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Commentary: With Student Loan Debt at an All-Time High, Proposed Solutions Range from Code Changes to Loan Forgiveness

ABI Bankruptcy Brief

December 19, 2019

 
ABI Bankruptcy Brief
 
 
NEWS AND ANALYSIS

Commentary: With Student Loan Debt at an All-Time High, Proposed Solutions Range from Code Changes to Loan Forgiveness

For millions of Americans, seeing the federal government simply forgive their student loan debts may sound very appealing, according to a blog post on CardRates.com. And with Democratic hopefuls like Bernie Sanders and Elizabeth Warren pushing plans that would eliminate all — or a significant portion of — student loan debt, the prospect doesn’t seem completely unrealistic. Other more nuanced recommendations, such as those proposed by ABI's Commission on Consumer Bankruptcy, suggest changes to the U.S. Bankruptcy Code that would make it easier for student loan debt to be discharged during or after bankruptcy. John Rao, an attorney at the National Consumer Law Center who is also a member of ABI's Consumer Bankruptcy Commission, shed some light on the report and highlighted some of its recommendations on the student loan debt crisis. Current bankruptcy law allows consumers to discharge student loans only if they can prove that repayment of the loans will impose an “undue hardship” on them and their families. “We included what we consider to be a best interpretation of the undue hardship provision,” Rao said. “We suggest an interpretation that I think is actually closer to the statutory language and points out how courts have really missed the mark on this, and they have developed standards that are much more extreme than what the language would suggest.” The commission’s stance is that recent graduates should generally be required to repay “government-made or guaranteed student loans,” but it does recommend amendments that would allow the loans to be discharged in certain circumstances. These situations include loans made by nongovernmental entities, loans incurred by a person other than the person receiving the education, loans being paid through a five-year chapter 13 bankruptcy plan, or loans that are first payable more than seven years before a chapter 7 bankruptcy is filed. Read more.

To view the Commission’s recommendations on student loan debt and bankruptcy, please click here.

Be sure to also read “Game of Loans: Is Student Debt Forgiveness Coming?” in the December edition of the ABI Journal.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) and student debt was the focus of a segment on "Tucker Carlson Tonight" on FoxNews on Monday. Carlson pointed out that BAPCPA has prevented young people from discharging student loan debt through bankruptcy. Students who had been pressured to take on “life-destroying” amounts of student loan debt could never get rid of that debt under the new law, harming America's middle class in the face of rising education costs. Click here for the video clip and the transcript of the segment.

Also, the cost of rising tuition was a focus of an ABI Talk at the 2019 Winter Leadership Conference. Click here to watch the presentation by Inez Stepman of the Independent Women’s Forum (Washington, D.C.)
 

Pot Firms’ Grim Reality: Cash Crunch, No U.S. Bankruptcy Access

It was only a year ago that exuberance enveloped the marijuana industry as legalization was spreading and the growth potential seemed boundless. But that bubble has burst as the reality of a difficult regulatory landscape sunk in, according to a Bloomberg News analysis. Since March, stocks are down by about two-thirds. Capital markets have largely frozen for all but the strongest companies, and now a cash crunch is leaving some on the verge of going bust. But due to the illegal status of cannabis under U.S. federal laws, firms there are blocked from seeking protection in bankruptcy court. The industry’s problems have become so dire that one senior executive at a large cannabis company predicts that as many as a dozen smaller companies may fail by the second quarter of 2020. For U.S. firms, this poses an intractable problem: Bankruptcy is governed by federal law, which considers marijuana an illegal substance. This means they can’t get chapter 11 protection from creditors or a centralized sale process. Without that, the result could be a state-by-state scramble by creditors for assets. The U.S. bankruptcy trustee, which serves as a watchdog over the court process, “has taken a hard-line position on this,” said Sean Gordon, partner at Thompson Hine LLP. “It is incredibly difficult for a marijuana-related business to file and not get their case dismissed.” In Canada, bankruptcy filings have already begun. Wayland Group Corp., one of the first Canadian cannabis companies to be awarded a cultivation license in 2014, filed for protection from creditors earlier this month. DionyMed Brands Inc. filed for receivership in October when a creditor demanded immediate payment of a C$25 million loan, and Ascent Industries Corp. has been reorganizing under court supervision since March. While the smallest players are most at risk, better-known companies are also running low on cash. Los Angeles-based MedMen Enterprises Inc. said last week it has reduced corporate staff by more than 40 percent. It also issued $27 million in shares at 43 cents each, 14 percent below the stock’s Dec. 10 closing price.

Commentary: Fuzzy Math that Fueled Junk Debt Boom Is Sparking Jitters

Some of the riskiest borrowers, and the private-equity firms often behind them, have been massaging a measure known as EBITDA — earnings before interest, taxes, depreciation, and amortization — to appear more creditworthy and take out bigger loans, according to a Bloomberg Businessweek commentary. Money managers, regulators and credit-rating companies say they’re being vigilant. Even so, the fuzzy numbers may be creating a false perception of safety in the $2.5 trillion market for low-rated corporate debt. That market is a key source of funds for companies with less-than-stellar credit and for private-equity firms, which typically load the businesses they acquire with debt to boost returns. Institutional investors have increased their purchases of high-risk loans and bonds over the past decade, as near-zero interest rates made other fixed-income assets less attractive. That demand helped make bigger and riskier loans possible. Matthew Mish, head of credit strategy at UBS Group AG, says that even a garden-variety recession in the next year or two could cause earnings for the weaker borrowers to drop by as much as 40 percent from peak to trough, rivaling the declines seen during the global financial crisis. Such a meltdown of corporate balance sheets could fuel a cascade of defaults and bankruptcies.


 

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New on ABI’s Bankruptcy Blog Exchange: Supreme Court Grants Cert to Decide Fate of Repossessed Cars in Bankruptcy

Yesterday, the SCOTUS granted certiorari in City of Chicago v. Fulton, 19-357, to resolve a circuit split about whether a creditor's inaction in not returning property repossessed pre-petition can violate the automatic stay. The split arises predominantly from chapter 13 cases in which, pre-petition, creditors repossessed or cities impounded debtors' cars.

For further analysis, be sure to read today's column of Rochelle's Daily Wire.

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

 
© 2019 American Bankruptcy Institute
All Rights Reserved.
66 Canal Center Plaza, Suite 600
Alexandria, VA 22314
 

Analysis: Five Years Out of Bankruptcy, Can Detroit Avoid Another One?

ABI Bankruptcy Brief

December 12, 2019

 
ABI Bankruptcy Brief
 
 
NEWS AND ANALYSIS

Analysis: Five Years Out of Bankruptcy, Can Detroit Avoid Another One?

Tuesday marked the five-year anniversary of Detroit's exit from the largest city bankruptcy in the nation's history, the Detroit Free Press reported. Now billions lighter in debt and running $100 million-plus annual surpluses, Detroit is in phenomenally better financial shape than when it entered the bankruptcy, which lasted 17 months. But the process did not eliminate all future obstacles, and whether the city can keep its budget act together — and avoid a do-over bankruptcy — is a question that may find an answer over the next five to seven years. The first big challenge comes in mid-2023, when Detroit's "pension holiday" ends and it must start making full yearly contributions — about $163 million a year and every year — toward two city retirees' pension funds. The city was given a vacation from pension payments as part of its post-bankruptcy restructuring plan.


 

America’s Dairy Farmers Are Hurting, but a Giant Merger Could Make Things Worse

America’s dairy farmers have been battered over the past decade by a nationwide drop in milk consumption, the rise of dairy-free and plant-based alternatives and the trade war with China. But New York dairy farmer John Lamport says that there is another factor pushing down milk prices and harming farmers: the business practices of Dairy Farmers of America, a farmer-owned cooperative. The biggest dairy co-op in the U.S., with more than 14,000 members from New York to California, D.F.A. was established in 1998 to help farmers like Lamport market their raw milk to dairy processing companies, which prepare the milk for distribution to retailers. Over the years, however, the co-op has also invested heavily in milk-processing operations, meaning that it buys some of the milk its own marketing arm sells. Those investments have created a conflict of interest, farmers and the lawyers who represent them say, since milk processors benefit from lower prices, while farmers benefit from higher ones. Now, the co-op is in talks to acquire Dean Foods, a century-old milk-processing company that sought bankruptcy protection in November. No agreement has been reached, but the prospect of D.F.A.’s taking control of Dean Foods, the co-op’s biggest customer, has raised new antitrust concerns..

