House Rejects Bill to Classify Modified Loans as Accruing

Members of a House subcommittee voted Thursday not to pass the ""Common Sense Economic Recovery Act"":http://financialservices.house.gov/UploadedFiles/hr1723ai.pdf (H.R. 1723), which would have allowed banks to classify modified loans as accruing rather than non-accruing.

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""Common sense says if you are making your loan payments on time then regulators should not force banks to foreclose on property owners asking for a modification or consider your loan to be in non-accrual status. As long as payments are being made, your loan should be considered in good standing, particularly in this economy,"" Rep. Bill Posey (R-Florida) said when he introduced the bill in ""July."":http://dsnews.comarticles/proposed-bill-would-allow-banks-to-classify-modified-loans-as-accruing-2011-07-08

While most members of the Subcommittee on Financial Institutions and Consumer Credit agreed that, in many instances, examiners and regulators are posing undue hardship on community banks, Posey's bill was shot down with 8 ayes and 10 nays.

Several members expressed concerns that community banks are suffering at the hands of overzealous examiners.

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""I certainly agree that the examination should be thorough, but it should not be a witch hunt,"" said Rep. Steve Pearce (R-New Mexico).

Ranking member Rep. Carolyn B. Maloney (D-New York) said she does ""share the sentiment"" of the bill. ""This bill, however allows financial institutions to manipulate their accounting so that it does not have to hold additional capital against a potentially problematic loan,"" she said.

""The result is that the banks will have less equity related to total assets,"" she added.

Maloney also pointed out that the American Bankers Association (ABA) opposes the bill.

In a statement earlier this week, the ABA said, ""H.R. 1723 has worthy goals and attempts to address real problems that community banks experience. Unfortunately, the bill would legislate changes in accounting standards, which should be avoided.""

As such, the ABA urged the subcommittee not to approve the bill.

Maloney told committee members she is in the midst of working on a new bill that would address the same issues but in a different manner.

Rep. Spencer Bachus (R-Alabama) stated that the Common Sense Economic Recovery Act would ""undermine confidence in financial institutions"" and would make it more difficult for the FDIC to implement corrective action when necessary.

Bachus believes Maloney's bill will be more fair and impose more consistency.