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GAO Recommends Actions to CFPB on Private Student Loan Rehab Programs

ABI Bankruptcy Brief

May 30, 2019

ABI Bankruptcy Brief

GAO Recommends Actions to CFPB on Private Student Loan Rehab Programs

The Government Accountability Office (GAO) is recommending that the Consumer Financial Protection Bureau (CFPB) clarify which financial institutions have the authority to offer private student loan rehabilitation programs, reported. Private student loans, which are not guaranteed by the federal government, are offered by many banks. But the largest banks that provide private student loans told the GAO that they do not offer private student loan rehabilitation programs. The GAO said that the director of the CFPB should provide written clarification to nonbank private student loan lenders on their authorities to offer private student loan rehabilitation programs that include removing information from credit reports. The GAO also said that the CFPB, after consulting with the prudential regulators and relevant industry groups, should provide written clarification on what information in a consumer’s credit report constitutes a private student loan reported “default” that may be removed after successful completion of a private student loan rehabilitation program.

The issue of student loan debt and bankruptcy is the first problem addressed in the Final Report of the ABI Commission on Consumer Bankruptcy. Click here to download your copy.

Commentary: No Bankruptcy Protection for Marijuana Businesses, Even for Tangential Players

A company's legal dispute with a medical marijuana dispensary, which is an unlawful enterprise under federal law, requires the company's dismissal for "cause" from a chapter 11 case, a Detroit bankruptcy judge has ruled, according to a Reuters commentary. A custom cabinetmaker filed for chapter 11 days after a state court in Detroit ordered the company to act in accordance with a real estate contract it had signed with a state-licensed marijuana dispensary. The dispensary had a deal to lease space from the owner of the cabinetmaking company, with the cabinetmaker acting as the landlord, according to the commentary. The dispensary also had an option to buy the property. According to the U.S. Trustee, the cabinetmaker has plenty of expected revenue under its deal with the dispensary and went into bankruptcy only because its owner wanted to get out of the original real estate agreement and renegotiate a more favorable deal. Either way, the Trustee said, the dispensary’s business is illegal under federal law. Presiding over the debtor’s bankruptcy, the trustee argued, “places the court in an impossible position: to assess and assign the value to the estate of illegal activity.” The debtor, represented by the Metro Detroit Bankruptcy Law Group, said it had been duped into the real estate deal with the dispensary and that it didn’t want to be involved in the pot business. Judge Thomas Tucker sided with the trustee, concluding that the cabinetmaker’s owner pushed his company into chapter 11 to evade the state court decision compelling him to comply with the real estate deal he’d entered into with the marijuana dispensary.

*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

Pimco Says CLO Losses Will Surpass Those in Prior Cycles

Pacific Investment Management Co.’s Beth MacLean said that collateralized loan obligations (CLOs) will hand investors bigger losses in the next cycle downturn, Bloomberg News reported today. The warning that bundled leveraged loans will be the hardest-hit part of the loan market during the next slump comes as these structured securities face increased scrutiny by regulators. Cumulative leveraged loan default rates in the last few cycles were 25 to 30 percent, with about 70 percent recovery, MacLean said. In the next cycle, assuming the same cumulative default rate with 60-65 percent recovery, there will be increased losses for investors, she said. “Those losses are going to be borne primarily by CLO equity investors,” MacLean said. In the next cycle, with a scenario of 50 percent recovery, there would be $150 billion in leveraged loan losses, MacLean said. That’s still a small figure relative to losses in equity markets, she pointed out.

Commentary: A Cautionary Rare Earths Tale Can Be Found in Molycorp's Rise and Fall

Investors with long memories might be forgiven for a sense of déjà vu over warnings about rare earths and Chinese supply, according to a Bloomberg commentary. Chinese state media reports grabbed global attention on Wednesday as they dropped heavy hints about export cuts. Rare earths are produced for the most part in China. The U.S. has just one mine, and that was at the center of a cautionary tale of commodity boom and bust earlier this decade. Back in 2010, a slump in Chinese exports sparked concerns about a shortage and alternative sources of supply. Enter Molycorp Inc., the operator of the Mountain Pass mine in California. The company sold shares at $14 apiece in its New York initial public offering in July that year. Rare earths prices zoomed higher, and by May of 2011 the stock topped $75, giving the company a market capitalization of more than $5 billion. Yet, despite much speculation, a true physical shortage of rare earths never materialized. Molycorp attempted a strategic pivot by acquiring Neo Material Technologies Inc., a Canadian metals processor, for $1.2 billion in 2012. But relentless rare earths deflation was ultimately the death knell for Molycorp. It couldn’t eke out sustained profitability, and by early 2015 it was talking to debt-restructuring advisers. The company filed for bankruptcy protection in June of that year, listing assets of $2.49 billion and liabilities of $1.79 billion.

*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

Cyberattacks Add to List of Municipal Bond Credit Risks

Breckinridge Capital Advisors said that the recent ransomware attack that shut down some of Baltimore’s computers, the second in 15 months, underscores the growing credit risk that cyberattacks pose to states and cities, Bloomberg News reported yesterday. The May 7 attack on Baltimore has hobbled the city’s ability to collect water bills, property taxes and parking revenue. It also shut down the city’s system to process home sales. Baltimore’s general obligation bonds, like much local debt, are paid via property taxes, which make up about half of the city’s revenue. Cyberattacks also threaten to erode public confidence in government and can suggest weak governance, wrote Alriona Costigan, a vice president at Breckinridge, and Jesse Starks, the firm’s chief technology officer. This month’s cyberattack in Baltimore follows last year’s high-profile ransomware attack in Atlanta, which cost the city an estimated $17 million to fix, about 2.6 percent of the city’s budget, according to Boston-based Breckinridge, which oversees more than $37 billion in high-grade fixed-income assets. There have been at least 24 reported ransomware attacks on municipalities this year, including Greenville, N.C., and 46 last year, according to Moody's Investors Service.

New Jersey Pension Proposal Would Shift Some Workers to Hybrid Retirement Plan

Some New Jersey lawmakers are pushing an overhaul of the state’s pension system, one of the most deeply indebted retirement systems in the U.S., as payments are expected to more than double by 2023, the Wall Street Journal reported today. A bill introduced by the state Senate’s Democratic leadership would shift new state workers and teachers, as well as those with less than five years of experience, into a hybrid retirement plan that combines a pension with something like a 401(k) plan. Under the proposed legislation, New Jersey workers would receive a pension on the first $40,000 they earn with guaranteed benefits. Income on top of $40,000 would be factored into a 401(k)-type plan or an annuity. The state is currently expected to make more than $6 billion in annual pension payments by fiscal 2023, up from $3.2 billion in the fiscal year that ends in June. That increase alone is projected to consume more than 80 percent of New Jersey’s revenue growth by then. (Subscription required.)

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