Good morning, Chairman Hatch and other members of the Committee. I am Kenneth Beine, president of Shoreline Credit Union in Two Rivers, Wisconsin, and I appreciate the opportunity to be here to tell you about our concerns with bankruptcies and how they are impacting credit unions -- and my credit union in particular. I am speaking on behalf of the Credit Union National Association (CUNA), which represents over 90 percent of the 10,500 state and federal credit unions nationwide.

We are very pleased that the Committee is holding today’s hearing on bankruptcy abuse prevention legislation, S. 220. Credit unions have consistently had three top priorities for bankruptcy reform legislation: a needs based formula, mandatory financial education, and maintaining the ability of credit union members to voluntarily reaffirm their debts. Last year’s conference report, while a product of compromise, did a good job of balancing these issues. We strongly urge the 107th Congress to pass this compromise bill as soon as possible. Any further dilutions may result in this bill not addressing the real bankruptcy problems facing America’s consumers.

Shoreline is a $50 million state-chartered, federally insured credit union. We have a community-based charter, serving everyone who lives or works in Manitowoc County, and have almost 12,000 members. Currently we have $38 million in loans to our members – some $14 million in car loans, more than $16 million in home-secured loans, and almost one-half million in personal loans. In addition, we have issued about 1,600 credit cards for another $1.5 million.

Nationwide, non-business bankruptcy filings were almost 925,000 in the first nine months of 2000. While final full-year data is not yet available, the results from the first nine months suggest that full-year filings will exceed 1.2 million – very close to the 1.39 million record level of 1998. The 2000 total is likely to be about 4 percent lower than in 1999, but viewed in a broader historical context the results are disturbing: 1.2 million filings is double the national total in 1989 and four times higher than the total in 1984.

Furthermore, the current near-record level of filings has occurred in the best of economic times. The U.S. economy grew at its fastest annual pace in 16 years in 2000 and unemployment rates hovered near 30-year lows throughout the year. As the economy slows, the number of filings will undoubtedly begin to climb. We expect overall filings to grow by roughly 5 percent in 2001, though some industry experts believe the increases will be even higher. In fact, according to SMR Research, bankruptcy filings are predicted to increase nationwide in 2001 by up to 20 percent to record heights for a variety of economic reasons.

Credit unions are quite concerned about bankruptcies in the last few years because they have seen similar trends in the number of credit union members who file. Data from credit union call reports to the National Credit Union Administration (NCUA) suggest that roughly 220,000 credit union member-borrowers will file in 2000. This figure is nearly 66 percent higher than the level of filings we witnessed just six years ago. In addition, CUNA estimates that over 40 percent of all credit union losses in 2000 will be bankruptcy-related, and those losses will total approximately $475 million.

In Wisconsin we expect a 2.5 percent increase in the total number of credit union borrower bankruptcies in 2000. This translates to a total of roughly 4,150 filings.

At Shoreline Credit Union, bankruptcy filings and losses have shown a steady increase since 1996. In 1996 we had 1 member who filed for bankruptcy; in 1997 we had 3; 1998 brought 5 filings; in 1999 it rose to 8; and we hit 10 in 2000. We had only one Chapter 13 bankruptcy filing during the same period. In our case over 60 percent of our charge- offs are Chapter 7 filings.

As the number of member bankruptcies has increased, so too have the dollar losses to my credit union. Our loss from the one bankruptcy in 1996 was only $1,875, but in just one year the losses increased to $9,883 – an increase of over 500 percent. As noted in the Fact Sheet attached to my testimony, our bankruptcy losses have doubled each of the past three years.

Shoreline is a careful lender. We cannot afford to be otherwise. We do a good job with scrutinizing loan applications and carefully determining that the applicant is creditworthy before extending credit. We examine credit reports, verify income, and see that a reasonable debt-to-income ratio is maintained by the borrower. We even look at the applicant’s disposable income to determine that the applicant can make the payments. We routinely monitor our credit cards and do not make across-the-board increases to the credit limit.

In an effort to combat the number of bankruptcies at the credit union, Shoreline has tightened its credit policies. We now use bankruptcy predictors as part of the credit granting process. We have increased collateral requirements and opt to require a co-signer or co-maker on more loans than in the past. We do not reissue cards to those members who are overextended or have a poor repayment history with the credit union. We are also looking into introducing “risk-based lending” procedures in the near future.

