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Bankruptcy Brief

In the Decade Since Madoff, Ponzi Schemers Try New Tactics

ABI Bankruptcy Brief

September 26, 2019

 
ABI Bankruptcy Brief
 
 
NEWS AND ANALYSIS

In the Decade Since Madoff, Ponzi Schemers Try New Tactics

It has been more than 10 years since Bernard L. Madoff was caught running the biggest Ponzi scheme in history, a case that became a cautionary tale for investors and a call to action for regulators. The Securities and Exchange Commission made changes in its enforcement division to better detect fraud, established specialized teams and even revamped its system for handling tips from the public. But the prosecution of Madoff — who took investors for more than $50 billion — was not the Ponzi case to end all Ponzi cases. The SEC brought 50 percent more Ponzi prosecutions in the decade after Madoff’s arrest than in the 10 years before, according to a New York Times analysis of the agency’s enforcement announcements. Whether the increase is the result of enhanced enforcement or a proliferation of scammers, records show that Ponzi victims lost $31 billion in the decade beginning 2009, more than three times the amount lost in non-Madoff schemes in the previous decade. (The figures are not adjusted for inflation.) Half the 291 cases brought in the past decade involved schemes promoting nontraditional products. In the decade before the Madoff case, about 38 percent did. “Fraudsters are trying to wrap themselves in new products to garner the attention of investors,” said Jeff Boujoukos, director of the SEC’s Philadelphia regional office. It’s not the only way that scammers have sought to distinguish themselves. Some victims said they had been fooled by pitches offering modest returns, which made them seem more believable than promises of astronomical profits.

Marijuana Banking Bill Expected to Gain Traction in Senate

The Senate is poised to take up legislation to boost the nation’s booming cannabis industry, with its backers feeling bullish and selling it as a bill that is more about banking than marijuana, Politico reported. Their confidence follows action in the House yesterday, where Democrats and Republicans joined forces to pass a historic bill that would give legalized marijuana businesses access to banking services. Senate Republicans are expected to act as lawmakers face the inescapable reality of the 33 states and counting that have legalized marijuana in some form. The strongest indicator has come from Senate Banking Committee Chairman Mike Crapo (R-Idaho), who, after months of weighing the issue, said that he wants to advance the legislation. “It’s a problem that keeps coming up,” Sen. Marco Rubio (R-Fla.) said. “I think you can be against marijuana and still understand that if it’s going to be a legalized product, we need to be able to control it through our banking system.” It’s with that dichotomy in mind that advocates are approaching the Senate. Champions of the legislation proved in the House that it was possible to build a broad, bipartisan coalition to retool marijuana laws, even as many Republicans resist legalization and the drug remains illegal at the federal level. The House legislation wouldn’t change the legal status of cannabis but would shield banks and insurers from penalties if they choose to serve the industry in states where it has become lawful.



Analysis: Big Banks Loom over Fed Repo Efforts

The dominance of big firms trading in the overnight market for cash loans is hampering Federal Reserve efforts to calm short-term funding markets, the Wall Street Journal reported. Activity in the market for repurchase agreements, or repos, where banks and investors seek more than a trillion dollars in cash loans every day, has increasingly concentrated at large banks. When those banks hoard reserves, it can drive borrowing costs higher for smaller firms, according to a study by Fed economists published last year. The five largest banks hold more than 90 percent of the supply of total reserves, and a more even distribution would help cushion against such shocks, the study found. That is one challenge confronting Fed officials as they try to get funds flowing through the financial system following last week’s surge in overnight interest rates, which climbed as high as 10 percent. As the Fed has increased lending in the repo market, it is reliant on a small group of bond dealers to recirculate that money through the financial system, increasing opportunities for channels to get clogged.

Commentary: How the Impeachment Process Could Impact the Stock Market

With House Speaker Nancy Pelosi's announcement of a formal Trump impeachment inquiry, stock markets don't seem fazed, according to a Fortune commentary. After Richard Nixon's near impeachment, only put off by his resignation, the S&P 500 saw a 33 percent drop in value according to data compiled and sent to Fortune by LPL Financial. But the index shot up more than 39 percent after the House impeached Bill Clinton and the Senate failed to remove him. The difference, according to a note from LPL Financial senior market strategist Ryan Detrick, is where the economy already was: "The economy was headed into a vicious recession in the mid-'70s, while the economy was humming along in the late 1990s." Things are more mixed these days, with growth still happening but various worrying signs visible. A number of financial professionals who sent notes to Fortune largely thought things would be stable in the long run.

Bankruptcy Judge Vacancy for the District of Kansas

The U.S. Court of Appeals for the Tenth Circuit is seeking applications for a bankruptcy judgeship in the District of Kansas. Bankruptcy judges are appointed to 14-year terms pursuant to 28 U.S.C. §152. The position is located in Wichita, Kan., and will be available July 1, 2020, pending successful completion of a background investigation. For more information on how to apply, please click here.

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New on ABI’s Bankruptcy Blog Exchange: Plan-Confirmation Standards Under Small Business Reorganization Act of 2019

The Small Business Reorganization Act of 2019 is said to provide a “Chapter 12-type” reorganization opportunity for small businesses within chapter 11, even though standards for confirmation of a plan under the SBRA follow chapter 11, not chapter 12, 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: High-Dose Opioid Pills Helped Fuel Purdue Pharma’s Growth

