Financial giant Citigroup Inc will support a proposal in Congress to rewrite US bankruptcy law to help troubled mortgage borrowers avoid foreclosure, Chief Executive Vikram Pandit said.
Citi had previously opposed changing the law to let bankruptcy court judges, in some circumstances, cut mortgage debts to help bankrupt homeowners. Its backing comes amid a recession and a mounting housing market crisis.
“If enacted, this legislation would represent an important step forward,” Pandit wrote in a letter to lawmakers who midwifed the plan including Senators Charles Schumer and Richard Durbin.
The letter called the proposal “an additional tool” to help prevent foreclosure.
Schumer of New York, Durbin of Illinois and Sen. Christopher Dodd of Connecticut, all Democrats, said the legal reform would help “millions of families save their homes.”
The senators said they hope to attach the bill to a broad economic stimulus package.
A coalition of five consumer groups, including the Center for Responsible Lending, said: “We welcome the support of Citigroup, one of the nation's largest mortgage lenders, for responsible and urgently needed legislation.”
A financial industry group said it still opposes the bill, calling it too broad and a “risk to the mortgage markets.”
“The industry will still oppose the Durbin bill,” said Scott Talbott, a lobbyist for the Financial Services Roundtable, in a statement.
Last year, Durbin failed to win Senate passage of a similar measure. Opponents, including Republicans, some Democrats and banking and housing industry lobbyists said the proposal would raise costs for future homeowners.
Republicans were wary of staking out a position on the measure. “It's far too early to make that kind of decision,” Utah Republican Sen. Robert Bennett told Reuters on Thursday.
Michigan Rep. John Conyers, a Democrat, has introduced the measure in the House of Representatives so the plan can come before Congress even if it is not tacked onto the stimulus.
Today, most forms of personal debt such as vacation homes and family farms can be restructured in bankruptcy. But a mortgage on a primary residence cannot.
Under the proposed reform, the senators and Citi agreed that only mortgages entered into prior to its enactment would be eligible for the treatment. Homeowners would have to certify that they have tried to contact their lender before filing for bankruptcy.
Creditor claims on bankruptcy would be invalidated only by major violations of the “Truth in Lending Act” - meant to protect homebuyers from fraud.
“Citigroup's support means that the dam has broken across the banking industry. We now have a real chance to pass this legislation quickly,” Schumer said.
The National Association of Home Builders has dropped its opposition and the National Association of Realtors is mulling whether to support it.
The government has injected billions of dollars in taxpayer funds into Citigroup since October, making the nation's third-largest bank a top recipient of federal bailout money. (Reuters)