Betsy DeVos Testifies at House Hearing over Denying Student Borrower Relief

U.S. Secretary of Education Betsy DeVos endured a withering barrage of questions today at a House Education and Labor Committee hearing about her handling of a program meant to provide debt relief to federal student loan borrowers who say they were defrauded by for-profit colleges, NPR.org reported. DeVos testified one day after NPR published internal memos showing the Secretary overruled her own department's findings that borrowers deserved full relief from their loans, because their college credits are essentially worthless. Hundreds of thousands of borrowers are in limbo, and several members referred to the memos in their questioning. In answering questions from the panel, DeVos acknowledged some of the problems. "Yes, there is a backlog of borrower defense claims at Federal Student Aid," she said. "To say that I am frustrated by that is an understatement." While she stated her intention to enforce current regulations in "good faith," DeVos also repeated her position that taxpayers' interests need to be protected when deciding who should get their money back, and how much. More than 300,000 borrowers have pending claims, DeVos said on Wednesday. Some have been waiting, in many cases for years, for the Education Department to decide their financial fate. Federal agencies found, starting in 2015, that some for-profit colleges, including the now-defunct Corinthian Colleges and ITT Technical Institute, lied to these students about their job prospects and the value of their credits. Read more.

To read the prepared testimony from the hearing, please click here.
 

Corporate Pensions Head for Extinction as Nature of Retirement Plans Changes

The practice of companies sending monthly retirement checks to their former workers is headed for extinction, and remaining pension funds are in tough financial shape, USA Today reported. Nearly two-thirds of pension funds are considering dropping guaranteed benefits to new workers within the next five years, according to a human resources consulting firm that studied the matter. Despite gains in the stock market this year, U.S. pension plans are near their worst financial state in two years, according to the new report by Mercer, which casts a spotlight on the escalating cost of past promises to employees. Most U.S. companies no longer offer defined-benefit pension plans, which typically provided guaranteed monthly payments to workers when they retired. But pension funds that still operate must gain in value to ensure they have enough to meet their obligations. By late 2019, the average pension fund had 85 percent of the funds necessary to meet its obligations over time due largely to low interest rates, according to Mercer's 2020 Defined Benefit Outlook. The firm also reported that 63 percent of companies with defined-benefit pensions "are considering termination" of the plan within half a decade. That would mean the pensions would be closed off to future participants.


 

Law Firms 'Poised to Grow' as They Report More Success in Lateral Hiring

Law firms are planning to add equity partners while at the same time increasing leverage by hiring more junior and temporary lawyers, according to a recently released client advisory by Citi Private Bank’s law firm group and Hildebrandt Consulting, the ABA Journal reported. “Across most revenue segments, firms are poised to grow and are placing even greater emphasis on innovation, efficiency and practice profitability,” the advisory says. “Firms are also expected to expand their equity partnerships, aided by lateral growth strategies that are becoming more successful than we have ever seen before.” By the end of the year, revenue growth for law firms is expected in the range of 5.5 percent to 6.5 percent, according to the client advisory. Next year, revenue growth is expected to continue, reaching a range of 5 percent to 6 percent. The primary driver of growth has been an increase in billing rates, which grew by an average of 4.7 percent the first nine months of the year. Growth in demand for legal services was lower at just 0.9 percent, although Am Law 51–100 firms outpaced the overall numbers with a 1.8 percent rise in demand. Sixty-one percent of law firm leaders responding to a 2019 Citi survey said they expect to grow their equity partnerships in the next two years. Law firms are expected to increase their equity partner ranks through a mix of promotions and lateral hires.

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New on ABI’s Bankruptcy Blog Exchange: Chicago Exercising Control over Debtor Vehicles: To the U.S. Supreme Court?

A dispute is raging over the City of Chicago’s refusing to surrender possession of impounded vehicles upon their owners’ bankruptcy filing, according to a recent blog post. The bankruptcy proceeding is City of Chicago, Illinois v. Fulton, with a petition for certiorari pending before the U.S. Supreme Court (Case No. 19-357).

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

 
© 2019 American Bankruptcy Institute
All Rights Reserved.
66 Canal Center Plaza, Suite 600
Alexandria, VA 22314
 

Commentary: Would Canceling Student Debt Stimulate the U.S. Economy the Way Candidates Say It Would?

ABI Bankruptcy Brief

December 5, 2019

 
ABI Bankruptcy Brief
 
 
NEWS AND ANALYSIS

Commentary: Would Canceling Student Debt Stimulate the U.S. Economy the Way Candidates Say It Would?

Democratic candidates on the campaign trail have called the student debt crisis, now an estimated $1.5 trillion, a drag on the economy that prevents younger generations of Americans from purchasing homes and making larger investments. The most left leaning and popular plans are supported by Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.): They want to grow the shrinking middle class by canceling student debt for those who owe the most — graduates in their 20s and 30s, according to a Fortune commentary. The average student debt total per person in 2019 is about $30,000, according to Credit.com data, with an average monthly payment of $393 upon graduation. For specific fields, that debt is much higher: Medical school graduates, for instance, owe approximately $200,000 for their education. Proponents of canceling student debt argue that doing so would put billions of dollars back into the economy, stimulating growth while providing financial relief to young people. But while estimated to add $86 billion to $108 billion to GDP annually over the course of a decade, the improvement would only be a modest one in terms of the U.S. economy overall, according to a recent report by Moody’s Investors Service. A similar economic boost could also be achieved through less aggressive means, such as payment restructuring, the report adds.



Attending the Winter Leadership Conference? Don’t miss the ABI Talk tomorrow by Inez Feltscher Stepman of the Independent Women's Forum, who will explore whether there is too much emphasis on reducing student loan debt, including through bankruptcy, and not enough on the real causes of skyrocketing college costs.

High-Interest Loan Companies in Utah Using Small Claims Court Proceedings to Have Borrowers Arrested

While it is against the law to jail someone because of an unpaid debt (Congress banned debtors’ prisons in 1833), debtors across the country are routinely threatened with arrest and sometimes jailed, and these practices are particularly aggressive in Utah, ProPublica reported. Technically, debtors are arrested for not responding to a court summons requested by the creditor. But for many low-income people who are not familiar with court proceedings, lack access to transportation, child care options or time off, or move frequently and thus may not receive notifications, it’s a distinction without a difference. In Utah, payday lenders and similar companies that offer high-interest, small-dollar loans dominate small claims courts. Loans for Less, for example, filed 95 percent of the small claims cases in South Ogden, a suburban city of 17,000 about a half-hour north of Salt Lake City on the interstate, in fiscal year 2018, according to state data. Across Utah, high-interest lenders filed 66 percent of all small claims cases heard between September 2017 and September 2018, according to a new analysis of court records conducted by a team led by Christopher Peterson, a law professor at the University of Utah and the financial services director at the Consumer Federation of America, and David McNeill, a legal data consultant and CEO of Docket Reminder. Companies can sue for up to $11,000 in Utah’s small claims courts, which are stripped of certain formalities: There are rarely lawyers, judges are not always legally trained, and the rules of evidence don’t apply. Lenders file thousands of cases every year. When defendants don’t show up — and they often don’t — the lenders win by default. Once a judgment is entered, companies can garnish borrowers’ paychecks and seize their property. If borrowers fail to attend a supplemental hearing to answer questions about their income and assets, companies can ask the court to issue a bench warrant for their arrest.

Author Provides Historical Look at Small-Dollar Lending on Latest ABI Podcast

ABI Executive Director Sam Gerdano talks with Prof. Anne Fleming of Georgetown University Law (Washington, D.C.), author of City of Debtors: A Century of Fringe Finance. In City of Debtors, Prof. Fleming explores the origins, growth and regulation of small-dollar lending institutions in the U.S. over the twentieth century. Listen to the discussion about the book and issues surrounding small-dollar loans.

How Credit Unions Outgrew Their Down-Home Reputations

Credit unions, long seen as a humdrum corner of consumer finance, are going toe-to-toe with the biggest financial institutions, the Wall Street Journal reported. Credit unions’ assets have grown at nearly twice the pace of banks’ over the past decade, and cooperatives are buying small banks in record numbers. One recently partnered with Google on its plans to create a checking account. Credit unions are owned by their members and are designed to return their profits in the form of lower borrowing costs and higher deposit rates. They are exempt from paying federal income taxes, and they are using their newfound financial heft to compete aggressively for business. Dozens of them dole out loans for boats, jet skis and recreational vehicles. Others are getting into cannabis banking. Some went big on problematic loans backed by taxi medallions. Economists and analysts are uneasy about how these bulked-up credit unions will fare in a recession. In another financial crisis, some could fail or shrink, stranding borrowers who prefer not to use banks. In a worst-case scenario, taxpayers could be saddled with the losses. “They are making lots of loans with high-risk features,” said Karen Petrou, co-head of Federal Financial Analytics, a regulatory advisory firm that has researched credit unions for the banking industry. Credit unions point out that even the largest cooperatives are small compared with the major banks. The entire industry collectively holds less in deposits than JPMorgan Chase & Co. They acknowledge that credit unions now offer loans for items that aren’t typical of a nonprofit, but they say credit unions don’t usually offer anything that banks don’t. (Subscription required.)


 

ABI’s Code & Rules Site Updated with Bankruptcy Rules that Took Effect December 1

ABI's Bankruptcy Code and Rules site has been updated with the new Rule Amendments effective Dec. 1. For a list of the amendments, please click here.
 

