BRUCE L. HAMMONDS
SENIOR VICE CHAIRMAN AND
CHIEF OPERATING OFFICER
ADMINISTRATIVE LAW SUBCOMMITTEE OF THE
COMMITTEE ON THE JUDICIARY
UNITED STATES HOUSE OF REPRESENTATIVES
ADMINISTRATIVE OVERSIGHT AND
THE COURTS SUBCOMMITTEE OF THE
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
March 11, 1999
Chairman Gekas, Chairman Grassley and Members of the House and Senate, my name is Bruce L. Hammonds and I am Senior Vice Chairman and Chief Operating Officer of MBNA America Bank, N.A. ("MBNA"), headquartered in Wilmington, Delaware.(1) My responsibilities include overseeing MBNA's credit, loss prevention, customer satisfaction, consumer finance and loan review activities. I have 29 years of experience in consumer lending, and have been a member of the MBNA management team since 1982.
I appreciate the opportunity to appear today before this joint hearing of the Commercial and Administrative Law Subcommittee of the Committee on the Judiciary, United States House of Representatives, and the Administrative Oversight and the Courts Subcommittee of the Committee on the Judiciary, United States Senate (the "Subcommittees"), to discuss our views on consumer bankruptcy issues. I hope that this statement will be helpful to the Subcommittees in your deliberations on the nature of the consumer bankruptcy reforms that are presently needed.
Despite an extraordinarily strong economy, personal bankruptcy filings in the U.S. have skyrocketed in recent years. During 1998, an all-time record 1.4 million personal bankruptcy petitions were filed, which represents about one for every 100 households nationwide. By comparison, the number of consumer bankruptcy filings in 1980 totaled 287,570. This means that the number of consumer bankruptcy filings in 1998 represents an increase of nearly 400% since 1980.
These bankruptcy filings generate huge losses. While MBNA's credit card losses have consistently been among the lowest in the business, this precipitous increase in the number of consumer bankruptcy filings has impacted virtually every lender, large and small, in nearly every sector of the credit granting community. In fact, it is estimated that more than $40 billion in consumer debt -- approximately $400 for each American family -- was erased as a result of bankruptcy in 1998. Inevitably, these losses are passed on to all consumers in the form of higher rates and higher prices for goods and services.
Despite the magnitude of these losses, bankcard issuers and the credit granting community more broadly believe that bankruptcy is an important protection for consumers who are severely overburdened financially. It should be noted, however, that as bankruptcy losses grow, it is those American consumers who continue to pay their debts who ultimately suffer the most because it is they who bear the cost of bankruptcy losses in the form of higher credit prices. Consumers also are harmed by increased bankruptcies when creditors, in an effort to reduce losses, tighten their credit standards and thereby decrease credit availability. As the Congress considers reform of the Federal bankruptcy system, it is critically important to keep in mind the adverse consequences bankruptcy has on the vast majority of consumers who continue to pay their debts. The basic requirements of fairness demand that a balance be restored between the interests of these consumers and the interests of those consumers who need bankruptcy relief.
The Fundamental Flaw
Unfortunately, today's consumer bankruptcy system does not strike that balance. The current bankruptcy system unnecessarily harms consumers and creditors alike because of a fundamental flaw -- it allows a debtor to discharge debts even if the debtor can repay some or all of those debts. In fact, under the current Bankruptcy Code, an individual debtor may obtain a discharge from contractual debt obligations without ever demonstrating actual need for this relief. To put it in context, this means that in 1998 alone, the Federal consumer bankruptcy system provided an estimated $40 billion of relief to debtors without either objective standards or systematic procedures for determining the actual relief needed by debtors.
This flaw undermines not only the integrity of the U.S. bankruptcy system, but also traditional obligations of individual responsibility. Moreover, the current bankruptcy system also fails the debtors it is intended to help, because it provides short-term relief without helping debtors avoid the same financial failure in the future. In short, the lack of objective and systematic procedures for determining debtor relief produces a bankruptcy process which, for both debtors and creditors, is needlessly costly and time consuming. The bottom line is that this flaw must be remedied if the consumer bankruptcy system is to be workable and fair to consumers and creditors alike.
Fair, Effective Needs-Based Bankruptcy Reform
To address this flaw, the Bankruptcy Code must be amended so that a debtor who needs bankruptcy protection will receive it, but only to the extent of that need. This approach would match the bankruptcy relief provided by the Code to the debtor's actual need and is essential to ensure fairness for all parties impacted by the bankruptcy process. Bankcard issuers believe that a needs-based approach of the type contained in H.R. 833, a bill introduced by Chairman Gekas and Congressman Boucher with over thirty bi-partisan original co-sponsors, would efficiently and fairly implement the kind of needs-based bankruptcy approach that is necessary. We are joined in our strong support for this reform by representatives of virtually every segment of the consumer credit granting community.