ABI Bankruptcy Brief

September 19, 2019

 
ABI Bankruptcy Brief
 
 
NEWS AND ANALYSIS

Analysis: High-Dose Opioid Pills Helped Fuel Purdue Pharma’s Growth

Purdue Pharma LP’s bankruptcy filing this week punctuates a fall from its perch as one of the pharmaceutical industry’s most recognizable marketers of opioid pain pills, according to an analysis in the Wall Street Journal. At its height, Purdue’s signature OxyContin product notched billions of dollars in annual sales, fueled in part by booming demand for high-dose pills. Purdue made about 10% of pills containing oxycodone — the active ingredient in OxyContin — that were purchased by U.S. pharmacies from 2006-12, according to a Wall Street Journal analysis of opioid sales data maintained by the U.S. Drug Enforcement Administration. But when taking into account the dosage strength of each pill, OxyContin represented a market-leading 27% of total oxycodone sold during the seven-year period reviewed by the Journal. High-dose pills are more prone to abuse, according to physicians and public health and law enforcement officials. The sales data were obtained by plaintiffs’ attorneys representing municipalities in cases against Purdue and other pharmaceutical-supply-chain players for their alleged roles in the opioid crisis, and made public as the result of a lawsuit brought by the Washington Post and HD Media. Purdue and the Sackler family that owns it are trying to resolve some 2,600 lawsuits from states, cities and counties that accuse the company of helping spark the nation’s opioid crisis through its aggressive marketing. Purdue and family members named in lawsuits have broadly denied the allegations and have said they are committed to helping curb opioid addiction.

Usury Lawsuits Put Future of a $563 Billion Bond Market at Risk

A pair of lawsuits targeting entities that JPMorgan Chase & Co. and Capital One Financial Corp. use to bundle credit card loans into bonds could threaten the future of the $563 billion market for debt backed by consumer obligations, Bloomberg News reported. At issue is whether credit card interest rates can be considered usurious. A Civil War-era piece of legislation has long shielded national banks from having to comply with state regulations, some of which cap the maximum rate on loans at as little as 5 percent. But borrowers are arguing that the packaging of credit card debt into notes to sell to investors removes it so far from a bank that the shield shouldn’t apply. The defendants say the suits are baseless because banks still maintain customer relationships and charge interest — even if they’ve bundled rights to receive the interest into securities. Should the plaintiffs prevail, the ruling would chill the market for bonds tied to consumer loans, industry groups say, forcing banks to keep more risk on their balance sheets and stifling their ability to extend credit. The fallout could ultimately extended to the $9 trillion mortgage-backed securities market, causing home loans to fall under a patchwork of state regulations, they warn.



Wall Street Banks Look to Sell More Research to Companies

Goldman Sachs and Morgan Stanley are going head-to-head with the likes of Bain and McKinsey, hoping to sell research services to companies to offset big falls in demand from their traditional clients in asset management, the Financial Times reported. Historically, the reams of research and economic analysis produced by Wall Street’s army of “sellside” analysts has been targeted at hedge funds and fund managers — the “buyside” in industry jargon. But investment groups have come under ferocious fee pressure in recent years and are trying to cut down on costs. At the same time, new regulations stemming from the EU — which have washed over the U.S. — have required banks to charge investors for the research they provide, rather than bundling the cost into commissions for trading. Research divisions within banks often have staffing and resources that dwarf the biggest think tanks and consultancies, churning out huge amounts of industry, economic and financial research, from simple stock recommendations to machine-learning-driven analyses of corporate sentiment. Total commissions paid by U.S. fund managers, covering both research and trading, came to almost $8 billion last year, according to Greenwich Associates, down from a peak of $14 billion in 2009.

Op-Ed: Fed Chairman Jerome Powell Masters the Art of Saying Nothing

Asked Wednesday when the Federal Reserve would be done cutting interest rates, Chairman Jerome Powell answered, “When we think we’ve done enough.” Reminiscent of Supreme Court Justice Potter Stewart’s definition of pornography — “I know it when I see it” — Mr. Powell’s answer was crafted both to convey the imprecision of the task and avoid tying him down with specifics, according to an op-ed in the Wall Street Journal. Indeed, pressed throughout his press conference on what the Fed would do next, he gave variations of that non-answer. Did the Fed have a “bias” on which way rates would move next? He answered, “We made one decision, to lower the federal-funds rate by a quarter of a percentage point.” The immediate reason for this studied unhelpfulness is that the principal risk to the economy — a trade war between the U.S. and China — is impossible to forecast. But there is a larger purpose too: Talking less about the Fed’s intentions minimizes miscommunication while maximizing flexibility when economic and trade-war developments change, according to the op-ed.

Report: Cleanup of Abandoned Oil, Gas Wells Could Cost U.S.

U.S. taxpayers could face potentially hundreds of millions of dollars in cleanup costs from abandoned oil and gas wells on public lands, a government watchdog agency said Wednesday, the Washington Post reported. The Government Accountability Office said in a report that it identified almost 2,300 wells that have not produced oil and gas since 2008 and have not been reclaimed. The report said bankruptcies by well operators could saddle the government with $46 million to $333 million in reclamation liabilities. The wide range reflects the unknown costs of cleaning up the sites. To avoid such a scenario, GAO recommended that officials adjust the amount of bonds companies must post before drilling to better reflect possible cleanup costs. Current rules allow companies to post bonds of $150,000 to cover their wells nationwide. Abandoned wells have been a major issue across much of the West, including Wyoming, where companies have abandoned almost 6,000 oil and gas wells since 2014 amid low natural gas prices that led to a bust in the coal-bed methane industry. U.S. Rep. Raul Grijalva of Arizona, who had requested that GAO investigate oil and gas bonding practices, said the results underscore the need for an overhaul of federal bonding rules. “Much to the pleasure of the oil and gas industry, bond amounts have been ignored for decades, resulting in levels today that are woefully inadequate,” said Grijalva, who chairs the House Natural Resources Committee. (Subscription required.)

