House Panel Considers the Financial Institution Bankruptcy Act of 2014

ABI Bankruptcy Brief | July 8, 2014

July 15, 2014

NEWS AND ANALYSIS

HOUSE PANEL CONSIDERS THE "FINANCIAL INSTITUTION BANKRUPTCY ACT OF 2014"

The House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law held a hearing today on the proposed "Financial Institution Bankruptcy Act of 2014." The legislation aims to deal with resolving systemically important financial institutions (SIFIs). The bill would permit an expedited transfer of all the debtor's assets to a new bridge company on a short-term basis. This "single point of entry" (SPOE) bill, which would create a new subchapter V of chapter 11, is an alternative to the chapter 14 idea (S. 1861), which is also under review. "The single-point-of-entry approach to resolution involves commencing resolution proceedings only with respect to the financial firm's top-level parent holding company, with all losses of the distressed financial firm being borne by shareholders and creditors of that entity and not by taxpayers," said Donald S. Bernstein of Davis Polk & Wardwell LLP, a member of ABI's Commission to Study the Reform of Chapter 11. Prof. Thomas H. Jackson of the William E. Simon School of Business at the University of Rochester also testified in favor of the SPOE approach. "In this bankruptcy process, the bridge company, appropriately, faces market discipline first and foremost; in Title II, there inevitably is a heavier layer of regulatory overlay and control," Prof. Jackson said in his prepared testimony. While in favor of the approach, Prof. Stephen J. Lubben of Seton Hall University School of Law identified areas of concern with the legislation as currently drafted. The bill does not provide an explicit Federal credit support facility for the holding company, unlike Title II of Dodd Frank. In addition to concerns about a special trustee that would be assigned to hold the shares of the bridge company until they can be distributed under the debtor's plan, Prof. Lubben was concerned that the proposed bill would add layers of litigation and time to the process of resolving the insolvency of a large financial institution. "Without a viable mechanism to get the bridge company shares into the hands of creditors, the bill is apt to create a morass of litigation that will linger for years after the financial institution's failure," Lubben stated in his prepared testimony. For more information about the hearing, including prepared witness statements and a copy of the draft bill, please click here.

Prior to the House hearing, ABI held a 75-minute webinar on July 15 providing a basic overview of both the new bill and the current chapter 14 proposal providing for the reorganization or liquidation of large financial institutions. An archive file of the webinar will be available soon on ABI's eLearning site.

BOND INSURER TAKES ON DETROIT

Detroit expected a bruising battle with everyone from major banks to municipal unions when it filed its bankruptcy case last year, but its most persistent adversary has turned out to be a scrappy bond insurer that represents just 5 percent of the city's debt, the Wall Street Journal reported yesterday. New York-based Syncora Guarantee Inc., with about $400 million at stake, has attempted to block the city's access to casino-tax revenue, new borrowing to repair streetlights and the city's settlement with two major banks. Syncora insists that the city's debt-cutting and reinvestment plan aimed at restructuring, originally pegged at about $18 billion in long-term obligations, unfairly offers modest cuts to its pensioners and much more severe cuts to some bondholders backstopped by insurers like Syncora. A federal trial in bankruptcy court on the plan is scheduled for mid-August. Voting on the city's plan ended on Friday for 70,000 creditors, including 32,000 pension-holders. The city expects to announce the results no later than July 21, officials said. Read more. (Subscription required.)

CFPB SUES "DEBT COLLECTION LAWSUIT MILL"

The Consumer Financial Protection Bureau (CFPB) filed a lawsuit against a Georgia company it called a "debt collection lawsuit mill," The Hill reported today. The CFPB claimed yesterday that the firm, Frederick J. Hanna & Associates, spooks consumers with deceptive court filings and shoddy evidence to "intimidate" them into paying debts they do not actually owe. "The Hanna firm relies on deception and faulty evidence to drag consumers to court and collect millions," said Director Richard Cordray. "We believe they are taking advantage of consumers' lack of legal expertise to intimidate them into paying debts they may not even owe." The CFPB said that the firm has filed hundreds of thousands of lawsuits on behalf of clients like banks, debt buyers and credit card issuers. This assembly-line approach led to more than 350,000 lawsuits filed between 2009 and 2013 in Georgia alone. The regulator also claimed that the firm often filed suits signed by attorneys that were not actually crafted by lawyers, but rather automatically created by non-attorney staff. To bolster this claim, the CFPB pointed out that one attorney had signed off on more than 130,000 lawsuits over a two-year stretch. Read more.

DIVE IN MINORITY LENDING PUTS PRESSURE ON FANNIE/FREDDIE

Minorities have been disappearing from the ranks of homebuyers who seek and receive conventional loans backed by Fannie Mae and Freddie Mac, a trend that poses risks for them and for the U.S. economy, Bloomberg News reported yesterday. With minorities growing as a share of the population, their homebuying patterns will have an increasing impact on housing sales. African Americans are about 13 percent of the U.S. population but represented about 5 percent of conventional mortgage borrowers in 2001, before the housing bubble burst, according to data collected by federal regulators. By 2012, they were only 2 percent. Over the same period, Hispanics dropped from almost 8 percent of such borrowers to 4.5 percent, even as their share of the population grew to 17 percent. The disparities are set to grow. By 2025, minorities could make up almost half of the population between the ages of 24 and 34, when most first-time buyers enter the market, according to a June report by Harvard University's Joint Center on Housing Studies. Read more.

HOUSE DEMOCRATS INTRODUCE HOUSING FINANCE REFORM MEASURE

Three House Democrats introduced on Thursday the latest legislative volley aimed at overhauling the housing finance system, The Hill reported on Friday. Reps. John Delaney (D-Md.), John Carney (D-Del.) and Jim Himes (D-Conn.) offered a bill that preserves the 30-year fixed-rate mortgage and uses private-sector pricing to reduce the risk of future bailouts for taxpayers. The measure would wind down government-controlled mortgage giants Fannie Mae and Freddie Mac and replace them with a new system based on private capital. The bill winds down Fannie and Freddie over five years and revokes their charter, but allows them to be sold and recapitalized as entities with different business plans without any of their current unique powers. "This legislation ensures that new homeowners will continue to have access to the affordable, predictable financing options they need, while protecting taxpayers and our economy from future downturns," Himes said. Read more.

NEW CASE SUMMARY ON VOLO: NEAL V. FIRST ALLIANCE BANK (6TH CIR.)

Summarized by Ryan Heilman of Wolfson Bolton PLLC

Applying Tennessee law, the Sixth Circuit affirmed the district court's decision sustaining the chapter 7 trustee's objection to the debtors' attempt to exempt two annuities.

There are more than 1,300 appellate opinions summarized on Volo, and summaries typically appear within 24 hours of the ruling. Click here regularly to view the latest case summaries on ABI's Volo website.

NEW ON ABI'S BANKRUPTCY BLOG EXCHANGE: COULD A BITCOIN EXCHANGE CONSTITUTE BEING A "STOCKBROKER" UNDER THE CODE?

A recent blog post examines whether a bitcoin exchange might be considered a "stockbroker" under the Bankruptcy Code.

Be sure to check the site several times each day; any time a contributing blog posts a new story, a link to the story will appear on the top. If you have a blog that deals with bankruptcy, or know of a good blog that should be part of the Bankruptcy Exchange, please contact the ABI Web team.

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