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New on ABI’s Bankruptcy Blog Exchange: Regulators Issue Warning on Growth of Nonbank Mortgage Sector

A report from the Financial Stability Oversight Council cited a bigger share of originations and servicing by nonbanks as a potential vulnerability in the financial system, according to a recent blog post.

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

 
© 2019 American Bankruptcy Institute
All Rights Reserved.
66 Canal Center Plaza, Suite 600
Alexandria, VA 22314
 

Amendments to Federal Rules of Bankruptcy Procedure Take Effect December 1

 

 

 

 

 

 

November 21, 2019

 
ABI Bankruptcy Brief
 
 
NEWS AND ANALYSIS

Amendments to Federal Rules of Bankruptcy Procedure Take Effect December 1

There are four rule amendments to the Federal Rules of Bankruptcy Procedure expected to take effect on December 1, 2019, according to the "In the (Red)" blog by Robert L. Eisenbach:

• Rule 4001(c) has been amended to clarify that Rule 4001(c), governing the obtaining of credit, does not apply in chapter 13 cases.
• Rule 6007 has been amended to specify who needs to be served with a motion to abandon, to provide that the objection deadline is within 14 days of service of the motion unless otherwise fixed by the court, and to clarify that a court’s order granting the motion itself effects the abandonment without need for further notice.
• Rule 9036 has been revised to confirm that both notice and service to a registered electronic filing system user can be done by filing the pleading with the court’s electronic filing system. This, however, does not apply to service requirements under Rule 7004.
• Rule 9037 has been amended to add a subsection (h) setting forth procedures for motions seeking to redact previously filed documents otherwise protected under Rule 9037(a). Rule 9037(a) protections cover Social Security numbers, birth dates, names of minors and financial account numbers.

In addition, although not a Federal Rule of Bankruptcy Procedure change, Rule 26.1(c) of the Federal Rules of Appellate Procedure has been revised to require certain disclosures in bankruptcy case appeals, according to Eisenbach. Each debtor, including any debtors not named in the caption, must be identified. For each debtor that is a corporation, the Federal Rule of Appellate Procedure 26.1(a) disclosures must be provided regardless of whether the corporate debtor is named in the caption. For a redline of the rule changes, please click here.

Survey: Private-Credit Boom Seen Continuing Despite Slowdown Concerns

A survey of over 60 asset managers in the industry found that the global private-credit market will continue to expand amid a structural shift toward direct lending, even as money managers increasingly expect a turn in the economic cycle to impact future growth, Bloomberg News reported. The retrenchment of the banking sector and the growing clout of private equity will also underpin the market, according to the report from the Alternative Credit Council, an industry trade group, and law firm Dechert LLP. Private credit has grown into an almost $800 billion asset class as yield-starved investors flock to the market looking for higher returns. Yet with so much cash flowing in, it’s also fueling concerns that growing competition to allocate capital could lead to softer returns and weaker lending standards. “As private equity capacity increases, more deals and larger deals are being done in the private space,” Benoit Durteste, chief executive officer of Intermediate Capital Group, said in the report. “This is why we are seeing larger and larger deals in private debt and the limits keep on being pushed.” Private credit assets under management stood at $787 billion as of March, the most recent data available, up from $42 billion in 2000, according to Preqin Ltd., a London-based research firm.

Analysis: How the Discount Window Became a Pain in the Repo Market

Banks have all but abandoned the Federal Reserve’s discount window, and it is straining Wall Street’s post-crisis infrastructure, the Wall Street Journal reported. Borrowing from the discount window, the Fed’s only channel for lending directly to banks, has plummeted. Through October, banks are on pace to borrow just $750 million from the Fed this year, half of last year’s total and well below the record low of $940 million set in 1961. Banks are desperate to avoid the stigma attached to accessing the window, which is designed to help them weather short-term funding crunches. It is one reason they are hoarding cash at levels well above what regulators require, ensuring that they won’t be caught short if markets go awry. The hoarding has drained liquidity from other parts of the market, contributing to a cash shortfall that roiled overnight-lending markets in September. The resulting spike in rates forced the Fed to inject tens of billions of dollars into the market for repurchase agreements to stabilize it. Two months later, the Fed is still pumping money into the repo market. (Subscription required.)

Critics Say ‘Junk Plans’ Are Being Pushed on ACA Exchanges

The Trump administration is encouraging consumers on the Obamacare individual market to seek help from private brokers, who are permitted to sell short-term health plans that critics deride as “junk” because they don’t protect people with preexisting conditions, or cover costly services such as hospital care, in many cases, the Washington Post reported. Consumers looking at their health insurance options on the website for the federal marketplace, called healthcare.gov, may be redirected to other enrollment sites, some of which allow consumers to click a tab entitled “short-term plans” and see a list of those plans, often with significantly cheaper premiums. Short-term plans were once barred from the exchanges because they were considered inadequate coverage and do not meet the insurance requirements laid out under the Affordable Care Act. The president has repeatedly contended that short-term plans provide “relief” from expensive individual market insurance plans that are unaffordable to many consumers. The rule allowing the sale of such plans was finalized late last year, just weeks before open enrollment, so this is the first year they are widely available. Under the ACA, all health insurance plans have to cover 10 essential health benefits, including maternity and newborn care, prescription drugs, emergency room services and mental health. Short-term health plans do not have to cover those services, can discriminate against those with preexisting conditions and set caps on how much they are willing to pay, which is prohibited for Obamacare plans. Brokers often make higher commissions on short-term plans, health policy experts said, which gives them an incentive to sell them. They are supposed to present ACA-compliant plans to consumers, but are allowed to provide other options, including short-term plans. Some brokers make clear that such plans are not as comprehensive as ACA plans, but experiences differ.



Be sure to mark your calendars for March 5, 2020, as ABI's Health Care Program in Nashville, Tenn., will be examining policies and trends in health care distress. Registration coming soon!


WSJ Pro Cybsercurity Executive Forum: $400 Discount for ABI Members


The 3rd annual WSJ Pro Cybersecurity Executive Forum will be taking place in New York on December 3, 2019. All ABI members are able to take advantage of a $400 discount on the regular rate.

Cybersecurity risks are rapidly changing, so this year’s forum and master classes have been designed to focus on such timely topics as lessons from the most recent major hacks, what and how to report to the board, and navigating the complexities of cyber-insurance. As always, each subject will be examined through a business lens, with actionable takeaways given to senior executives and opportunities to connect with fellow leaders who share your challenges.

For details on the full speaker line-up and agenda, please click here. When booking, please use code ‘cyberabi’ to secure your $400 discount. If you have any questions, please email cyber@wsj.com.

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New on ABI’s Bankruptcy Blog Exchange: CFPB's Final Payday Rule Should Be Ready in Spring, Agency Says

In an update of its rulemaking agenda, the bureau said it "expects to take final action in April 2020" on a proposal that would rescind strong underwriting requirements, according to a recent blog post.

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

 
© 2019 American Bankruptcy Institute
All Rights Reserved.
66 Canal Center Plaza, Suite 600
Alexandria, VA 22314
 

NY Fed: Black Student Loan Borrowers Are Defaulting at Nearly Twice the Rate of Whites

ABI Bankruptcy Brief

November 14, 2019

 
ABI Bankruptcy Brief
 
 
NEWS AND ANALYSIS

NY Fed: Black Student Loan Borrowers Are Defaulting at Nearly Twice the Rate of Whites

Research released yesterday by the Federal Reserve Bank of New York showed that student loan borrowers from mostly black neighborhoods are almost twice as likely to default on their debt as borrowers from neighborhoods that are mostly white, Reuters reported. Borrowers from black neighborhoods also tend to carry larger debt loads, the data showed. Fed researchers found that people in black-majority neighborhoods were slightly more likely to borrow for college, with 23 percent of residents carrying student loans, compared to 17 percent of people in Hispanic-majority neighborhoods and 14 percent in white-majority zip codes. Higher borrowing rates in black neighborhoods could be explained by differences in income, with people from lower-income households being more likely to need loans to pay for school, the researchers wrote. Still, the differences in borrowing rates were not large enough to fully explain the disparities in default rates and student loan balances. Some 17.7 percent of borrowers in majority-black neighborhoods defaulted on their student loans, a proportion roughly twice as high as the 9 percent of borrowers from mostly white neighborhoods who defaulted on loans.



Click here to read the full study.

Georgetown Study Measures Return on Investment of College Education

Researchers at the Georgetown University Center on Education and the Workforce aimed to answer the question of the value of a college education using newly released federal data to try to calculate return on investment for thousands of colleges across the country, the Washington Post reported. The results — searchable and sortable online — were released today, with rankings of 4,500 schools. Among the top 10 colleges with the best long-term net economic gain are Harvard University, the Massachusetts Institute of Technology and Stanford University. Forty years after enrollment, bachelor’s degrees from private colleges have the highest returns on investment. But the top three on the top 10 list — eclipsing MIT and Stanford — are schools specializing in pharmacy and health sciences. The only two public schools to make that top 10 list are maritime academies.