U.S. Housing Starts Rose Significantly in August

Home building in the U.S. increased in August to the highest level since June 2007, according to Commerce Department data released Wednesday, the Wall Street Journal reported. The report cues a positive note for the American housing industry in what has been a year marked by lagging home sales and sluggish single-family construction. Housing starts, a measure of new-home construction, climbed 12.3 percent in August from the prior month to a seasonally adjusted annual rate of 1.364 million. “The new-home market is getting a boost this year from lower mortgage rates and the extremely low levels of supply for existing homes.” said Ben Ayres, senior economist at Nationwide. Economists had forecast that starts rose 4.1% to an annual pace of 1.24 million last month. Despite the August jump in housing starts, the market is playing catch-up, said National Association of Home Builders economist Robert Dietz, because single-family housing starts year-to-date are still down 2.7% Housing-starts data are volatile from month to month and can be subject to large revisions. August’s 12.3% increase for starts came with a margin of error of 10.2 percentage points. More broadly, home construction has been weak this year. In the first eight months of 2019, starts were down 1.8% compared with the same period in 2018.

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New on ABI’s Bankruptcy Blog Exchange: Student Loans Are Not the No. 1 Source of Millennials' Debt

A recent blog post discusses the results of a survey that found that, excluding mortgages, millennials carry an average of $28,000 in personal debt, most of it on credit cards.

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- The Small Business Reorganization Act Arrives in February 2020; Here's What You Need to Know

ABI Bankruptcy Brief

September 12, 2019

 
ABI Bankruptcy Brief
 
 
NEWS AND ANALYSIS

Commentary: The Small Business Reorganization Act Arrives in February 2020; Here's What You Need to Know

With President Trump’s signature on Aug. 23, the "Small Business Reorganization Act of 2019" (SBRA) will officially take effect in February 2020. The SBRA is designed to fill a gap in the current bankruptcy laws by providing a framework for small businesses to successfully reorganize in bankruptcy court, according to a recent commentary in the National Law Review. Under the SBRA, the Bankruptcy Code will be amended to ease the procedural burden on small businesses seeking reorganization. The SBRA amends the Bankruptcy Code with the addition of a new subchapter V to chapter 11, defining a small business debtor as an entity with an aggregate of noncontingent liquidated secured and unsecured debt of not more than $2,725,625. The SBRA mandates that a standing trustee be appointed in every small business chapter 11, similar to the existing statutes for chapter 12 and chapter 13. Among other provisions, the new subchapter will now allow a small business to confirm a plan over the objections of creditors, which is a significant change and should greatly increase the overall success rate for small businesses.



Also, don't miss the ABI Talk at the Winter Leadership Conference on Dec. 6, "New Reorganization Hope for Main Street Debtors," to be delivered by Bankruptcy Judge Michelle Harner (D. Md.; Baltimore). Register here.

Student Borrowers ‘Preyed Upon’ by Loan Servicers, but Lawmakers Want to Change That

A House Financial Services Committee hearing on Tuesday tackled the issue of student lending and its ramifications for 45 million American student loan borrowers, CNBC.com reported. Both Democrats and Republicans on the committee agreed there are problems with the current student lending system. Specifically, lawmakers and consumer advocates criticized student loan servicing companies such as Navient, saying that student borrowers need more assistance and protections from these for-profit corporations. Democrats unveiled eight draft bills on Tuesday for discussion that would, among other things, establish a student borrowers’ bill of rights, strengthen credit-reporting standards, block debt collectors from unfairly going after student borrowers, protect private student loan borrowers and help borrowers with student debt purchase their first home. Seth Frotman, executive director of the Student Borrower Protection Center, says that student loan borrowers have a “bullseye” on their back and are subjected to “predatory tactics” from servicing companies from the day they take out their loan until the day they pay it back. He claims that’s because student borrowers have less rights than nearly any other type of borrower. “You have more protections if you’re paying back your credit card or your mortgage,” Frotman said.



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

More Americans Going Without Health Coverage Despite Strong Economy, Census Bureau Finds

The proportion of Americans without health insurance grew significantly last year for the first time this decade, even as the economy’s strength pushed down the poverty level to its lowest point since 2001, according to federal data released on Tuesday, the Washington Post reported. The finding that 27.5 million U.S. residents lacked coverage in 2018, based on a large U.S. Census Bureau survey, reverses the trend that began when the Affordable Care Act expanded opportunities for poor and some middle-income people to get insurance. Taken together, the census numbers paint a portrait of an economy pulled in different directions, with the falling poverty rate coinciding with high inequality and the growing cadre of people at financial risk because they do not have health coverage. As more Americans found jobs, the poverty rate fell last year to its lowest level since 2001, and middle-class income inched marginally higher. Median U.S. income — the point at which half of U.S. families earn more and half earn less — topped $63,000 for the first time, although it was roughly the same level as it was 20 years ago, after adjusting for inflation.



An article in the Summer 2019 edition of the ABI Law Review found that individuals who experienced a gap in medical care coverage over a two-year period were roughly twice as likely to file for bankruptcy as those who retained continuous coverage. Click here to read the article. A forthcoming podcast will feature the authors, Profs. Brook E. Gotberg of the University of Missouri School of Law (Columbia, Mo.) and Prof. Michael D. Sousa of the University of Denver Sturm College of Law (Denver, Colo.), discussing their research.

U.S. Consumer Prices Rose 0.1 Percent in August

U.S. consumer prices rose slowly in August, held down by weak energy prices that masked a broader firming in price pressures, the Wall Street Journal reported. The consumer-price index, which measures what Americans pay for items from fresh whole milk to lawn-care services, rose a seasonally adjusted 0.1 percent in August from a month earlier, matching economists’ expectations. The sluggish pace of overall price growth largely reflected a decline in energy prices. Core consumer prices, which exclude the volatile categories of food and energy, increased 0.3 percent from the previous month. This marked the third straight monthly increase of 0.3 percent and an uptick from earlier in 2019. Prices for a wide array of goods and services rose last month. Rent and medical prices were among the drivers behind stronger inflation in August.

