy. About the only thing that is clear is that there are many factors contributing to the increase, such as the loss of stigma, an elevated acceptance of a culture of debt accumulation, divorce, job loss, medical emergencies, and the ever-increasing cause of gambling. For credit unions, and all financial institutions, the increasing number of bankruptcies has led to greater losses, which in turn, has an effect on their bottom line and services. A certain amount of loan losses, either through regular charge-offs or bankruptcy, is a normal cost of doing business. However, to the extent some bankruptcies are filed by borrowers who could repay some or all of the discharged debt, someone else has to pay for those losses.

For credit unions, excessive bankruptcy losses result in a transfer of benefits from some members to others. The members receiving the additional benefit are of course those that have some of their loans discharged that they could actually pay. Those paying for this benefit are the membership as a whole, and borrowing members in particular. To the extent a credit union incurs excess bankruptcy losses, the general membership suffers reduced dividends on shares. Borrowing members pay for bankruptcy losses in two additional ways, because credit unions will respond to rising bankruptcy losses in two ways. First, credit unions are likely to raise rates on loans, especially unsecured loans. All borrowers thus pay for the benefit of the few. Second, credit unions are also likely to tighten credit-granting standards, again especially on unsecured loans. Thus, some members will have access to credit denied, or receive less credit than they otherwise would have, as a result of excess bankruptcy losses.

Credit Unions Support Financial Education

While we do not know the exact causes for the increase in bankruptcy filings, what does appear obvious to us is that over the long term, financial education is a key to curtailing the use of bankruptcy as a financial planning tool. Credit unions clearly recognize the value of financial counseling for their members. According to a recent CUNA bankruptcy survey, 70 percent of credit unions counsel financially troubled members at the credit union. A similar percentage of credit unions may also refer members to an outside financial counseling organization, such as the Consumer Credit Counseling Service (CCCS), and many do both. At Plains Bell, we refer those members who are experiencing financial difficulties to the local CCCS and have found that beneficial for the members and their families. We also try to educate our members about alternatives to bankruptcy and how to improve their credit. We offer credit counseling to all our members at any time and encourage them to come to the credit union for help if they are experiencing financial difficulties. We tell the members about this service in our newsletter and other publications.

However, even with financial counseling, we certainly recognize that there are some instances in which bankruptcy may be the only alternative for members, the way for them to get the needed "fresh start." But even for those who need to file for bankruptcy, financial counseling is still very beneficial in helping them to learn of ways to repair their financial standing and avoid future financial difficulties.

Credit unions want to help their members avoid financial difficulty through learning to manage their credit. We believe that more emphasis should be placed on consumer financial education so people can learn how to manage credit and what the alternatives to bankruptcy are. The CUNA Bankruptcy Subcommittee recently reported that "[e] ducation was found as one of the most promising strategies to consider in attempting to reverse the trends in bankruptcy." Credit unions have found that educating their members about credit and how to use it can be an effective deterrent to filing for bankruptcy.

Therefore, CUNA strongly supports the provisions in S 625 and HR 833, bankruptcy reform bills, that require the debtor to receive credit counseling prior to filing for bankruptcy and prohibits the chapter 7 or 13 debtor from receiving a discharge if the debtor does not complete a course in personal financial responsibility. Recognizing that consumers need to know more about alternatives to bankruptcy so they can make a more informed decision, we also support the provisions that require a consumer debtor to be given a notice about bankruptcy and a description of services from trustee-approved credit counseling services. Any sensible bankruptcy reform should include education provisions to give debtors the tools they need to make wise decisions about filing for bankruptcy and to succeed financially after bankruptcy.

In addition, credit unions recognize that financial education needs to be made available early on and before consumers experience financial problems. We support the Sense of Congress provision in the bills that each of the states should develop curriculum on personal finance for elementary and secondary schools. Credit unions are currently going into their local schools and teaching students about money management. In addition, the National Youth Involvement Board (NYIB), a national network of credit union volunteer professionals, helps credit unions to educate young members. During the 1997-1998 school year more than 5,000 credit union speakers visited classrooms across the country, and as a result, more than 110,000 students heard about the wise use of credit, savings options, budgeting, and careers.

Many credit unions also devote office space for consumer libraries that enable members to use a wide range of financial periodicals, manuals, and books to learn more about money management and to research buying decisions, retirement plans, and a host of other issues relating to personal finance. And, through various new initiatives, CUNA is developing an even more aggressive strategy to promote consumer financial education.