Click here to read more about the research.

Is there too much emphasis on reducing student loan debt, including through bankruptcy, and not enough about the real causes of skyrocketing college costs? Don't miss Inez Feltscher Stepman of the Independent Women's Forum tackling these issues at her ABI Talk at the Winter Leadership Conference.



Don't miss your chance to earn 10+ hours of CLE, hear 70 thought leaders speaking on engaging panels and many opportunities to network. Register here.

Cash-Strapped Small Businesses Turn to GoFundMe

Most people think of GoFundMe as a way to raise money for medical debt, funeral costs or natural disaster relief, but the crowdfunding website is increasingly being used by struggling small businesses, said Chief Executive Rob Solomon, the Wall Street Journal reported. Thousands of small businesses, ranging from comic-book shops to drive-in movie theaters, have opened campaigns across 19 countries. “These independent businesses become pillars in a community, and when they can’t stay open, the communities really rally,” Solomon said. Unlike on other crowdfunding websites, GoFundMe organizers are able to cash out all of the money they raise, minus a 2.9 percent credit-card processing fee, regardless of whether they reach their goals. Jessica Walker, president and chief executive of the Manhattan Chamber of Commerce, said small and mid-level independent businesses are being squeezed by rising rents, minimum-wage increases and mandatory sick leave. Crowdfunding can help fill the gap. “If a business is struggling, it’s much harder to get a bank loan,” Walker said.(Subscription required.)



Rewrite of Lower-Income Lending Rules to Advance in December

A top bank regulator is poised to propose changes to bank lending requirements that could potentially transform the way lenders make billions of dollars in loans, investments and donations to customers in lower-income areas, the Wall Street Journal reported. The proposal from the Office of the Comptroller of the Currency to regulations of the Community Reinvestment Act, which requires banks to serve borrowers of all income levels who reside near their branches, could also make it easier for banks to meet certain lending requirements, particularly in poorer neighborhoods. The agency is planning to release its overhaul sometime in December. Banks would be encouraged to make loans to lower-income borrowers based on the geographic concentrations of their deposits, in addition to the locations of their physical branches, Comptroller of the Currency Joseph Otting said. Under discussion since the earliest days of the Trump administration, a formal proposal has been repeatedly pushed back as the OCC sought to coordinate with two other banking agencies on the changes. It isn’t yet clear if one of the other agencies — the Federal Deposit Insurance Corp. — will jointly propose the changes with the OCC, though Otting said that he is “very optimistic” it will. The third regulator, the Federal Reserve, isn’t expected to be a part of the OCC’s overhaul after the two regulators disagreed on how to refashion the rules, Otting said. (Subscription required.)

Severe $15.8 Trillion Pension Crisis Looms Worldwide, G-30 Says

The U.S., China and other leading economies are confronting a massive funding gap of $15.8 trillion in 2050 to ensure lifetime financial support for their aging populations, Bloomberg News reported. That’s according to a report spearheaded by former U.K. Financial Services Authority Chairman Adair Turner for the prestigious Group of 30, comprised of current and former policymakers. “If public policies and individual behaviors do not change, many countries’ pension systems will face a severe crisis, threatening either unaffordable public expenditure pressures or inadequate incomes for retirees,” Turner said. The projected $15.8 trillion shortfall is adjusted for inflation, so the actual nominal dollar amount in 2050 will be materially larger, equivalent to 23 percent of global gross domestic product that year, according to the report. The G-30, which includes Bank of England Governor Mark Carney and former U.S. Treasury Secretaries Timothy Geithner and Lawrence Summers, mainly blamed antiquated pension and retirement systems for the financing gap, which it pegged at $1.2 trillion in 2018.

Aging-in-Place Technology Trend Poses Challenge to Builders of Living Facilities for Elderly

The rise of technologies that help the elderly stay in their homes threatens to upend one of commercial real estate’s biggest bets: Aging baby boomers will leave their residences in droves for senior housing, the Wall Street Journal reported. Developers and senior-housing companies have spent billions of dollars over the past five years to build facilities that provide housing, food, medical care and assistance for the elderly. While these properties have been filling up with people born during the Depression or World War II era, real estate investors are eagerly eyeing the massive baby-boomer generation: 72 million people born between 1946 and 1964, or about one in five Americans. Their needs would require hundreds of thousands of new units, if previous demand patterns persist. But this wager on elderly care is falling short of expectations, and there are concerns that it could become one of the biggest real estate miscalculations in recent memory, some analysts suggest. That is in part because venture capital and other companies are expected to invest about $1 billion this year in these and other “aging-in-place” technologies that are starting to enable seniors to enjoy similar living standards and access to care in their own homes. (Subscription required.)

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New on ABI’s Bankruptcy Blog Exchange: A Challenge in Representing Family Businesses

One of the greatest challenges in representing family businesses is ensuring accuracy in preparing and filing schedules. This challenge is daunting for lots of reasons: Schedules are often prepared under time pressures and with limited resources, the extent and depth of information required is significant, supporting records and memories are often unclear, and remedies for less-than-accurate information can be severe, according to a recent blog post.

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

 
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Study: Student Loan System Presents Repayment Challenges

ABI Bankruptcy Brief

November 7, 2019

 
ABI Bankruptcy Brief
 
 
NEWS AND ANALYSIS

Study: Student Loan System Presents Repayment Challenges

The Pew Charitable Trusts commissioned the Trellis Company, a Texas-based organization that acts as a guarantor for the Federal Family Education Loan (FFEL) program, to conduct an analysis of almost 400,000 borrowers in that state during the five-year period beginning when their student loans entered repayment anytime between October 2007 and September 2011, according to a press release. Based on the repayment activity and outcomes over those five years, the researchers divided borrowers into three main groups: those who had defaulted, those who owed more than their original balances, and those who owed less than their original balances. This analysis concentrates on Texas, rather than the nation as a whole, because Trellis has a rich administrative dataset and similarly robust data were not available at the national level. However, researchers supplemented the Trellis data with structured interviews with borrowers from the dataset and benchmarked this state-focused analysis with nationally representative data to ensure that the Texas findings were generally reflective of what is known at the national level and to create a more complete picture of borrower behavior. Some of the key findings were:

- Approximately a quarter of borrowers defaulted within five years of entering repayment.
- Those who owed more than their original balances after five years in repayment — 21 percent of borrowers — had frequently missed and paused payments.
- Almost half of borrowers had paid down some principal after five years. However, only 22 percent of borrowers never missed or paused payments.

Click here to read more about the research.

Is there too much emphasis on reducing student loan debt, including through bankruptcy, and not enough about the real causes of skyrocketing college costs? Don't miss Inez Feltscher Stepman of the Independent Women's Forum tackling these issues at her ABI Talk at the Winter Leadership Conference.



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Lawmakers to Introduce Legislation to Establish Cap on High-Cost Loans

The U.S. military realized some years ago that a lot of service members were getting into serious trouble with payday and other loans with annual interest rates of 300 percent or higher. In 2006, President George W. Bush signed into law a measure that caps interest rates to protect active duty troops. Now, some members of Congress want to expand those safeguards to cover all Americans, according to an NPR report. "We're going to expand it to the rest of the country," says Rep. Glenn Grothman (R-Wis.). He's joining four Democrats who will be introducing House and Senate versions of the Veterans and Consumers Fair Credit Act. The Military Lending Act caps annual interest at 36 percent and offers other safeguards. But there is likely to be strong lobbying against a nationwide interest rate cap. The American Bankers Association has opposed the idea in the past, and lenders who make loans with high interest rates are already speaking out in dramatic terms. "Our estimate is that this will redline 150 million Americans from access to credit," says Mary Jackson, CEO of the Online Lenders Alliance. She says people need these loans. She agrees that the interest rates are high — averaging more than 100 percent a year for the lenders she represents. But Jackson says that is justified by the risk that lenders take in making these loans. She cites a World Bank policy paper that found while rate caps can prevent predatory lending, they can also have unintended consequences. "Our customers are accessing our loans to solve an immediate problem that they have," Jackson says. "If their car breaks down it means they can't get to work, so these loans are very, very helpful." She argues that a rate cap would take away access to these loans.