Need Cash? Companies Are Considering Magazine Subscriptions and Phone Bills When Making Loans

For decades, banks and other financiers have relied primarily on consumers’ borrowing history to make lending decisions. Now revenue-hungry companies are considering metrics both mundane and peculiar, like whether applicants shop at discount stores, subscribe to magazines or pay their phone bills on time, the Wall Street Journal reported. Those experimenting with new metrics range from big-name banks like Goldman Sachs Group Inc., Ally Financial Inc. and Discover Financial Services to upstart financial-technology firms. The changes are an about-face for many banks, which have spent much of the decade since the financial crisis chasing mostly ultra-creditworthy customers. But that pool is only so big. The field of potential new borrowers is huge: About 53 million U.S. adults don’t have credit scores, according to Fair Isaac Corp., creator of the widely used FICO scores. Another roughly 56 million have subprime scores. Some have a checkered borrowing history or high debt loads. But others, banks point out, just don’t have traditional borrowing backgrounds, often because they are new to the U.S. or pay for most expenses with cash. Government officials at times have encouraged or even required changes to the information in credit reports and scores, reasoning they would bring loans to deserving borrowers who might not fit a traditional mold.

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New on ABI’s Bankruptcy Blog Exchange: Specific Benefits Protected Under the HAVEN Act

A recent blog post explored the specific benefits protected under the Honoring American Veterans in Extreme Need Act of 2019 (HAVEN Act), which was signed into law by President Trump on Aug. 23.

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
 

GAO Finds Expanded Student Loan Forgiveness Program Still Rejecting Most Applicants

ABI Bankruptcy Brief

September 5, 2019

 
ABI Bankruptcy Brief
 
 
NEWS AND ANALYSIS

GAO Finds Expanded Student Loan Forgiveness Program Still Rejecting Most Applicants

The Government Accountability Office (GAO) released a report today finding that the vast majority of applicants to a program designed to forgive student loans for public servants are still being denied, despite an effort from Congress to expand the program, The Hill reported. The GAO found that just 661 out of 54,184 requests, or 1 percent, for the new Temporary Expanded Public Service Loan Forgiveness (TEPSLF) program were accepted in its first year, from May 2018 to May 2019. Congress created the expansion program to the Public Service Loan Forgiveness (PSLF) last year after an outcry that the system's requirements were so rigid and poorly communicated that lawmakers needed to step in. The expansion program also came in response to a report from the GAO last year finding a PSLF rejection rate of 99 percent. PSLF was created in 2007 to forgive the remainder of federal student loan debt for graduates who pay loans for 10 years and work in a qualifying job for the government or a nonprofit. The program has been under intense scrutiny since last year's GAO report, and this summer the American Federation of Teachers filed a lawsuit over its failure. This year's GAO report recommends that the Education Department streamline the TEPSLF and PSLF application process and improve transparency with borrowers about the program's process and requirements.



The House Financial Services Committee will hold a hearing next Tuesday titled, "A $1.5 Trillion Crisis: Protecting Student Borrowers and Holding Student Loan Servicers Accountable." For more information, please click here.

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

PG&E Seeks More than $14 Billion in Equity in Restructuring Plan

PG&E Corp. is floating a restructuring plan that calls for more than $14 billion in equity commitments — while giving no clear picture of what its liabilities may be, Bloomberg News reported. In a draft term sheet, PG&E laid out a reorganization proposal that would have it exiting the largest utility bankruptcy in U.S. history next year by using a mix of debt and equity to cover the costly claims it faces from wildfires that its equipment ignited. The company fell short, however, of giving an actual estimate for those claims, and the plan is due to be filed on Monday. PG&E, California’s largest electric utility, was forced to seek chapter 11 protection in January to deal with claims tied to deadly blazes that devastated Northern California in 2017 and 2018. It warned at the time that its liabilities may exceed $30 billion. The company is now rushing to come up with a plan to cover the costs as bondholders including Pacific Investment Management Co. and Elliott Management Corp. try to pitch their own proposal that would all but wipe out the stake of current shareholders.



Fed Officials Warn the Consumer Is Alone in Carrying U.S. Economy

Federal Reserve officials are weighing two competing forces in the U.S. economy: the resilience of the consumer versus the fallout from uncertainty around trade disputes and weaker global growth, Bloomberg News reported. “The consumer is now carrying all of the weight, or much of the weight, for growth going forward,” Federal Reserve Bank of New York President John Williams said during a speech yesterday. “One thing, though, about consumer spending that you have to be careful about is it’s not really a leading indicator.” As threats from U.S./China trade tensions have chilled business confidence and investment, consumers have been the main drivers of growth. There’s weakness surfacing in manufacturing and concerns brewing in financial markets that the world economy may be heading toward recession. The theme was echoed later on Wednesday by Dallas Fed chief Robert Kaplan, who told an audience in Toronto that he was watching to see whether weak macroeconomic data will filter into consumer attitudes. Kaplan, who isn’t a voter on the Federal Open Market Committee this year, said that if policymakers wait for consumer spending to weaken, it might be too late.

Small Business Hiring Increased in August

A great U.S. job market for workers at small firms got a little better in August, according to the latest monthly employment survey from the National Federation of Independent Business, the Wall Street Journal reported. “Job creation picked up in August, with an average addition of 0.19 workers per firm compared to 0.12 in July," reports NFIB Chief Economist William Dunkelberg. Given that small businesses are still trying to hire more workers, Dunkelberg said that it is “hard to call it a ‘recession’ when job openings still exceed job searchers.” Amid the ongoing American worker shortage, the NFIB report also finds that business owners are not giving up the search for new talent. Friday’s government jobs report will provide a snapshot of the broader economy. (Subscription required.)

Freddie Mac: Mortgage Rates Drop to Another 3-Year Low

Once again, the average U.S. rate for a 30-year fixed mortgage fell to another three-year low this week, according to the latest Freddie Mac Primary Mortgage Market Survey, HousingWire.com reported. According to the company’s data, the 30-year fixed-rate mortgage averaged 3.49 percent for the week ending today, down from last week’s rate of 3.58 percent. Unsurprisingly, this average is nearly an entire percentage point lower than the 2018 average rate of 4.54 percent. The five-year Treasury-indexed hybrid adjustable-rate mortgage averaged 3.3 percent, slipping from last week’s rate of 3.31 percent. This rate sits significantly lower than the same week in 2018, when it averaged 3.93 percent.

