Proposed Change in Bankruptcy Laws Has Unclear Impact on Important TILA Claims - Are the Banks Influencing Congress Too Much?

Important legislation is pending that is apparently being pushed forward on a rush basis. The proposed legislation is entitled, “Helping Families Save Their Homes in Bankruptcy Act of 2009″. The primary affect of the proposed legislation is that it will allow Bankruptcy Courts in Chapter 13 proceedings to modify loan terms on primary residences.

This makes economical sense because it allows debtors to deal with all their financial issues in one place. The proposed legislation is supported by Attorney Generals and Consumer Bankruptcy attorneys.

It is argued that since Bankruptcy Courts already modify mortgages on second homes, there appears to be no reason to deny distressed American homeowners modifications of their primary homes’ mortgages in Bankruptcy Court. Further, the involvement of the Bankruptcy Court in loan modifications will mitigate against the perceived overall lack of cooperation by Banks to “voluntarily” modify loans.

The proposed law, however Impacts Claims under the Truth in Lending Act (”TILA”) and its Unclear Whether It Upholds an Important Consumer Remedy or Takes It Away:

The proposed law addresses mortgages where Banks have violated TILA. The impact on TILA claims in the proposed legislation, however, is very unclear.

For example, it appears Illinois Bankruptcy Lawyer Andy Miofsky understands the proposed legislation will prohibit the powerful consumer remedy of loan rescission from being asserted in Bankruptcy Court and limit consumer remedies to fines. (unfavorable to Consumers and favorable to Banks). Mr. Miofsdy’s s view is expressed in his article “Citigroup Backs Mortgage Modification Bill . . . But Since When Do Banks Make The Laws?”

On the other hand, it appears that Massachusetts Bankruptcy Attorney L. Jed Berlinder believes that the proposed law prohibits Banks from enforcing a void claim in Bankruptcy Court, that is a claim where the security on a home is void due to a consumer exercising the powerful rescission remedy under TILA (good for the consumer) [1-8-09 article by Mr. Berlinder entitled “Remove That Mortgage Entirely: Yes, We Can”]

Another source, The Wall Street Journal, reports that, in order to garner Citigroup’s support for the proposed legislation, Congress members have watered down the effectiveness of TILA such that consumer remedies will be available only for “major violations” of TILA, whatever “major” violations means. http://online.wsj.com/article/SB123144562914865337.html?mod=djemalertNEWS

The proposed legislation is most likely being changed and “tweaked” on a daily basis by Congress which may account for the conflicting understandings of the impact on TILA claims in Bankruptcy Court.

Concern has been voiced as to the extent of “influence” that Citigroup and other Banks are having on Congress. What will the proposed legislation actually look like when Citigroup and the Banks finish “negotiations” with Congress?
Most importantly, how much deference, if any, is Congress giving to the American taxpayers? You know the same taxpayers who are paying multi-billions in bail out funds to the Banks.

With such an important consumer right at stake, the American public should be kept more abreast on whether Congress intends to protect this important consumer remedy, of whether it will sacrifice it at the behest of the Banks.

Americans should act now and sign a Petition asking Congress to fully protect TILA claims in Bankrupty Court under the proposed legislation. A few seconds and a simple click could have an important impact on. Act now, sign the petition to Congress - see resource box.

Mary K. Lenahan is a lawyer in Southern California knowledgeable in foreclosure defenses, loan modification, debt negotiation, and bankruptcy. CAConsumerLawyers.com