Pensions Venture into Risky Corners of the Market in Hunt for Returns

Some pension fund managers are venturing further into unusual investment territory as this year’s plunge in bond yields makes it even harder to find decent long-term returns, the Wall Street Journal reported. Funds are dabbling in riskier asset classes, including private markets, real estate projects, infrastructure financing and direct lending. Some are making riskier fixed-income bets, buying volatile assets such as 100-year Argentine government bonds. Others are going farther afield, investing in greenhouses and waste management. The giant pools of retirement money are under pressure to take on more risk following decades of declining interest rates that have chipped away at returns from their traditional bond-heavy portfolios. Those concerns have been exacerbated this year as yields on government bonds dropped sharply and central banks loosened monetary policy to stimulate economic growth. Pension funds’ allocations to alternative asset classes rose to 26 percent in 2018 in the U.S., U.K., Japan, Australia, Canada, Switzerland and the Netherlands, from 19 percent in 2008, according to estimates from Thinking Ahead Institute, a research firm affiliated with Willis Towers. The allocation to bonds has remained steady at around 30 percent. That trend shows no signs of reversing, investors and analysts say. (Subscription required.)

Law Firm Debt Levels Shrink as Partners Put More Skin in the Game

A recent examination of major law firm failures showed how expansion and revenue gains can sometimes mask the struggles of law firms saddled by massive debt. Eventually, the debt load becomes too heavy, choking off growth and hastening collapse, Law.com reported. But industry watchers say law firms have become less reliant on bank debt over the past decade, as they explore other funding options. Often, that means raising capital from partners, or turning to other, less common sources. Michael McKenney, managing director of Citi Private Bank’s Law Firm Group, said “a deleveraging” has occurred at law firms since the Great Recession, when firm leaders started to reconsider how they funded operations and growth. “The debt load carried by firms today is quite a bit different from the debt load that was carried by firms in 2008 and 2009,” McKenney said, looking at a sample of 60 law firms in the Am Law 100, which does not include any firms that completed significant mergers or acquisitions in the past 10 years. Among that sample, he said, bank debt per equity partner was $94,000 at the end of 2008. At the end of 2018, bank debt per equity partner was $57,000 at the same 60 firms. But on the flip side, McKenney said, capital contributions per equity partner have jumped, from $330,000 in 2008 to $549,000 in 2018. The increase is due in part to law firms’ success in recent years, he noted, as capital contributions are often taken as a percentage of a partner’s earnings.

Judicial Conference’s Public Comment Period for Proposed Rules on SBRA Open Until Next Wednesday

On February 19, 2020, the Small Business Reorganization Act of 2019, P.L. 116-54 (SBRA), will go into effect – long before the normal three-year rules amendment process runs its course. As a temporary measure, the Advisory Committee on Bankruptcy Rules has drafted Interim Bankruptcy Rules that can be adopted by courts as local rules or by general order when the SBRA goes into effect. The Advisory Committee has also drafted amendments to the Official Forms to address the SBRA. The Standing Committee now seeks comment on the proposed SBRA rules and forms for a short four-week period prior to making final recommendations.

- Interim Bankruptcy Rules 1007(b), 1007(h), 1020, 2009, 2012(a), 2015, 3010(b), 3011 and 3016.
- Official Forms 101, 201, 309E, 309F, 314, 315, 425A, and new Official Forms 309E2 and 309F2

The comment period is open until November 13, 2019. Because of the short publication period for the Interim Rules and related Official Forms, there will be no public hearings.

Read the text of the proposed amendments and supporting materials.

Written comments are welcome on each proposed amendment. The Advisory Committee on Bankruptcy Rules will review all timely comments, which are made part of the official record and are available to the public. The comment period closes on November 13, 2019. Click here to submit a comment.

Photos of ABI's Opening Reception and Programming at NCBJ's 2019 Annual Conference Now Available on Flickr!

Attend NCBJ's 2019 Annual Conference in Washington, D.C., last week? Be sure to visit ABI's Flickr page to find pictures from the opening reception and ABI's programming on Nov. 1. Click here to browse.

Former ABI President Releases New Song on Spotify/iTunes

As chair of Pachulski Stang Ziehl & Jones’s post-confirmation practice group, Andy Caine oversees the entire spectrum of claims and avoidance litigation for debtors, creditors' committees, trustees, liquidation or post-confirmation trusts, and defendants, from “mega cases” to smaller, individual matters. He served as ABI President from 2002-03. Andy is also an accomplished musician, singer and songwriter. Earlier this year, he released an EP of his work on Spotify and iTunes. Listen to his newest release, "Promised Land," on Spotify.

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New on ABI’s Bankruptcy Blog Exchange: Purdue Pharma Examiner?

The U.S. Trustee should move for the appointment of an examiner in Purdue Pharma's bankruptcy. That's what Profs. Jonathan Lipson, Stephen Lubben, and Adam Levitin wrote in a letter to the U.S. Trustee for Region 2 this week, according to a recent blog post.

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

 
© 2019 American Bankruptcy Institute
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Alexandria, VA 22314
 

U.S. Consumers Remain on a Spending Streak

ABI Bankruptcy Brief

October 31, 2019

 
ABI Bankruptcy Brief
 
 
NEWS AND ANALYSIS

U.S. Consumers Remain on a Spending Streak

Households increased spending headed into the fourth quarter, suggesting consumers have continued to help prop up U.S. economic growth, the Wall Street Journal reported. Personal-consumption expenditures, or household spending, rose a seasonally adjusted 0.2 percent in September from August, the Commerce Department said today. Outlays rose at a similar pace in August after growing more briskly in the first half of 2019. Consumers are helping lift the economy while manufacturing and business investment falter. They are, however, spending at a less robust pace than last year, aligning with a broader slowdown in economic growth that economists expect to continue. A modest rise in labor costs also helped keep U.S. inflation low in September, suggesting that a pickup in prices over the summer might have been short-lived. (Subscription required.)

In Manufacturing Midwest, Signs of Trouble Amid Good Times

Even as the $21 trillion U.S. economy continues growing and unemployment hovers at a half-century low, factory activity has contracted for two consecutive months, according to the closely watched Institute for Supply Management index, the Washington Post reported. Many consumer-goods makers are still humming. But manufacturers that serve global markets are being buffeted by trade wars and profound uncertainty over the future. Already, plants in several Midwestern states are shedding workers. Manufacturing employment is down by almost 9,000 in Pennsylvania over the past year and 6,800 in Wisconsin. Michigan, Indiana and Minnesota also have lost factory jobs, though in Ohio, assembly lines continue to add them. The president’s tariffs on China, Canada, Mexico and the European Union — and those trading partners’ retaliations against the U.S. — are sapping manufacturers’ strength, economists said. Through August, Wisconsin companies’ exports to China of $822 million were 25 percent less than in the same period in 2018, according to the Census Bureau.



Commentary: Coal Jobs Are About to Take Another Hit as Consumption Continues to Plummet

Before the 2000s, job losses in coal mining were mainly about better mining equipment and the rise of less-labor-intensive above-ground mining operations. For the past decade, though, the main driver has been falling U.S. coal consumption, according to a Bloomberg commentary. Natural gas pushed coal aside to become the main fuel used in electricity generation, and renewables gained ground, even as demand for electricity remained flat. There was a brief uptick in consumption in 2016 and early 2017 as rising natural gas prices drove some utilities to switch temporarily from gas back to coal, but after that the consumption slide resumed. Lately it has even accelerated: In July, according to numbers released last week by the Energy Information Administration, coal consumption was 11.6 percent lower than in July 2018. Yet coal mining employment has held up due to a revival in U.S. coal exports after a global economic slowdown in 2015 and 2016. But the main driver of the employment gains seemed to be that U.S. coal was emerging after years of retrenchment and lots of bankruptcies as a consolidated, leaner industry with a friend in the White House and hopes for better times ahead, according to the commentary. Robert Murray, whose privately held Murray Energy Corp. had bought several bankrupt mining operations, predicted just after President Trump’s inauguration in January 2017 that Trump would put the industry on a path to revival “in three months” thanks to environmental deregulation and resurgent demand from steelmakers and other manufacturers. This week, Murray Energy filed for bankruptcy protection. The biggest U.S. coal miner, Peabody Energy Corp., which emerged from bankruptcy in April 2017, announced a 21.7 percent revenue decline for the quarter ending in September. In its earnings release, Peabody also said it planned to “reweight its investments” away from the U.S. “to capture higher-growth Asian demand.” Some U.S. mine shutdowns and layoffs have been announced already, and all signs point to more cutbacks soon.

Analysis: WeWork Falls Furthest in a Year of Clipped Wings for Hot Startups

WeWork, Lyft, Uber, Peloton: To their early backers, these are companies that would transform the way the world works, works out or gets around. To public stock investors, they are companies with inflated valuations and real questions about when they will start making money. The two views have collided this year, disastrously in WeWork’s case, according to an analysis in the New York Times. After it failed to sell its stock to the public last month, throwing its funding plans into disarray, the company was bailed out Oct. 22 by SoftBank, its largest outside investor. SoftBank’s takeover values WeWork, which leases office space to co-working tenants, at about $7 billion. That is a far cry from the $47 billion that the company was valued at in January. WeWork, which is based in New York, might be the most extreme example of the rebuke that public stock investors have delivered to high-flying start-ups, but it is hardly alone. Across Wall Street, in Silicon Valley and at some of the world’s largest companies, a reckoning is unfolding as valuations slide for the so-called unicorns — start-ups worth at least $1 billion — that everyone was once so eager to buy.