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New on ABI’s Bankruptcy Blog Exchange: Why the CFPB’s Payday Rule Is in the Hands of a Texas Judge

Consumer Financial Protection Bureau Director Kathy Kraninger is under pressure to ask a federal judge to lift a stay that has kept the agency's short-term-lending rule from going into effect, 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
 

Miss Yesterday’s Webinar Examining New Bankruptcy Laws? Replay Available!

ABI Bankruptcy Brief

August 29, 2019

 
ABI Bankruptcy Brief
 
 
NEWS AND ANALYSIS

Miss Yesterday’s Webinar Examining New Bankruptcy Laws to Help Distressed Small Businesses, Disabled Veterans and Family Farmers? Replay Available!

Experts participated on an ABI Media Webinar yesterday that provided an overview of the recently enacted “Small Business Reorganization Act of 2019” (H.R. 3311), “HAVEN Act” (H.R. 2938) and “Family Farmer Relief Act of 2019” (H.R. 2336). President Donald J. Trump on Aug. 23 signed the bipartisan bills into law. The webinar features:

Robert J. Keach of Bernstein, Shur, Sawyer & Nelson (Portland, Maine) discussing SBRA. Keach testified on ABI’s behalf in support of H.R. 3311, H.R. 2938 and H.R. 2336 before the House Judiciary Committee Subcommittee on Antitrust, Commercial and Administrative Law on June 25.

Kristina Stanger of Nyemaster Goode, P.C. (Des Moines, Iowa) and Jessica Hopton Youngberg of the Veterans Legal Services Clinic at the New England Center & Home for Veterans in Boston, both members of ABI's Veterans' Affairs Task Force, discussing the HAVEN Act.

Joseph A. Peiffer of Ag & Business Legal Strategies (Cedar Rapids, Iowa) and Donald L. Swanson of Koley Jessen (Omaha, Neb.), both with more than 30 years of experience in bankruptcy and agricultural law, discussing the Family Farmer Relief Act.

ABI Executive Director Samuel J. Gerdano moderated the webinar. To watch the replay, please click here.
 

Commentary: Private Equity's Abuse of Limited Liability*

One of the central features of the Stop Wall Street Looting Act that was introduced by Sen. Elizabeth Warren and a number of co-sponsors is a targeted rollback of limited liability, according to a CreditSlips blog post by Prof. Adam Levitin of Georgetown University Law. This provision, more than any other, has gotten some commentators’ hackles up, even those who are willing to admit that there are real problems in the private-equity industry and who welcome some of the other reforms in the bill. The idea that limited liability is a sine qua non of the modern economy is practically Gospel to most business commentators. These commentators assume that without limited liability, no one will ever assume risks, such that any curtailment of limited liability is a death sentence for the private-equity industry, but they're wrong, according to Levitin. Limited liability is a substantial, regressive cross-subsidy to capital at the expense of tort creditors, tax authorities and small businesses. Limited liability is a relic of the underdeveloped financial markets of the Gilded Age and operates as an implicit form of leverage provided by law, according to Levitin. But it’s hardly either economically efficient or necessary for modern business activity.



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

Latest ABI Podcast Features Experts Discussing Consumer Commission's Recommendations on Discharge Violations, Attorney Competency and Lawyer Misconduct

ABI's latest podcast features members of ABI's Commission on Consumer Bankruptcy discussing recommendations from the Final Report looking at remedies for discharge violations, attorney competency and remedying lawyer misconduct. Commissioner Rudy Cerone of McGlinchey Stafford, PLLC, (New Orleans) moderates the discussion with fellow Commissioners Tara Twomey of the National Consumer Law Center (San Jose, Calif.) and Richardo Kilpatrick of Kilpatrick & Associates, P.C. (Auburn Hills, Mich.), and Karen Cordry of the National Association of Attorneys General (Washington, D.C.), who was a member of the Chapter 7 Advisory Committee.

White Paper: Retailers Face Tough Decisions as China Tariff Pressures Mount

To date, many consumer goods such as toys, shoes and electronics have been strategically exempted from the tariffs, which has to a great extent spared U.S. shoppers from feeling the pain at the point of sale. But based on the Trump administration’s position, if the most recent round of talks on the issue between President Trump and Chinese leader Xi Jinping do not end well, the pain could become very real for both U.S. consumers and the businesses they frequent sooner rather than later, according to a research paper by Hilco Global. New tariffs could impact 100 percent of the toys and sports equipment imported from China to the United States, as well as 93 percent of the footwear and 91 percent of textiles and clothing, according to an analysis by the Peterson Institute for International Economics. Moving ahead, many retailers may experience shortages of supply as they seek non-Chinese vendors and ramp up those new and intricate relationships. Additionally, because most are not in a position to raise pricing enough to nullify the impact of the increased tariffs on their businesses, it can also be expected that we will see continued compression of retail gross margins.

Banks Fire Up Their Mortgage Machines for a Refinancing Boom

With rates for home loans sinking to their lowest levels since late 2016, Wells Fargo & Co., the biggest mortgage lender in the U.S., has boosted staffing for the business by about 10 percent this year and plans to keep hiring. Bank of America Corp. is hiring in areas including sales, processing and underwriting. The mortgage industry has added almost 5,000 employees since March, a 1.5 percent gain, according to the Bureau of Labor Statistics. The volume of applications for refinancing mortgages has more than tripled since December, according to a barometer from the Mortgage Bankers Association.