If a member is experiencing financial problems and mentions bankruptcy to us, our loan officers inform the member of the downside to such an action – damaged credit, loss of services – and let the member know that the credit union is there to help them through the financial difficulty. We attend all 341 hearings, where creditors are permitted to question the debtor, and encourage reaffirmations by offering debtor-friendly terms.

Credit Unions Support Financial Education Credit unions clearly recognize the value of financial counseling for their members. According to a recent CUNA bankruptcy survey, 70 percent of credit unions counsel financially troubled members at the credit union. A similar percentage of credit unions may also refer members to an outside financial counseling organization, such as the Consumer Credit Counseling Service (CCCS), and many do both.

Shoreline regularly refers members who are experiencing financial difficulties to the local CCCS and have found the program to be beneficial for the members and their families. We also try to educate our members about alternatives to bankruptcy. We address credit issues in our newsletter and recently added a consumer credit session to our annual spring Home Buying Seminar series.

CUNA strongly supports the provision in S. 220 that requires a person contemplating bankruptcy to receive a briefing about available credit counseling and assistance in performing a budget analysis. We also strongly support the provision in this legislation that would prohibit the Chapter 7 or 13 debtor from receiving a discharge if the debtor does not complete a course in personal financial management. Any sensible bankruptcy reform should include education requirements to give debtors the tools they need to make wise decisions about filing for bankruptcy and to succeed financially after bankruptcy.

We also strongly support amendments to Section 527 that would require a debt relief agency providing bankruptcy assistance to analyze the benefits of different forms of debt relief with the debtor and to emphasize the need for full and accurate disclosure of assets, liabilities and income.

CUNA is also an active supporter of the Youth Financial Education Act (H.R. 61) as introduced by Representatives David Dreier (R-CA) and Earl Pomeroy (D-ND). This legislation would authorize the U.S. Department of Education to provide grants to state educational agencies to develop and integrate youth financial education programs. It would also require these funds to be used to carry out programs for students in kindergarten through grade 12, based on the concept of achieving financial literacy through the teaching of personal financial management skills, and the basic principles involved with earning, spending, saving and investing.

Credit unions recognize that financial education needs to be available early on and before consumers experience financial problems. We are pleased that a financial management training test program is included as part of S. 220, as well as the provision encouraging states to develop personal finance curricula for elementary and high schools.

Financial education is a high priority for our national trade association. Last year, CUNA and the National Endowment for Financial Education (NEFE) entered into a partnership whereby credit union volunteers teach financial education in our nation’s schools. It is based on the philosophy that discipline in managing money is best achieved if it is learned early in life. Many credit unions had already been working with their local schools, as well as devoting office space for consumer libraries that enable members to use a wide range of financial periodicals, manuals, and books to learn more about money management.

Credit Unions have also differentiated themselves from other financial institutions in terms of giving college students credit cards. Many credit unions offer educational sessions on budgeting and using credit wisely on college and university campuses at various times during the year, including freshmen orientation and classes. Education is the key in helping college students to avoid falling into debt at an age where their main focus is on obtaining a college degree. By educating these students, credit unions help them to positively handle their personal finances and to make them even more attractive candidates for credit products such as auto loans and mortgages later in life. Many colleges and universities welcome credit union representatives to teach these courses on their respective campuses and continually ask these representatives to come back year after year.

I am confident that early financial education would have helped some young adult members of Shoreline Credit Union to make different decisions than they did. In one case, a couple in their mid-twenties decided that they wanted a “clean slate” prior to getting married. They ran up credit card purchases. One prepaid on an auto loan with us to have the cosigner released. (Both were employed full-time.) They both then filed for Chapter 7. My credit union’s share of their version of financial planning was a write-off of almost $3,000 in credit card debt plus another couple of hundred dollars on the disposal of the auto.

In another case, an expectant young mother who lived at home with her parents (with a stable part-time job and a small automobile loan at Shoreline) wanted to quit her job, but didn’t want to “burden her child with her credit problems,” and asked if we would accept the car in full payment of the loan balance. My loan officer offered to rewrite the loan terms or suspend payments for several months and also informed her that she would still be responsible for the remaining balance on the loan after the sale of the car. She was not interested. She subsequently filed Chapter 7 and turned over the vehicle to us. We incurred about a $3,000 loss.

Even with financial counseling, I recognize there are instances in which bankruptcy may be the only alternative for some members, the way for them to get a much needed “fresh start.” But I am not convinced that in either of these examples, bankruptcy was the right solution.