For Seniors Hoping to Age in Place, the Cost of In-Home Care Just Got a Lot More Expensive

A new survey by Genworth Financial found that the fastest-rising long-term care cost is not for the most skilled care at a nursing home or assisted-living facility, but in-home services, the Washington Post reported. Genworth reported that the cost of homemaker services — in which an aide may help with tasks such as cooking, cleaning and running errands — has increased 7.14 percent in the past 12 months. That’s four times the increase in the median cost of a private room in a nursing home, which rose 1.82 percent. The cost of a home health aide — who assists someone in eating, getting dressed or taking medication — increased 4.55 percent. On an annual basis, the median cost for homemaker services is $51,480 based on 44 hours per week ($22.50 an hour). The yearly cost of home health-aide services is $52,624 ($23 an hour). The median yearly cost of care in an assisted-living facility is $48,612.

Judicial Conference’s Public Comment Period for Proposed Rules on SBRA Open Until Nov. 13

On February 19, 2020, the Small Business Reorganization Act of 2019, P.L. 116-54 (SBRA), will go into effect – long before the normal three-year rules amendment process runs its course. As a temporary measure, the Advisory Committee on Bankruptcy Rules has drafted Interim Bankruptcy Rules that can be adopted by courts as local rules or by general order when the SBRA goes into effect. The Advisory Committee has also drafted amendments to the Official Forms to address the SBRA. The Standing Committee now seeks comment on the proposed SBRA rules and forms for a short four-week period prior to making final recommendations.

- Interim Bankruptcy Rules 1007(b), 1007(h), 1020, 2009, 2012(a), 2015, 3010(b), 3011 and 3016.
- Official Forms 101, 201, 309E, 309F, 314, 315, 425A, and new Official Forms 309E2 and 309F2

The comment period is open until November 13, 2019. Because of the short publication period for the Interim Rules and related Official Forms, there will be no public hearings.

Read the text of the proposed amendments and supporting materials.

Written comments are welcome on each proposed amendment. The Advisory Committee on Bankruptcy Rules will review all timely comments, which are made part of the official record and are available to the public. The comment period closes on November 13, 2019. Click here to submit a comment.

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New on ABI’s Bankruptcy Blog Exchange: Fed's Powell Says Revamp of Capital, Liquidity Rules Not under Consideration

Federal Reserve Chairman Jerome Powell said yesterday that he does not think revamping capital or liquidity requirements is necessary, despite recent volatility in the repurchase markets, according to a recent blog post.

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

 
© 2019 American Bankruptcy Institute
All Rights Reserved.
66 Canal Center Plaza, Suite 600
Alexandria, VA 22314
 

Analysis: How a Major U.S. Farm Lender Left a Trail of Defaults, Lawsuits

ABI Bankruptcy Brief

October 24, 2019

 
ABI Bankruptcy Brief
 
 
 
NEWS AND ANALYSIS

Analysis: How a Major U.S. Farm Lender Left a Trail of Defaults, Lawsuits

As the U.S. agricultural economy sours and farmers’ financial woes pile up, BMO Harris Bank is leaving behind a trail of farmers who have lost nearly everything, Reuters reported. The bank, a subsidiary of Canada’s Bank of Montreal, has struggled to recoup some of its investments through a slew of bitter legal fights. The plight of BMO Harris and its customers reflects broader distress in the U.S. farm sector. Farmers are struggling to pay back their loans or obtain new ones. Shrinking cash flow is pushing some to retire early and a growing number of producers to declare bankruptcy, according to farm economists and legal experts. BMO Harris may yet face more defaults, judging by its high level of delinquent loans. At the end of June, nearly 13.1 percent of its farm loan portfolio was at least 90 days late or had stopped accruing interest because the lender doubts the money will be paid back - compared to 1.53 percent for all U.S. farm loans at banks insured by the Federal Deposit Insurance Corporation (FDIC). BMO Harris had the highest rate among the 30 largest FDIC banks, according to a Reuters analysis of loan data the banks reported to the regulator. BMO Harris spokesman Patrick O’Herlihy attributed the high delinquency rates to the bank’s lending in the upper Midwest, where dairy and grain operators have faced serious financial challenges. Sam Miller, BMO Harris’s managing director of agriculture banking, said the bank is keeping a closer eye on its customers with cash-flow shortages and lending to fewer mid-sized operators. ”We have to be more vigilant in underwriting the risk,” Miller said. Some experts and bankruptcy attorneys representing former BMO Harris customers say the bank issued too many loans for too long that farmers simply could not pay back. The problems, they said, stem from the aggressive practices of some loan officers and a lack of oversight by bank auditors.

Public Law 116-51, the Family Farmer Relief Act, raised the eligibility limit for Chapter 12 up to $10 million from about $4 million, and is now in effect.

 

Commentary: Rethinking College — and How to Pay for It

The price of a college education has outpaced both incomes and federal grants, as administrative bloat and cuts in state funding have led private and public institutions to increase their tuition fees, according to a Bloomberg News commentary. For the lowest-income quarter of students, the average annual cost of attendance (including living expenses, net of grants) reached about $11,600 in 2016, roughly 30 percent higher in real terms than in 1996. The federal government has sought to fill the breach with a crazy quilt of loan options, both subsidized and not: Stafford, Perkins, Plus loans for parents, and a system intended to consolidate them all. No matter the choice, those who enroll emerge with increasing debts, which weigh on the economy by impairing graduates’ ability to start families, buy houses and save for retirement. As of June, total student debt stood at an estimated $1.48 trillion, or about 36 percent of disposable income. That’s up from $250 billion, or 12 percent, in 2003. Unfortunately, the benefits of a college education appear to have little to do with what people actually learn, according to the commentary. A 2009 survey across 25 institutions found that four years of college had only a limited effect on critical thinking, complex reasoning and writing. The combination of big debts and low-quality education has caused a lot of financial distress. Those who drop out or attend for-profit schools, or who were simply unlucky enough to graduate into a weak economy, often find themselves with obligations they can’t hope to pay — and can’t discharge in bankruptcy. Proposals to make higher education free for all or forgive student debt would primarily benefit the wealthy, who already account for the majority of college-goers and loans outstanding. Also, debt can be a legitimate way to finance an education that provides a high return. Its growth can even be seen as a positive sign, reflecting Americans’ desire to invest in themselves. Removing public support and letting the market sort things out is not a great option, either. That said, policymakers can take steps to improve the system through access, cost control and quality, according to the commentary.



Don't miss the ABI Talk at ABI's 2019 Winter Leadership Conference on "The Rhetoric and Reality of Student Debt," to be delivered by Inez Feltscher Stepman of the Independent Women’s Forum (Washington, D.C.). Ms. Stepman will examine whether there is too much emphasis on reducing student loan debt, including through bankruptcy, and not enough about the real causes of skyrocketing college costs. For more information on WLC and to register, please click here

Massachusetts AG Sues DeVos over Debt Relief for Corinthian Colleges Students

Massachusetts attorney general Maura Healey filed a lawsuit Tuesday against Education Secretary Betsy DeVos and the Education Department, seeking debt cancellation for 7,200 former Corinthian Colleges students, Inside Higher Ed reported. Healey's office submitted an application for loan relief in 2015 on behalf of those students who attended Everest Institute campuses in Massachusetts. The application was based on a state lawsuit against Corinthian, which found that the for-profit chain had violated the state's Consumer Protection Act. Although a federal court last year found that the group application was a valid submission, the department has yet to agree to rule on the claims. The former Corinthian students have continued to face repayment and in some cases have had tax refunds seized or wages garnished. Healey has argued that Corinthian misled former students by routinely inflating job-placement rates in communications with former students. The Project on Predatory Student Lending at Harvard Law School filed a similar lawsuit on Tuesday on behalf of the same borrowers.

Trouble Is Brewing for American Companies that Gorged on Cheap Credit

Unlike the collateralized debt obligation (CDO), the collateralized loan obligation (CLO) made it through the financial crisis largely unscathed and has boomed in the decade since, Bloomberg Businessweek reported. Fueled by an unprecedented $3.5 trillion wave of private-equity buyout deals that occurred during the past decade, as well as rock-bottom U.S. interest rates that only stoked investors’ willingness to gamble on riskier assets, the CLO market has more than doubled since 2010, to $660 billion. But as odds of a recession in 2020 grow, ratings downgrades could cause a stampede of selling by CLOs, potentially cutting off scores of companies from additional credit, preventing them from refinancing their debt, and threatening their survival. Almost 40 percent of issuers of junk debt (which includes leveraged loans), according to Moody’s, are now rated B3 and lower — a record high. “If there’s no price support for lower-rated loans, that will be reflected over time in new-issue and refinancing markets, which may mean the lowest-quality borrowers lose access to capital markets,” says Andrew Curtis, the head of Z Capital Group‘s credit arm, which manages CLOs and other funds. Volatility in the market could spill over into the high-yield bond market and even send ripples into the broader economy that could deepen or prolong any recession.

