A bill that would make major changes to the ways banks and developers lend and borrow money is headed toward a potentially contentious showdown Tuesday at the state Capitol.
Senate Bill 448 breezed unanimously through the Senate but has run into objections in the House, where the Banks and Banking Committee will take testimony Tuesday. The bill would absolve, in some cases, borrowers of honoring personal guarantees they put down as collateral if their loan is sold to a third-party collection agency.
Developers, who typically sign personal guarantees to secure big loans from banks, support the measure, while bankers are becoming increasingly vocal that the bill is essentially a developer bailout.
Now, another vocal group has sided with the banks: the tea party.
The bill, Atlanta Tea Party Patriots leaders said in a "call to action" to supporters, "is an attempt at what amounts to a bailout for big money land developers who made millions off land speculation during the real estate boom, but now want to be retroactively [yes retroactively] absolved of their personal guarantees."
It continued: "While millions of Georgians are paying their debts during this hard economic time, while small businesses struggle to get loans, and while thousands of Georgians' homes are being foreclosed on, well-connected developers are seeking to be bailed out of their financial obligations ... ultimately at YOUR expense."
But Sen. Don Balfour, R-Snellville, said the bill is necessary to protect borrowers in an era where banks are shedding loans even if the borrower is current on payments. With 60 percent of the state's banks under some sort of federal oversight, banks are more regularly selling loans to third-party collectors for pennies on a dollar rather than risk default and the expense of trying to recoup the investment.
Those third parties buy the loan at a great discount, but also currently get to sue the borrower for the personal guarantee. That's not fair, said Balfour, who sponsored SB 448. Say a third party buys a developer's $100,000 loan for 20 cents on a dollar, or $20,000. The developer's personal guarantee goes with the loan, and the third party then also sues the developer for the remaining $80,000 of the original loan.
"If I buy a discounted note, I don't know how I can sue him for any money, because no one required me to buy the note," Balfour said.
The bill limits third-party creditors from collecting more from the original borrower than what they paid. In the previous example, the third party could collect only $20,000 from the borrower.
Bankers, however, say the bill would further cripple the state's equity markets and make banks even more hesitant to lend money if personal guarantees become essentially meaningless.
"One can only hope that in its haste to react to some of the aftereffects of the financial system meltdown that the Georgia Senate did not adequately consider the unintended consequences of this bill," BankSouth CEO Harold Reynolds said in a letter to House Banks and Banking Committee Chairman Greg Morris, R-Vidalia.
Balfour said he supports efforts to tighten the bill's scope in the House and he will work with House leaders to make changes. Morris' committee will hear from both sides from 1 to 3 p.m. Tuesday in Room 406 of the Coverdell Legislative Office Building.
Staff writer Kristina Torres contributed to this article.
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