The reformed Bankruptcy Code should establish clear and objective standards for determining a debtor's repayment capacity. These standards are as follows: if the debtor can pay all of his or her secured debt payments, priority debts and living expenses and still have sufficient remaining income to repay some portion of his or her unsecured debts above a statutory minimum, the debtor would be required to repay that portion through a Chapter 13 repayment plan, if the debtor seeks the protection of the Bankruptcy Code. If the debtor cannot repay, the debtor could freely choose to file under Chapter 7.
Moreover, a needs-based system would assign debtors to the appropriate chapter -- that is, to Chapter 7 or to Chapter 13 -- at the start of the bankruptcy case. This would drastically reduce the number of costly and time-consuming disputes that occur in today's system, in which a debtor's Chapter 7 filing usually may be challenged only after the case is well under way and only through a separate judicial procedure. Once the needs-based bankruptcy system is established, the Federal bankruptcy system will largely run itself and disputes will be limited to exceptional cases.
Systematic Needs-Based Bankruptcy Creates Enormous Efficiencies
This brings me to a very important point. While fundamental fairness alone dictates that a needs-based bankruptcy system be adopted, it should be noted that its implementation also would introduce enormous efficiencies into the bankruptcy system. A needs-based bankruptcy approach would actually reduce the overall costs of consumer bankruptcy by decreasing the litigation and disputes that result from today's arbitrary bankruptcy system. Under such an approach, based on a simple calculation which is easily verified by the trustee, individuals who can repay some portion of their debt would automatically enter a Chapter 13 repayment plan, and those who cannot would be free to enter into Chapter 7. As noted above, a needs-based bankruptcy system would largely run itself: the vast majority of bankruptcy cases would travel routinely and efficiently through the system, and disputes would be limited to exceptional cases.
Without systematic needs-based bankruptcy relief, the U.S. bankruptcy system will continue to be arbitrary, wasteful and fundamentally unfair to the great majority of consumers who pay for the system but do not use it. Unless this flaw is addressed, controversy surrounding consumer bankruptcy will intensify, not diminish.
Finally, I would like to take a moment to address a couple of myths that you are likely to hear repeated, possibly today and certainly in the coming months. One is that bankruptcy reform legislation is unnecessary because the system is not broken. Some will claim that credit cards are the real cause of the explosion in personal bankruptcies, and that restricting the availability of credit through credit cards would solve this nation's bankruptcy crisis. I understand that for many this is a tempting and popular position, but it is false. The evidence simply does not support such a contention.
Instead, let's look at the facts. More than 96% of credit card accounts pay as agreed, and only about 1% end up in bankruptcy. Moreover, bankcard debt represents less than 16% of total debt on the average bankruptcy petition and, according to a 1997 Federal Reserve Board survey, credit cards account for a mere 3.7% of consumer debt -- hardly large enough figures to be the cause of the bankruptcy crisis.
Another popular myth is that credit grantors are intentionally offering credit willy-nilly to people who cannot handle it. Once again, this contention simply is not true. Card issuers use highly sophisticated and expensive "prescreening" underwriting techniques, which involve consideration of as many as hundreds of factors about a consumer, to ensure that consumers who receive "pre-approved" offers of credit have a demonstrated ability and willingness to repay their debts.
Let me tell you specifically how we do it at MBNA. MBNA is the second largest lender through credit cards in the world. We receive an application from every customer, pull a full credit report on that customer, and do a debt-to-income analysis. We call back over 20% of the customers to develop additional information. A credit analyst will then make a decision to approve or decline the account. If the account is approved, a risk rating is applied and, in many cases, a senior lender sign-off is also required. We believe we are making the right decision every time. The majority of bankruptcies in our file are on customers who have been on the books for more than three years and have had some significant change in their financial condition.
The fact is, the overwhelming majority of Americans use credit wisely and successfully. Americans use their cards to pay at the gas pump, the grocery store and literally millions of other places. With the advance of on-line security systems, consumers are increasingly using their cards to conduct business and make purchases over the Internet. And credit has made opportunities available for millions of Americans who might not otherwise have had them, across a huge range of income levels.
In addition, the lending industry spends millions of dollars every year on education programs designed to help consumers use credit wisely. The bankcard industry works particularly closely with the more than 1,200 Consumer Credit Counseling Services offices around the country, which help many thousands of consumers get control of their finances and repay their debts. We are proud of the lending community's far-reaching efforts to inform, educate and assist consumers.
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Once again, I want to thank you for the opportunity to appear before you today. Please let me know if we can be of any further assistance to the Subcommittees or their staff.
0 MBNA America Bank, N.A., a national bank, is the largest independent credit card lender in the world and one of the three largest credit card lenders overall. MBNA America Bank, N.A. and its subsidiaries have $60 billion in managed loans outstanding and almost 20,000 employees in 28 offices located in the U.S., the United Kingdom and Canada.