Judicial Conference’s Public Comment Period for Proposed Rules on SBRA Open Until Nov. 13

On February 19, 2020, the Small Business Reorganization Act of 2019, P.L. 116-54 (SBRA), will go into effect – long before the normal three-year rules amendment process runs its course. As a temporary measure, the Advisory Committee on Bankruptcy Rules has drafted Interim Bankruptcy Rules that can be adopted by courts as local rules or by general order when the SBRA goes into effect. The Advisory Committee has also drafted amendments to the Official Forms to address the SBRA. The Standing Committee now seeks comment on the proposed SBRA rules and forms for a short four-week period prior to making final recommendations.

- Interim Bankruptcy Rules 1007(b), 1007(h), 1020, 2009, 2012(a), 2015, 3010(b), 3011 and 3016.
- Official Forms 101, 201, 309E, 309F, 314, 315, 425A, and new Official Forms 309E2 and 309F2

The comment period is open until November 13, 2019. Because of the short publication period for the Interim Rules and related Official Forms, there will be no public hearings.

Read the text of the proposed amendments and supporting materials.

Written comments are welcome on each proposed amendment. The Advisory Committee on Bankruptcy Rules will review all timely comments, which are made part of the official record and are available to the public. The comment period closes on November 13, 2019. Click here to submit a comment.

Don't miss the "New Reorganization Hope for Main Street Debtors" ABI Talk by Judge Harner at ABI’s Winter Leadership Conference



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Report: Consumer Class Actions Nearly Tripled in the Past Decade

Lex Machina has issued a report saying that the number of consumer-protection class actions has nearly tripled in the past decade, with cases over data privacy and unwanted text messages behind the increase, the National Law Journal reported. The “Consumer Protection Litigation Report,” released yesterday, is the first of its kind by Lex Machina, a unit of LexisNexis that tracks consumer-protection lawsuits filed in federal courts. Overall, the number of consumer-protection lawsuits rose by less than 20 percent from 2009 through 2018, with a collective 132,000 awarding $34 billion in damages over the past decade. Class actions, however, rose much higher, from 1,223 to 3,382 filings, in the same time frame. Laura Hopkins, a legal data expert at Lex Machina, attributed much of that increase to a rise in data breach cases. “You could classify that as [being that] more catastrophic events are happening to a large group of people,” she said. “There’s more liability in data breach cases, and higher expectations for data security. Also, plaintiffs are seeing that if they come together, they have a little more traction or leverage and media exposure from class actions.”

Commentary: White House Wants to Privatize Fannie and Freddie, but It Needs Wall Street’s Help

The Trump administration wants to put Fannie Mae and Freddie Mac back into private hands after more than a decade in government control, but the path to doing so will likely lead through Wall Street, according to a Wall Street Journal commentary. Before the two mortgage giants can be privatized, they will potentially have to raise billions of dollars from investors, a move that will require big banks to move further into a sticky political issue. Financial firms are already laying the early groundwork. Executives at Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley in recent months have talked with the Treasury Department and Fannie and Freddie’s regulator about how a capital raise could work. There are no indications that the government has begun a formal process for hiring banks on a capital raise, and it could be a hard sell to investors. Still, several, including Bank of America, Citigroup and Goldman, have begun preparing internally to win a role in what could be a landmark event. (Subscription required.)

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New on ABI’s Bankruptcy Blog Exchange: House Passes Bill to Crack Down on Shell Companies

The Corporate Transparency Act would require companies to report their true owners to the Financial Crimes Enforcement Network, removing the burden on banks of collecting beneficial ownership information about their clients, according to a recent blog post.

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

 
© 2019 American Bankruptcy Institute
All Rights Reserved.
66 Canal Center Plaza, Suite 600
Alexandria, VA 22314
 

Judicial Conference Opens Proposed Rules for SBRA for Public Comment

ABI Bankruptcy Brief

October 17, 2019

 
ABI Bankruptcy Brief
 
 
NEWS AND ANALYSIS

Judicial Conference Opens Proposed Rules for SBRA for Public Comment

On February 19, 2020, the Small Business Reorganization Act of 2019, P.L. 116-54 (SBRA), will go into effect – long before the normal three-year rules amendment process runs its course. As a temporary measure, the Advisory Committee on Bankruptcy Rules has drafted Interim Bankruptcy Rules that can be adopted by courts as local rules or by general order when the SBRA goes into effect. The Advisory Committee has also drafted amendments to the Official Forms to address the SBRA. The Standing Committee now seeks comment on the proposed SBRA rules and forms for a short four-week period prior to making final recommendations.

- Interim Bankruptcy Rules 1007(b), 1007(h), 1020, 2009, 2012(a), 2015, 3010(b), 3011 and 3016.
- Official Forms 101, 201, 309E, 309F, 314, 315, 425A, and new Official Forms 309E2 and 309F2

The comment period is open until November 13, 2019. Because of the short publication period for the Interim Rules and related Official Forms, there will be no public hearings.

Read the text of the proposed amendments and supporting materials.

Written comments are welcome on each proposed amendment. The Advisory Committee on Bankruptcy Rules will review all timely comments, which are made part of the official record and are available to the public. The comment period closes on November 13, 2019. Click here to submit a comment.

Commentary: Puerto Rico’s Debt Deal Leaves No Room for Error

Puerto Rico’s Oversight Board has put forward a debt restructuring proposal that, if approved by U.S. District Court Judge Laura Taylor Swain, would allow the commonwealth to emerge from bankruptcy. It promises to make the island’s debt more sustainable and includes necessary protections for pensions and public workers. Yet notwithstanding potential complaints from bondholders, it also leaves no room for error, according to a Bloomberg commentary. Neither does it relieve Congress of its responsibility to support the island’s economic recovery. Prior to the proposed debt-restructuring plan, Puerto Rico had around $50 billion of tax-supported debt. That was far more than the island could afford to pay out of a $70 billion economy. Annual debt service was over 28 percent of Puerto Rico’s revenues, more than five times the average state and three times the average of the 10 most indebted states. A fundamental objective of the board’s debt-reduction plan has been to put the island’s public finances on a sustainable footing to make sure that Puerto Rico isn’t back in bankruptcy 10 years from now. Thus, its plan to restructure the debt would impose haircuts of 28 percent to 36 percent on general obligation and constitutionally guaranteed bonds issued before 2012. Higher haircuts of up to 87 percent would be imposed on subordinated bonds, and bonds issued after 2011 that are being challenged as unconstitutional because they breached the debt limits set in the island’s constitution when they were issued. This would cut Puerto Rico’s tax-supported debt in half, from $50 billion to $25 billion, and keep Puerto Rico’s annual debt service at just under $1.5 billion, or roughly 9 percent of the broadest definition of government revenues.



Reality-TV Show Tries Financial Makeovers for Those with Student Debt

“Going From Broke,” a new reality show created by actor, producer and entrepreneur Ashton Kutcher, looks to illustrate how the financial realities facing young people today are disrupting the traditional ladder to financial success, the Wall Street Journal reported. Kutcher described “Going From Broke”—which will make its debut on Thursday —as a makeover show that includes transformations and reveals, much like the reality programs “Queer Eye” and “The Biggest Loser.” The 10-episode series will stream on Chicken Soup for the Soul Entertainment and Sony Corp.’s Crackle service. Hosts Dan Rosensweig, the chief executive of educational-technology company Chegg Inc., and Danetha Doe, the financial author behind Money & Mimosas, show up with hefty folders and loads of paperwork in tow. They help participants cut credit cards, find new side hustles, restructure student loan payments and otherwise try to figure out what roadblocks are keeping them from their financial goals. “Going From Broke” isn’t the first debt-focused television show; CNBC shows such as “Til Debt Do Us Part” have tackled similar subject matter. “Paid Off,” a truTV game show hosted by Michael Torpey, promises to award contestants the exact amount of their student loan total should they win several rounds of trivia.



Don't miss the ABI Talk at ABI's 2019 Winter Leadership Conference on "The Rhetoric and Reality of Student Debt," to be delivered by Inez Feltscher Stepman of the Independent Women’s Forum (Washington, D.C.). Ms. Stepman will examine whether there is too much emphasis on reducing student loan debt, including through bankruptcy, and not enough about the real causes of skyrocketing college costs. For more information on WLC and to register, please click here

Bank Regulators Present Dire Warning of Financial Risks from Climate Change

Home values could fall significantly, banks could stop lending to flood-prone communities, and towns could lose the tax money they need to build sea walls and other protections: These are a few of the warnings published today by the Federal Reserve Bank of San Francisco regarding the financial risks of climate change. The collection of 18 papers by outside experts amounts to one of the most specific and dire accountings of the dangers posed to businesses and communities in the U.S. — a threat so significant that the nation’s central bank seems increasingly compelled to address it. In a letter to Sen. Brian Schatz (D-Hawaii) this year, Fed Chair Jerome H. Powell wrote that the Fed takes “severe weather events” into account in its role as a financial supervisor. Meanwhile, the San Francisco branch of the Federal Reserve — which is responsible for banking oversight across a major swathe of the American West — has been more blunt, writing this past March that volatility related to climate change has become “increasingly relevant” as a consideration for the central bank. With today’s actions, the San Francisco Fed has taken a further step. The research, conducted by 38 academics and practitioners from around the country and published with the knowledge of the Fed’s board of governors, presents in precise language a dire picture of the risks of a changing climate, and warns that local governments don’t have the means to deal with them.