Credit Unions Support Reaffirmations as a Benefit Both to the Member and to the Credit Union Because we are not-for-profit financial cooperatives, losses to the credit union have a direct impact on the entire membership due to a potential increase to loan rates or decrease in interest on savings accounts. Credit unions strongly believe that reaffirmations are a benefit both to the credit union, which does not suffer a loss, and to the member/debtor, who by reaffirming with the credit union continues to have access to financial services and to reasonably priced credit. CUNA could not support bankruptcy reform legislation if any amendment would undermine the ability of credit unions and their members to work out reaffirmation agreements.

CUNA strongly supported the original House-passed bankruptcy bill in the 106th Congress, which did not materially amend the reaffirmation provisions. The bankruptcy bill that eventually passed by both houses and presented to the President in December, however, contained a lengthy disclosure statement for reaffirmations, which is contained in Section 203 of S. 220. The form is intended to assure that debtors entering into a reaffirmation agreement understand all aspects of signing that contract. CUNA appreciates the work of this committee, and the work of Senators Jeff Sessions (R-AL) and Jack Reed (D-RI), to recognize in the Section 203 language the unique relationships that credit unions have with their members.

Shoreline, like most credit unions, has a policy that if a member causes a loss to the credit union, services to that member, aside from maintaining a share account, will be withheld. Most credit union members take this seriously and continue to reaffirm on their credit union loans. However, we are beginning to see that some members do not care if they cause a loss and are denied service because they believe they can get credit elsewhere -- even though it may be at a higher rate. We continue to see more surprise bankruptcies, where the member is a long-time member and is current on his or her debt at the time the bankruptcy petition is received.

Perhaps the best defense of the credit union movement’s position that reaffirmation benefits both the member and the credit union is to provide another real life example. We had a middle aged couple file for Chapter 7 in 1999 due to several medical problems and loss of employment. They reaffirmed their automobile loans with Shoreline. Although not required to repay their credit card loans, they were adamant about doing so, and did so quite voluntarily after discharge. Needless to say, today they are members in good standing, and need only ask to be granted future loans.

Credit Unions Support Needs-Based Bankruptcy Credit unions are very anxious to see Congress enact meaningful bankruptcy reform and believe that “needs-based bankruptcy” presents the best opportunity to achieve this important public policy goal. Credit unions believe that consumers who have the ability to repay all or some part of their debts should be required to file a Chapter 13, rather than have all their debt erased in Chapter 7. Therefore, CUNA supports the needs-based provision that is contained in S. 220. This provision was a compromise developed out of the bankruptcy reform bills that received overwhelming support in the 106th Congress.

Let me tell you about a case at my credit union that illustrates why needs-based bankruptcy and its provisions are needed. A young woman had an automobile loan from Shoreline Credit Union, with her mother as a co-signer. The daughter fell behind on the payments, and the mother offered to take over the loan completely if the credit union was willing to remove the daughter’s name from the loan. Since the mother had a good credit and employment history, we agreed to do so. The woman filed for Chapter 7 before the due date of the first payment. We lost $6,000. We eventually learned that she had previously filed for bankruptcy and “didn’t want her daughter to have the same credit problems.”

What this member did borders on fraud. People should not be able to use the bankruptcy code as a tool to avoid inconvenient obligations by transferring their debts to fellow consumers – my members – your constituents. This is wrong. This is abuse.

You have the power to make it right.

Again, let me say that I am pleased you are holding this hearing today. Credit unions are very anxious to see Congress enact meaningful bankruptcy reform and believe that a needs-based bankruptcy system presents the best opportunity to achieve this important public policy goal. The 106th Congress strongly supported needs-based bankruptcy, and CUNA supported these efforts. These hearings that are being held on S. 220 show that the 107th Congress is continuing to move toward passage of bankruptcy abuse reform legislation, and we hope that bankruptcy reform will become law in the coming months.

Thank you, and I will be happy to answer any questions.

FACT SHEET

Shoreline Credit Union Two Rivers, Wisconsin

Total Assets: $50.5 million (data as of December 2000)
Members: 11,700
Total Loans: $38.0 million

Losses Due to Bankruptcy:
2000: $22,375
1999: $34,577
1998: $15,309
1997: $ 9,883
1996: $ 1,875
Number of Filings	Chapter 7	Chapter 13	Total
2000	10	0	10
1999	7	1	8
1998	5	0	5
1997	3	0	3
1996	1	0	1