July 14, 2008

Whitehouse Sponsors Bill to Help Relieve Credit Crunch

Legislation Pushes Lenders to Lower Rates, Gives New Leverage to Consumers Facing Bankruptcy

Providence, R.I. – As the U.S. economy struggles with a deepening credit crisis, Rhode Islanders saddled with high-interest loans are finding it almost impossible to repay their debts. During a visit today to the Urban League of Rhode Island, which counsels people facing credit or repayment problems, U.S. Senator Sheldon Whitehouse (D-RI) announced new legislation aimed at offering consumers some relief from sky-high interest rates.

“With working families in Rhode Island and across the country stretched thin by rising gas and grocery prices, interest rates that can climb well above 25 or 30 percent are excessive, unnecessary, and harmful both to family budgets and our economy,” Whitehouse said. “It’s time to send a strong message to abusive lenders that they will no longer be able to take advantage of consumers without facing significant consequences.”

Under the Consumer Credit Fairness Act (CCFA), if a consumer enters bankruptcy proceedings, creditors charging excessive interest rates and fees would not receive a single dollar in repayment until all other creditors are paid in full. The bill would also offer additional relief to consumers pushed into bankruptcy as the result of loans carrying excessively high interest rates or fees. U.S. Senator Dick Durbin (D-IL), the Senate Assistant Majority Leader and strong advocate for credit fairness, will cosponsor the measure.

Debt related to consumer credit has increased 48 percent since 2000, and now stands at an all-time high of over $2.5 trillion. Consumer bankruptcy filings were up 38 percent last year alone. Whitehouse’s new bill makes two changes to the Bankruptcy Code in an effort to crack down on abusive consumer lending practices. The bill would set claims relating to credit arrangements with excessive interest rates and fees at a lower priority than all other claims, meaning abusive lenders will risk no recovery of high-interest debt.

The bill would also exempt consumers who declare bankruptcy as the result of high-interest debt from the means test requirement enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (P.L. 109-8). The 2005 law generally prohibits consumers who have earned more than the median income in their states from filing Chapter 7 bankruptcy; under the CCFA, all consumers pushed into bankruptcy due to excessive interest rates and fees would be eligible for Chapter 7 discharge of their debts. Taken together, these two reforms will encourage lenders – who will not want to forgo repayment if their customers file for bankruptcy – to keep their rates reasonable.

Under the CCFA, the protections afforded consumers in bankruptcy are triggered if the interest rate charged the consumer exceeds 15 percent, the highest rate credit unions may legally charge, plus the current yield on the 30-year Treasury bond. At today’s T-bill yield, that translates to interest rates higher than 19.4 percent. The bill covers debts incurred under credit card agreements, payday loans, car loans, and a wide range of other consumer loan products.

The Urban League of Rhode Island offers credit counseling as part of its Foreclosure Prevention and Intervention Program, which helps Rhode Islanders find safe, affordable housing or remain in their homes during times of financial difficulty. The program works with families to manage mortgage loans and create plans to pay down debt. During his visit, Whitehouse heard from counselors who advise struggling families, and individuals working to get their finances back on track.


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Meaghan McCabe, (202) 224-2921