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Philadelphia Fed Explores Access to Credit after Consumer Bankruptcy Filing

 

 

 
 

March 5, 2015

 
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  NEWS AND ANALYSIS

PHILADELPHIA FED EXPLORES ACCESS TO CREDIT AFTER CONSUMER BANKRUPTY FILING

A new working paper from the Philadelphia Federal Reserve explored variations in chapter 7 and chapter 13 filings to see if there is a difference in post-bankruptcy access to credit for consumers. The working paper focused on unsecured debt, such as credit cards, and found that:
 
- Credit scores start to recover dramatically before the date on which debt is discharged for both filer types, which might be caused by the waiting period before debtors are allowed to file for bankruptcy again. This waiting period may mitigate the risk of default for lenders.
 
- Despite the recovery in their credit scores, bankruptcy filers have limited access to unsecured credit. Even though debtors may be able to obtain some unsecured credit after bankruptcy, their credit limits are substantially lower than they were before bankruptcy filing.
 
- Chapter 7 filers have a greater opportunity to acquire unsecured credit from new lenders than chapter 13 filers do. 
 
- Despite reduced access to new credit, chapter 13 filers are better able to maintain old credit and, as a result, generally have higher overall credit limits than their chapter 7 counterparts. 
 
Click here to read the working paper.

NEW YORK FED: STUDENT LOANS DEFAULTS STARTED TO RISE BEFORE THE GREAT RECESSION

The New York Fed has come to some new conclusions about student loan distress, mainly that default rates for student loans were already on the upswing up before this economic calamity, Mainstreet.com reported yesterday. The New York Fed based its conclusions on a cohort of defaulters assembled using the Consumer Credit Panel, which is based on Equifax credit data. The New York Fed said that its results are analogous to default rates in the Department of Education’s studies, but go beyond the Education Department’s three-year time frame. “We find that default rates continue to grow after three years and performance of that cohort worsened in the years leading up to the Great Recession,” the New York Fed's report stated. The Fed looked at outcomes over the life of a student loan rather than at a smaller slice. The Fed began following the 2009 cohort in 2004, the 2007 cohort in 2000 and the 2005 cohort in 1996. Other studies were limited to three years. The report noted that earlier snapshots of delinquency and default rates miss the fact that many borrowers who are current today have had serious stress in the past. Only about 63 percent of borrowers appear to have completely avoided delinquency and default. The highest default rates are among borrowers who owe less than $5,000. Read more.

For more on student loans and bankruptcy, be sure to register for the next ABI Live Webinar on March 18 titled, "New Developments in Student Loans: Need to Know," or purchase ABI's Graduating with Debt: Student Loans under the Bankruptcy Code.

 

COMMENTARY: DESPITE CHANGES, AN OVERHAUL OF WALL STREET FALLS SHORT

Despite the 2008 financial crisis, it will always be the case that bankers will try to manipulate the system and hide their leverage, according to a commentary yesterday on the New York Times DealBook blog. Some experts say that it would be better to overcorrect, rather than try to fine-tune. “An engineer doesn’t build a bridge for the exact weight of the truck,” said Erik F. Gerding, a regulatory expert at the University of Colorado Law School. Banks are still far too dependent on short-term funding, and given that the most immediate cause of the financial crisis was that banks faced runs in the short-term lending markets, this is a spectacular hole in financial reform, according to the commentary. Another hole is that regulators haven’t solved the problem of how to wind down failed giant banks, according to the commentary. Resolution authority, where the banks write “living wills,” may be an insoluble problem, according to the commentary. Executives have little incentive to get it right, according to the commentary, and such a failure might not come for five, 10 or even 25 years. Read more.

LEGISLATION TO REFORM CFPB ANNOUNCED DURING HOUSE COMMITTEE HEARING

At Tuesday’s House Financial Services Committee hearing, featuring testimony of Consumer Financial Protection Bureau (CFPB) Director Richard Cordray, U.S. Rep. Randy Neugebauer (R-Texas) said that he would be introducing a bill to reform the CFPB this week, ACAInternational.org reported yesterday. As the five-year anniversary of the creation of the CFPB under the Dodd-Frank Act approaches, Neugebauer said that the bureau has failed to prove it can act in a sustainable manner. Similar legislation has been introduced in the past, and recently bipartisan legislation to add an inspector general at the CFPB was reintroduced in the Senate and House of Representatives. Tuesday’s hearing focused on accountability of the bureau, its upcoming regulations of the debt collection and payday lending industries, for example, and how the scope of its consumer protections could be negatively impacting small businesses. Read more.

Click here to read Cordray’s prepared hearing testimony.