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New on ABI’s Bankruptcy Blog Exchange: Small Business Reorganization Act Signed into Law — A New Frontier for Small Business Bankruptcies

President Trump on Aug. 23 signed the Small Business Reorganization Act (SBRA) into law. The SBRA is scheduled to take effect on February 22, 2020, and offers small businesses with aggregate liabilities that do not exceed $2,725,625 the opportunity to resolve their outstanding debts through a condensed and price conscious chapter 11 bankruptcy proceeding, according to a recent blog post. This new proceeding is to be governed under subchapter V to chapter 11 of the Bankruptcy Code.

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
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Bankruptcy Bills Await President's Signature

ABI Bankruptcy Brief

August 22, 2019

 
ABI Bankruptcy Brief
 
 
NEWS AND ANALYSIS

Bankruptcy Bills Await President's Signature

A trio of bankruptcy bills are sitting on President Trump’s desk awaiting his signature. The three bankruptcy bills are the “Small Business Reorganization Act of 2019” (H.R. 3311), the “Honoring American Veterans in Extreme Need Act of 2019” or the “HAVEN Act” (H.R. 2938), and the “Family Farmer Relief Act of 2019” (H.R. 2336).

JPMorgan: Tariffs Could Cost U.S. Families Up to $1,000 a Year

More than a year into the U.S./China trade war, American consumers are about to find themselves squarely in the crosshairs for the first time, with households estimated to face up to $1,000 in additional costs each year from tariffs, according to research from JPMorgan Chase, the Washington Post reported. Consumers, whose spending fuels about 70 percent of the U.S. economy, have been largely shielded from previous rounds of tariffs, which have left businesses reeling and upended global supply chains. But that’s about to change with the 10 percent levies on roughly $300 billion in Chinese imports, about a third of which will take effect Sept. 1. Those tariffs will primarily target consumer goods. Amid growing concern that the tariffs could damage the economy, Trump abruptly announced he would delay tariffs on certain popular products such as laptops, footwear and video games — about two-thirds of the impacted items — until mid-December. But that’s not enough to eliminate the added burden for consumers. JPMorgan researchers calculated that after the 10 percent levies go into effect, American families will be facing about $1,000 in additional costs from all tariffs on Chinese goods annually. If the upcoming tariffs are raised to 25 percent, as Trump has warned, consumers’ costs could go as high as $1,500 a year, researchers estimated. “The impact from reduced spending could be immediate for discretionary goods and services, since tariffs are regressive,” JPMorgan researchers noted. “Unlike the agriculture sector, which is receiving subsidies/aid to offset the impact of China’s retaliatory actions, there is no simple way to compensate consumers.”



Law Firm Bills in Big Bankruptcy Cases Growing Rapidly

There was no summer slowdown for law firms advising on large corporate bankruptcies: The season has brought a bonanza of law firm fee applications and approvals, Law.com reported. Several large firms stand to gain up to tens of millions of dollars from some of the most active chapter 11 bankruptcies this summer, including Sears Holding Corp. and PG&E Corp. In the Sears case, Bankruptcy Judge Robert Drain on June 28 approved fee requests for 16 advisors — including six law firms — that totaled about $130 million in all for work mostly from mid-October through February. Across the country, PG&E has already paid more than $84 million to four firms in the months leading to its January 2019 bankruptcy.

Wells Fargo Pays $6.5 Million to Navajo Nation over 'Predatory' Practices

Wells Fargo & Co. will pay the Navajo Nation $6.5 million to settle a lawsuit over “predatory and unlawful practices” by the bank, the Native American tribe said today, Reuters reported. The Navajo Nation sued Wells Fargo in federal and tribal courts in 2017, alleging that the San Francisco-based bank had opened unauthorized accounts for vulnerable tribe members as part of the potentially millions of fake accounts opened by bank employees nationwide. The settlement “puts other companies on notice that harmful business practices against the Navajo people will not be tolerated,” Navajo Nation President Jonathan Nez said in the statement, which referred to Wells Fargo’s “long campaign of predatory and unlawful practices.” The settlement with the Navajo Nation followed a $575 million deal in 2018 with U.S. states over claims that Wells Fargo opened phony customer accounts and improperly referred and charged customers for financial products.

Hedge Funds Have Already Bled $55.9 Billion This Year

Hedge funds have already bled 50 percent more money this year than in all of 2018, as the industry struggles to win back investors fed up with high fees and poor performance, Bloomberg News reported. Investors yanked $8.4 billion in July, bringing net outflows this year to $55.9 billion, according to an eVestment report on Thursday. That’s up from $37.2 billion for all of last year. Investors’ frustration with hedge funds continues to mount, driving down management and performance fees to well below the “two and 20” fee model once considered standard, according to Eurekahedge. More hedge funds have shut than started in each of the last three years, and those that do launch are far smaller than they were before the financial crisis. The pain for hedge funds isn’t spread evenly, with 37 percent of funds posting net inflows this year. So-called event-driven funds have fared the best, with inflows of $10.3 billion through July, eVestment data show. These funds try to cash in when events such as mergers, takeovers and bankruptcies lead to a temporary mispricing of a company’s shares.

