Banks try to squash bankruptcy legislation

WASHINGTON — Big banks, scrambling to prevent the government from forcing them to rewrite mortgages for struggling homeowners, are using their lobbying clout to press the Obama administration and Congress to scale back a key measure to rescue borrowers from foreclosures.

The legislation, expected to pass the House today, would let bankruptcy judges reduce the principal and interest rate on a home loan. That essentially would require mortgage companies to let debt-strapped homeowners reduce their monthly payments rather than lose their main residences.

Obama called for it last week as part of his housing-rescue plan. Democrats and consumer advocates regard it as crucial to slowing the rapid rate of foreclosures.

But the mortgage industry contends the measure will impose steep and unpredictable costs on its companies, which will be forced to pass them along to borrowers in the form of higher fees and interest rates. The industry spent millions last year on a successful lobbying effort to kill the bill, which almost all Republicans oppose. Opponents call it the "cram-down."

This year, with Obama in the White House and Democrats enjoying a broader majority, a rift has emerged in the industry. One major player, Citigroup Inc., has bowed to the new political reality and moved to grab a seat at the negotiating table.

It cut a deal last month with Democrats to back the plan, as long as it applied only to existing loans made before enactment and was limited to homeowners who try working with their lender to adjust their loans before seeking relief in bankruptcy.

Other banks have changed their strategy, but not their position. They are continuing efforts to squash the legislation, but also have stepped up their bid to gut key provisions. Among their goals: restrict the measure to certain kinds or sizes of home loans, certain borrowers, or situations where the mortgage holder — known as the loan servicer — agrees to the changes.

"I don't see a scenario where we can ever support this, but we're trying to make it the least-worst way to do the wrong thing," said Scott Talbott, a lobbyist for the Financial Services Roundtable, a trade group representing large banks. The group spent $7.8 million last year lobbying on this and other issues.

That legislation, sponsored by Rep. John Conyers, D-Mich., the Judiciary Committee chairman, is part of a broader housing plan. It includes a boost in the Federal Deposit Insurance Corporation's borrowing authority and other steps to prevent foreclosures. In the Senate, Dick Durbin of Illinois, the No. 2 Democrat, has teamed with the Banking Committee chairman, Chris Dodd, D-Conn., and Charles E. Schumer, D-N.Y., on the bankruptcy measure. A vote could come in a few weeks.

Aside from Citigroup, two other large banks, JPMorgan Chase & Co. and Bank of America Corp., have been in discussions with top Democrats. Neither has signed onto the bill, however.

Industry players are pushing to limit the measure to home loans originated in the last several years and to strengthen the requirement that borrowers prove they tried other ways of modifying their mortgages before resorting to bankruptcy.

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