Bankers and developers sparred Wednesday before a state House committee over a bill that would make major changes in the ways they do business together.
Developers and other supporters of Senate Bill 448 -- which would in some cases absolve borrowers of honoring personal guarantees they put down as collateral if their loan is sold to a third-party collection agency -- say it could help struggling banks ward off failure and help struggling small businesses by encouraging lenders to work out troubled loans. The bill, they say, also would prevent third-party collection agencies from making outrageous profits through lawsuits and foreclosures on loans they buy for pennies on the dollar.
But several bankers said it would have the exact opposite effect. The bill would be disastrous, potentially causing more bank failures, while robbing banks of a critical outlet to replenish their capital and make new business loans to stimulate the economy.
The bill also would effectively rewrite terms of legal contracts -- the loans -- retroactively, bankers and lawyers for lenders say.
Others have opposed the bill, calling it a bailout for developers that the average borrower could not take advantage of because it does not apply to such things as home mortgages. Amendments to the bill also would further narrow its scope, so it would not apply to student loans, credit cards or car loans that are sold on the secondary market.
The bill, which would still allow banks to sell distressed loans to third-party collection agencies, would limit what buyers could collect to no more than what they paid the bank to buy the loan, plus interest.
The bill’s sponsor, Sen. Don Balfour, R-Snellville, told the banking panel that “predators” are making “huge profits that hurt community bankers and small businesses around this state.”
Georgia leads the nation in bank failures since mid-2008.
Banks routinely sell loans to third parties for a variety of reasons, such raising liquidity or getting out of a line of business. In the fallout of the currently struggling real estate market, many banks, to improve the balance sheet, are selling pools of distressed loans to investor groups who may foreclose on the loan, seize and sell the collateral property and sue those with personal guarantees on the loan.
Kessel Stelling, the chairman and CEO of Synovus Finanical, the second-largest banking company in Georgia, said the bill would make getting credit harder.
“The sale of loans [in this manner] allows us to get back to the business of lending,” he said.
Kevin Ward, an Atlanta lawyer who often works for creditors in cases of loan defaults, called the bill a “bailout” for a handful of large debtors who have the means to repay their debt but have refused. Passage of the bill would buy them time to protect assets in trusts, which could prevent creditors from ever collecting.
Borrowers and bankers sign loans and agree to terms knowing the loan includes provisions for the bank to sell the loans to other institutions, Ward said.
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