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New on ABI’s Bankruptcy Blog Exchange: Restaurant Business Is Giving Lenders Indigestion

As a growing number of restaurant chains are going bankrupt, loan charge-offs are rising, 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
 

Analysis: Bankruptcy Filings by U.S. Energy Producers Pick Up Speed

ABI Bankruptcy Brief

August 15, 2019

 
ABI Bankruptcy Brief
 
 
NEWS AND ANALYSIS

Analysis: Bankruptcy Filings by U.S. Energy Producers Pick Up Speed

Bankruptcy filings by U.S. energy producers so far this year have already nearly matched the total for the whole of 2018, according to a report yesterday by Haynes and Boone LLP, as volatile oil and gas prices are driving companies to seek protection from creditors, Reuters reported. A total of 26 firms with debts totaling $10.96 billion have filed for court restructuring through mid-August, according to the law firm’s report. Last year, 28 companies filed for bankruptcy listing $13.2 billion in debt, while 24 firms sought protection in 2017 with $8.5 billion in debt. Throughout most of 2019, U.S. light, sweet crude oil has been stuck in the $50 range on the New York Mercantile Exchange, finishing on Wednesday at $55.23. West Texas Intermediate averaged $65.06 a barrel last year. Natural gas prices also have fallen so low in some places that some companies have shut in wells and others have paid pipeline operators to take their gas. Buddy Clark, a partner at Haynes and Boone, said, however, that he did not predict a new wave of producer bankruptcies similar to that which followed the oil price collapse mid-decade. In 2015, there were 44 oil and gas producers filing for protection with combined debts of $17.4 billion. “We’re not going to see anywhere near the wave of bankruptcies in 2015,” Clark said. Many of 2019’s filings are pre-planned chapter 11 restructurings, where creditors agree in advance on a financial restructuring plan, Clark said.



Get a better understanding of what happens when an oil, gas or other natural resources company goes bankrupt. Order your copy of ABI's revised and expanded When Gushers Go Dry: The Essentials of Oil & Gas Bankruptcy, Second Edition.

Study: Student Loans and Auto Debts Comprise Increasing Share of Delinquency Rates

Total household debt balances increased by $192 billion in the second quarter of 2019, boosted primarily by a $162 billion gain in mortgage installment balances, according to the latest Quarterly Report on Household Debt and Credit from the New York Fed’s Center for Microeconomic Data (the mortgage installment balances exclude home equity lines of credit, which are reported separately and have been declining in balance for some time). The new mortgage total of $9.4 trillion is slightly higher than the previous high in mortgage balances from the third quarter of 2008 in nominal terms. In the data, there are several categories of delinquency — for example, 30, 60, 90 and 120+ days past due — plus “severely derogatory,” which includes any stage of delinquency paired with a repossession, foreclosure or “charge-off." During and after the Great Recession, the 90+ day delinquency rate, especially for mortgages, soared and an unprecedented number of properties entered foreclosure. This created a surge in severely derogatory balances that took years to work down, even as delinquencies other than severe derogatories were declining relatively rapidly. Although the housing crisis produced a huge increase in severely derogatory mortgages, that effect has dissipated as the foreclosure pipeline has cleared out in even the slowest states. Today, auto and especially student loan balances are the interesting components: In the second quarter of this year, the outstanding severely derogatory balance is comprised of 35 percent defaulted student loans, which have grown stunningly since 2012. Auto loans are now 21 percent of the outstanding severely derogatory balance, a larger share than what we’ve seen historically as the auto loan market has expanded and auto loan delinquencies have been increasing for subprime borrowers over the past five years.



New Puerto Rico Governor Finally Receives Support

Puerto Rico's new governor finally appeared to be overcoming some of the challenges to her authority yesterday following weeks of political turmoil in the U.S. territory, with key members of the majority New Progressive Party expressing support, the Associated Press reported. That may allow Gov. Wanda Vázquez, who has never held elected office, to turn her attention to the territory’s lagging efforts to recover from 2017’s devastating Hurricane Maria, as well as the grinding economic slump and debt crisis that has led to demands for austerity from a federal board overseeing its finances. Senate President Thomas Rivera Schatz, who had been seen as her chief challenger, issued a statement yesterday backing her and saying that he’d only been looking for a replacement because he thought Wanda Vázquez didn’t want the governor’s job — although his efforts had continued well after she said she did. Rivera Schatz had suggested the post go to the island’s congressional representative, Resident Commissioner Jenniffer González, but González too issued a statement of support for Vázquez on Tuesday. Under the territory's constitution, the governorship fell to Justice Secretary Vázquez on Aug. 7 when Gov. Ricardo Rosselló resigned after intensive public protests and his attempt to name a last-minute successor were knocked down by the territory’s Supreme Court.

U.S. Will Back More Condominium Loans Aimed at First-Time Buyers

The Trump administration is vastly expanding the scope of condominium purchases eligible for lower-down-payment loans, the Wall Street Journal reported. The move, announced yesterday by the Federal Housing Administration, could help revive the entry-level condo market for first-time buyers because FHA-backed loans require only a 3.5 percent down payment and lower credit score than conventional loans. It also loosens financial-crisis-era rules and could expose the government to a higher likelihood of loan default if the housing market continues to slow and prices fall. The FHA insured a million home loans last year made by banks and other private lenders, the vast majority of which were for single-family homes. With the new rules, the agency estimates it could insure as many as 60,000 additional condo loans each year, on top of the 16,000 condo loans it backed in 2018. The median price of an existing condo or co-op unit was just over $260,000 in June, compared with nearly $290,000 for the median existing single-family home, the National Association of Realtors said. (Subscription required.)

Commentary: Subzero Interest Lending Presents Alarming Signal for Global Financial Markets

For Americans accustomed to paying 4 or 5 percent mortgage rates, let alone the double-digit figures consumers endured in the early 1980s, the new loan from Denmark’s Jyske Bank might seem inconceivable, according to a Washington Post commentary. The Danish lender last week started offering home buyers 10-year mortgages at an interest rate of -0.5 percent. That means borrowers over a decade will pay back a little less than the amount borrowed, not including one-time fees. This highly unusual condition may be good for Danish home buyers, but economists say that it’s an alarming sign for the global economy. Several major governments and more than 1,000 big companies in Europe are now able to effectively borrow from global financial markets at a negative interest rate. For Jyske Bank, that means it can turn around and lend money at a subzero interest rate, too. The amount of this type of debt, issued as government or corporate bonds, has doubled since December and now totals $15 trillion. The sudden increase suggests that a fast-rising share of investors are so nervous about the future they’re willing to actually lose a little money by lending it to a borrower that is almost certain to pay it back, rather than risk betting on something that could go bust.

