Is Lender Reform Coming?

Let’s all hope so!

Last night I had dinner with Zach Roberts and Aysha Austin from the Paladin Legal Advocacy Center in Las Vegas, Nevada, and Zach says that lender reform is indeed coming.

Earlier this year, there was a lot of talk about the “judicial cramdown,” which was legislation designed to allow bankruptcy judges to “cramdown” or reduce a mortgage’s principal in a bankruptcy proceeding. That legislation failed because, according to Zach, it was poorly organized and not well funded.

However, the National Association of Consumer Bankruptcy Attorneys (NACBA) is revisiting this issue and calling it lender reform so that they can get popular support for it.

I also did some research on this issue, and Senator Dick Durbin, the Senate Majority Whip, D-Illinois, is already talking about reintroducing the legislation in November if lenders don’t modify 500,000 or more loans before that time.

The idea behind the legislation is that lenders would modify more loans faster, negotiate in good faith, and treat homeowners fairly. If they do not, the homeowner has the threat of bankruptcy, and the lender would likely prefer to have a say in the principal reduction rather than leaving it up to bankruptcy judge.

This is good news for homeowners and investors. I understand that lenders are corporations designed to make a profit for their shareholders, but they are doing some dirty things, like placing recourse language into a loan modification agreements that continue to prey on homeowners. These dirty tricks will likely stop if the homeowner can file bankruptcy.

The downside to this legislation is that it will probably force millions of people into bankruptcy to save their homes. The NACBA’s member attorneys obviously stand to benefit if this happens because there will instantly be incentives for more people to file bankruptcy.

It will probably also overwhelm our judicial system and cause a backlog of cases in bankruptcy courts, which could be another incentive for lenders to negotiate. If a property is tied up in bankruptcy for months and lenders face collection of no payments but their hands are tied due to a stay of bankruptcy, they’re going to be even more incentivized to work with the homeowner.

So, here’s what you can do in the meantime: contact Senator Dick Durbin’s office here, and ask him to continue his work in pushing the legislation for the judicial cramdown/lender reform, even if you don’t live in Illinois. Let him know that you want this reform because no one else is pushing for it.