NEW PANEL STRIPS NEW YORK FED’S SUPERVISION POWER

The Federal Reserve Bank of New York, once the most feared banking regulator on Wall Street, has lost power in a behind-the-scenes reorganization at the nation’s central bank, the Wall Street Journal reported today. The Fed’s center of regulatory authority is now a little-known committee run by Fed governor Daniel Tarullo, which is calling the shots in oversight of banking titans such as Goldman Sachs Group Inc. and Citigroup Inc. The new structure was enshrined in a previously undisclosed paper written in 2010 known as the “Triangle Document.” The six-page document placed a new panel called the Large Institution Supervision Coordinating Committee, overseen by Tarullo, at the center of Fed supervision of banks. Supervisors at the 12 reserve banks operate under the “guidance and supervision” of the LISCC. Nine of the Federal Reserve Board’s members are on the 16-person committee; the New York Fed has three representatives, and they answer to Washington, D.C. New York Fed President William Dudley isn’t on it. Officials in Washington, D.C. say that centralizing regulatory authority in D.C. gives the Fed a broader view of risks across the whole system and a more evenhanded oversight approach.  As evidence of benefits from the stress tests Washington, D.C., introduced, officials say that the 50 largest U.S. banks increased their capital to $1.2 trillion by the end of the 2014 third quarter from $506 billion in early 2009. Under the new structure, the New York Fed president isn’t directly involved in many of the central bank’s most important supervision decisions, including stress tests. Supervisors of bank examiners often report directly to Tarullo’s group. Read more. (Subscription required.)

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PRE-ORDER NOW: ABI'S NEWEST PUBLICATION EXAMINES ISSUES SURROUNDING LITIGATION AND LIQUIDATION TRUSTS IN BANKRUPTCY

ABI's newest publication, A Practitioner's Guide to Liquidation and Litigation Trusts, tackles issues surrounding litigation and liquidation trusts established in an insolvent company's bankruptcy proceedings. Such cases as General Motors, ASARCO, Tronox, Enron and Bernard L. Madoff Investment Securities LLC have established these types of trusts as vehicles that can be separated from the insolvent company's business operations to administer assets that have uncertain recoveries or that may require significant time to handle (such as environmental claims). A Practitioner's Guide to Liquidation and Litigation Trusts is designed to give bankruptcy and other professionals an overview of how and when trusts can be used to handle significant large-scale litigation matters and the liquidation of other assets for the purpose of accumulating recoveries and distributing them across multiple claimants. The book offers guidance on the most common issues faced in establishing, managing, monitoring and ultimately concluding a liquidation trust or litigation trust. Convenient checklists, relevant case citations and references to bankruptcy-related issues, as well as recommended forms of trust agreements and suggested provisions for bankruptcy plans and disclosure statements, are also provided in this 300-page guide (which includes a separate thumbdrive containing more than 500 sample pages from liquidation and litigation cases).

A Practitioner's Guide to Liquidation and Litigation Trusts is currently available for pre-order (make sure to log in to receive the ABI member price of $85).

NEW CASE SUMMARY ON VOLO: KELLY V. SALLIE MAE INC. (9th Cir.)

Summarized by Joel Newell of Lane & Nach, P.C. 
 
The Ninth Circuit Court of Appeals reversed and remanded to the district court with instructions to reinstate the partial discharge ordered by the bankruptcy court. The bankruptcy court's judgment was not illogical, implausible, or without support; therefore, the bankruptcy court was not clearly erroneous.

There are more than 1,500 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: CREDIT SLIPS BLOGGERS’ AMICUS BRIEFS IN CAULKETT

A recent post on Credit Slips provides a summary of the amicus brief provided by the bloggers (bankruptcy professors) supporting the debtor in the Supreme Court case of Bank of America v. Caulkett.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

ORDER YOUR PRINTED COPY OF THE FINAL REPORT OF ABI'S COMMISSION TO STUDY THE REFORM OF CHAPTER 11!

Order your printed copy of the Final Report of ABI's Commission to Study the Reform of Chapter 11! The 402-page Final Report contains more than 200 discrete recommendations of chapter 11 policy reforms. ABI's Commission to Study the Reform of Chapter 11 was established in 2012 with a mission to study and propose reforms to Chapter 11 of the Bankruptcy Code and related statutory provisions. After months of deliberations, the Commission unanimously adopted this report to provide to Congress. For the special price of $40, you will have all the testimony, studies and figures that went into compiling the recommendations at your fingertips! Click here to order.

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UPCOMING EVENTS:

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9th Annual Credit and Bankruptcy Symposium
May 7-8, 2015
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17th Annual New York City Bankruptcy Conference
May 14, 2015
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May 17-21, 2015
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20th Annual Southeast Bankruptcy Workshop
July 23-26, 2015
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  CALENDAR OF EVENTS
 

2014

March
- ABI Live Consumer Webinar: "Student Loan Update"
March 18, 2015
- Bankruptcy Battleground West
March 24, 2015 | Los Angeles, Calif.

April
- Annual Spring Meeting
April 16-19, 2015 | Washington, D.C.

May
- Credit and Bankruptcy Symposium
May 7-8, 2015 | Uncasville, Conn.
- New York City Bankruptcy Conference
May 14, 2015 | New York, N.Y.
 

 

 


- Forty-Hour Bankruptcy Mediation Training
May 17-21, 2015 | New York, N.Y.
- Litigation Skills Symposium
May 19-22, 2015 | Chicago, Ill.

June
- Central States Bankruptcy Workshop
June 11-14, 2015 | Traverse City, Mich.

July
- Southeast Bankruptcy Workshop
July 23-26, 2015 | Amelia Island, Fla.

 

 
 
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