U.S. Trustee Program Making Adjustments to Implement HAVEN Act and Small Business Reorganization Act, According to October ABI Journal Article

The U.S. Trustee Program (USTP) is adjusting its responsibilities to implement the Helping American Veterans in Extreme Need (HAVEN) Act and Small Business Reorganization Act (SBRA), according to an article in the October ABI Journal. Both statutes were signed into law by President Donald Trump on Aug. 23, 2019, with the HAVEN Act becoming effective immediately and the SBRA effective Feb. 19, 2020. “The HAVEN Act and SBRA represent efforts to expand the availability of bankruptcy relief to different populations of debtors,” write Adam D. Herring and Walter W. Theus of the Executive Office for U.S. Trustees (Washington, D.C.) in their article “New Laws, New Duties.” “Along with that expansion, the USTP will continue to uphold its statutory duties to prevent abuse and provide effective oversight across the bankruptcy system.” Click here to read the full article.

Don't miss the "New Reorganization Hope for Main Street Debtors" ABI Talk by Judge Harner at ABI’s Winter Leadership Conference



To register for the conference, please click here.

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New on ABI’s Bankruptcy Blog Exchange: Supreme Court Is Yet to Decide if It Will Take CFPB Case

A list of upcoming cases published by the high court did not include a challenge to the bureau's constitutionality, but the justices could still decide to review it at a later date, according to a recent blog post.

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

 
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All Rights Reserved.
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Alexandria, VA 22314
 

NY Fed Analysis: Who Borrows for College — and Who Repays?

ABI Bankruptcy Brief

October 10, 2019

 
ABI Bankruptcy Brief
 
 
 
 
NEWS AND ANALYSIS

NY Fed Analysis: Who Borrows for College — and Who Repays?

Student loans neared $1.5 trillion in the second quarter of 2019, a more than fivefold increase since the beginning of 2003, according to a recent New York Fed analysis. The rapid growth was fueled by increases in both the number of borrowers — there are approximately 43 million borrowers in 2019, compared with only 19 million in 2003 — as well as a near tripling of the average balance per borrower, a rise to $33,500 in 2019 from $13,300 in 2003. Although these factors explain the rapid growth of aggregate student debt, there remains a large number of borrowers with smaller balances. The distribution of borrowers by balance reflects this; the median balance among borrowers is just under $18,000. About 33 percent of borrowers have balances below $10,000, and 20 percent of borrowers have a balance of more than $50,000. Only a small percentage — 7 percent, or about 2.9 million borrowers — have a balance of over $100,000. Repayment on student loans has been slow, with high delinquency and default rates. Overall, 15 percent of borrowers in the second quarter of 2019 were 90 or more days past due or in default on a student loan. That share reflects an improvement from 2013, when it peaked at more than 17 percent. In addition to delinquency, other factors contribute to slow repayment patterns, such as more accommodating repayment plans, forbearance and deferment. Tellingly, only about 36 percent of borrowers who were still current on their loans in the second quarter of 2019 had reduced their balances over the past 12 months.



Don't miss the ABI Talk at ABI's 2019 Winter Leadership Conference on "The Rhetoric and Reality of Student Debt," to be delivered by Inez Feltscher Stepman of the Independent Women’s Forum (Washington, D.C.). Ms. Stepman will examine whether there is too much emphasis on reducing student loan debt, including through bankruptcy, and not enough about the real causes of skyrocketing college costs. For more information on WLC and to register, please click here

Employers Try a New Perk: Matching Student Loan Payments with 401(k) Contributions

Many workers with student loans postpone saving for retirement. Now, a handful of companies are trying to prevent them from falling behind on retirement savings by matching their student-loan repayments with contributions to 401(k) plans, the Wall Street Journal reported. In recent months, companies including Abbott Laboratories, Travelers Cos. and Raytheon Co. have either launched or announced plans for such programs. The companies join a growing number of others that are helping workers reduce student debt in other ways, including making direct payments to lenders. Eight percent of the 2,763 employers the Society for Human Resource Management surveyed in April offered assistance with student loans, up from 4 percent in 2018 and 3 percent in 2015. According to a survey of 250 companies last year by the Employee Benefit Research Institute, 11 percent of employers offered student-loan repayment subsidies and another 13 percent planned to add it.



Veterans Affairs Department Refunds $400 Million in Mistaken Home Loan Fees

Veterans Affairs officials have paid out more than $400 million in refunds of home loan funding fees in the wake of an inspector general’s report that tens of thousands of veterans were improperly tagged with extra costs when applying for the loans, the Military Times reported. Department officials said that they reviewed 130,000 cases over the summer to look for errors, which mostly involved simple clerical mistakes or disability ratings changes after veterans settled on their loans. Under existing rules, veterans and service members must pay a VA funding fee when they apply for a VA home loan, which costs anywhere between 0.5 percent and 3.3 percent of total money lent. The money is designed to defray some administration costs for the department, although disabled veterans are exempt from the fee. However, an inspector general report released earlier this year found that at least 53,000 disabled veterans had been charged the fees in recent years. VA officials announced in May that they would review current and past loans, and contact veterans eligible for refunds. In a statement, VA Secretary Robert Wilkie said the effort stretched back as far as 20 years ago. “Our administration prioritized fixing the problems and paid veterans what they were owed.”

Credit Card Delinquencies in U.S. on Rise for Smaller Issuers

Newly released data from the Federal Reserve shows that despite a 50-basis-point decline in the U.S. 10-year note yield since late July, the average interest rate on credit cards continues to hover close to record levels, Bloomberg News reported. The U.S. prime lending rate, the rate that commercial banks charge their most credit-worthy customers, has fallen thanks to easier Fed monetary policy. But the spread between the prime rate and the average annualized rate on credit cards widened to a record level at the end of August, because many issuers have been competing for new customers with richer rewards rather than lower rates. They may also be maintaining this record spread because risks are brewing, underscored by a pick-up in delinquency rates at smaller issuers of cards. Fed data show a growing gap between delinquency rates for the 100 largest banks compared with all others. Delinquent accounts for the largest banks were at 2.44 percent in the second quarter, while other banks saw the rate spike to 6.34 percent from 5.73 percent the prior quarter.

Analysis: Unreadable Fine Print in Leveraged Loans Sparks Market Backlash

Some of the largest investors in the $1.2 trillion market for risky corporate loans say that they’re being given too little time to comb through the hundreds of pages of documents that govern the deals, leaving them exposed to potentially dangerous loopholes, Bloomberg News reported. Now, many are urging the industry’s main trade group to do something about it. GSO Capital Partners, the credit arm of Blackstone Group Inc., is working with roughly a dozen other buy-side firms, as well as underwriters including JPMorgan Chase & Co. and Bank of America Corp., to propose new industry standards. Money managers often have only a day or two to sift through reams of loan documentation before deciding how much to buy — a timetable intentionally set up by borrowers seeking the best possible terms. The pushback follows a number of high-profile transactions in which private-equity sponsors took advantage of weak investor protections to shift assets and cash flow out of reach of creditors, catching them off-guard and fueling bitter clashes. “A 24-hour shot clock is obviously too short of a window to effectively go through these documents,” said Bill Housey, a senior portfolio manager at First Trust Advisors, who is not involved in the discussions. “If assets or collateral can be stripped from lenders through various loopholes, we want to make sure we are paying very close attention upfront.” The GSO-led group, which was created in June as a subcommittee of the Loan Syndications and Trading Association, is discussing a proposal to update guidance that the industry group first issued nearly 15 years ago. The market for leveraged loans has roughly doubled in size over the past decade as investors looking for higher returns piled into riskier debt. Borrowers have been able to chip away at traditional investor protections amid the surging demand for deals. That has left some of the largest private-equity firms in a tug of war with their own credit arms over deal terms.

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New on ABI’s Bankruptcy Blog Exchange: Agencies Sign Off on Final Volcker Rule Changes

The Volcker Rule reforms will result in significant changes to the proprietary trading ban first proposed by former Federal Reserve Chairman Paul Volcker and mandated in the Dodd-Frank Act, according to a recent blog post.

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

 
© 2019 American Bankruptcy Institute
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Alexandria, VA 22314
 

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