Credit Unions Support Reaffirmations as a Benefit Both to the Member and to the Credit Union

Because we are a not-for profit cooperative financial institution, losses to the credit union have a direct impact on the entire membership due to a potential increase to loan rates or decrease in interest on savings accounts. We have a policy that if a member causes a loss to the credit union, services to that member, aside from maintaining a share account, will be withheld. Most credit union members take this seriously and continue to reaffirm on their credit union loans. However, we are beginning to see that some members do not care if they cause a loss and are denied service because they believe they can get it elsewhere --even though it may be at a higher rate. We continue to see more surprise bankruptcies, where the member is a long-time member and is current on his or her debt at the time the bankruptcy petition is received.

Credit unions believe that reaffirmations are a benefit both to the credit union, which does not suffer a loss, and to the member, who by reaffirming with the credit union continues to have access to financial services and to reasonably priced credit. We are aware of concerns of abusive creditor practices, recently highlighted in high profile press coverage, but note that the current Bankruptcy Code, in fact, caught the violators. The size of the penalties imposed will undoubtedly act as a deterrent to others. The ability of credit unions to enter into reaffirmation agreements with their members is critically important. For example, at Plains Bell, 13 of 50 bankruptcies from 1995-1998, or 26 percent of all bankruptcies, have reaffirmed. These reaffirmations have resulted in recoveries that would have exceeded recoveries from chapter 7 cases that might have converted to chapter 13 cases. Because credit unions devote so much energy to working with and educating their members, our experience is common among most credit unions. Therefore, if reaffirmations were severely limited or made not usable, CUNA would strongly oppose bankruptcy reform legislation regardless of what the rest of the bill might contain.

As I said, reaffirmations are very important to credit unions, and they can be vital to the credit union member. For example, one member was encouraged by a bankruptcy attorney to file chapter 7 and was so misinformed by the attorney that the member thought his credit would not be impaired. The member then came to the credit union to get a loan and was told about the credit union's policy of denying services if the credit union suffers a financial loss. Because the member wanted to retain his access to financial services at the credit union and to reasonable credit, the member reaffirmed his debt with the credit union. Since the reaffirmation, the credit union has made additional loans to the member --at the same rate as loans to other members, and he has repaid those loans.

Credit Unions Support Needs-Based Bankruptcy

Credit unions are very anxious to see Congress enact meaningful bankruptcy reform and believe that "needs-based bankruptcy" presents the best opportunity to achieve this important public policy goal. Credit unions believe that consumers who have the ability to repay all or some part of their debts should be required to file a chapter 13, rather than have all their debt erased in chapter 7. While CUNA supports the needs-based provision that is contained in H.R. 833, it is still reviewing the approach taken in S. 625.

Because these provisions play an integral part to needs-based bankruptcy, we support the provision in both the House and Senate bills that required the debtor to provide accurate schedules with tax returns, pay stubs, and other proof of income. In addition, we support the random audit provision which would ensure that the debtor does provide accurate documentation of income and thus, those who can repay some part of their debts would be required to do so.

Again, let me say that I am pleased you are holding this hearing today. Credit unions are very anxious to see Congress enact meaningful bankruptcy reform and believe that a needs-based bankruptcy program represents the best opportunity to achieve this important public policy goal. The 105th Congress strongly supported needs-based bankruptcy, and CUNA supported these efforts. This hearing shows that the 106th Congress is continuing to move toward passage of bankruptcy reform legislation. We encourage members of the Senate Banking Committee to push for passage of this reform as soon as possible.

Thank you for the opportunity to testify today before the committee on CUNA's concern with financial services issues related to bankruptcy reform legislation.


Plains Bell Federal Credit Union

Amarillo, Texas

Total Assets: $17.7 million

Members: 5,500

Total Loans: $14 million

Losses Due to Charge-Offs:

1998: $53,534.00

1997: $32,165.00

1996: $57,627.00

1995: $35,266.00

Number of Filings: Chapter 7 Chapter 13 Total

1998: 10818

1997: 6511

1996: 9413

1995: 718

Number of Reaffirmations: Chapter 7 Chapter 13 Total

1998: 415

1997: 314

1996: 303

1995: 101

Home | Menu | Links | Info | Chairman's Page