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Racial Divide Exposed in Lending to the Smallest of Small Businesses

A new report from the New York Fed found that African-American and Hispanic owners of one-person businesses are more likely to be discouraged from applying for financing, and they’re less likely to receive financing when they do apply for it, than their white counterparts, 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
 

Student Loan Balances and Repayment Behavior Worse for Private Colleges

ABI Bankruptcy Brief

August 8, 2019

 
ABI Bankruptcy Brief
 
 
NEWS AND ANALYSIS

Student Loan Balances and Repayment Behavior Worse for Private Colleges

A study recently released by the New York Fed found that during the 2000-10 period, student loan balances at college exit increased and repayment behavior deteriorated for those pursuing undergraduate certificates and associate's and post-bachelor’s degrees at private institutions, relative to those pursuing such degrees at public institutions. Declines in repayment behavior at private institutions were sharpest for associate’s degrees and undergraduate certificates, according to the study by Meta Brown, an associate professor of economics at Stony Brook University, Basit Zafar, an associate professor of economics at Arizona State University, Rajashri Chakrabarti, a senior economist at the Federal Reserve Bank of New York and Wilbert van der Klaauw a senior vice president at the Federal Reserve Bank of New York. "Those [students] holding loans that are delinquent or in default may experience immediate financial hardship; down the line, they may see a reduction in their credit scores that makes it difficult for them to obtain home or car loans or even to find a job (since many jobs now make hiring conditional on a credit report check)," the researchers write. "Lack of credit access could further adversely affect consumption, which in turn could act as a drag on GDP growth."



The issue of student loan debt and bankruptcy is the first problem addressed in the Final Report of the ABI Commission on Consumer Bankruptcy. Listen to this podcast to find out more and click here to download your copy of the Final Report.

Analysis: Farmers Struggle as Trade War Intensifies

Hundreds of other farmers around the country, grappling with rising debt, dismal commodity prices and the fallout of the Trump administration’s trade wars, are facing the same fate, the Washington Post reported. Net farm income has dropped by nearly half in the past five years, from $123 billion to $63 billion. Dairy producers were already struggling with low prices due to oversupply and America's new thirst for alternatives such as soy milk when the Trump administration’s trade wars with Mexico, Canada and China hit, sending exports plunging and exacerbating gluts of various commodities. Dairy farmers have lost at least $2.3 billion in revenue since the trade wars began, according to the National Milk Producers Federation.



The U.S. Senate on Aug. 1 passed a bill that will make it easier for more farmers with larger amounts of debt to file for bankruptcy protection, Reuters reported. The bipartisan bill — H.R. 2336, the "Family Farmer Relief Act of 2019" — raises the ceiling on how much debt producers who file for chapter 12 bankruptcy can have, to $10 million from the previous $4 million. The bill awaits the President's signature into law.

Inflated Bond Ratings, a Catalyst of the Financial Crisis, Are Back

Inflated bond ratings were one cause of the financial crisis. A decade later, there is evidence they persist. In the hottest parts of the booming bond market, S&P and its competitors are giving increasingly optimistic ratings as they fight for market share, the Wall Street Journal reported. All six main ratings firms have since 2012 changed some criteria for judging the riskiness of bonds in ways that were followed by jumps in market share, at least temporarily, a Wall Street Journal examination found. The problem is particularly acute in the fast-growing market for “structured” debt — securities using pools of loans such as commercial and residential mortgages, student loans and other borrowings. The deals are carved into different slices, or “tranches,” each with varying risks and returns, which means rating firms are crucial to their creation. The Journal analyzed about 30,000 ratings within a $3 trillion database of structured securities issued between 2008 and 2019. The data, compiled by deal-tracker Finsight.com, allowed a direct comparison of grades issued by six firms: majors S&P, Moody’s Corp. and Fitch Ratings, and three smaller firms that have challenged them since the financial crisis, DBRS Inc., Kroll Bond Rating Agency Inc. and Morningstar Inc. The Journal’s analysis suggests a key regulatory remedy to improve rating quality — promoting competition — has backfired. The challengers tended to rate bonds higher than the major firms. Across most structured-finance segments, DBRS, Kroll and Morningstar were more likely to give higher grades than Moody’s, S&P and Fitch on the same bonds. Sometimes one firm called a security junk and another gave a triple-A rating deeming it supersafe.

Mall Landlords Weigh Becoming Lenders to Blunt Retail Apocalypse

Mall landlords accustomed to offering rent reductions to ailing retailers are mulling a new strategy to forestall the industry’s collapse: positioning themselves as lenders to tenants struggling to stay afloat, Bloomberg News reported. Boutique bank PJ Solomon has organized discussions with several mall owners about pursuing such a strategy with troubled retailer Forever 21 Inc. in what could serve as a model for future transactions within the sector. The talks have centered on converting rent and other liabilities into secured debt that could give distressed companies some breathing room to stay out of court, according to sources. If a retailer later goes bust, the arrangement could give landlords a stronger say in the restructuring process because lenders get higher priority in a bankruptcy. The landlords potentially could use their preferred status to bid for assets, swapping their unpaid claims for ownership. For mall operators dealing with wave after wave of closings, the situation is critical. More than 7,500 U.S. retail storefronts have shuttered this year alone, according to Coresight Research, dwarfing openings as chains such as Payless Inc. and Gymboree Corp. ceased operations.



Occupancy issues are at the heart of many significant retail cases, as detailed in the ABI publication Retail and Office Bankruptcy: Landlord/Tenant Rights, available at the ABI Store.

Zombie Debt: How Collectors Trick Consumers into Reviving Dead Debts

Debt collectors lose the right in many states to sue consumers after three or more years. But there’s a loophole: If the consumer makes a payment, even against his or her own will, that can be used to try to revive the life of the debt, the Washington Post reported. The practice could prove increasingly profitable as the country’s consumer debt reaches record levels — more than $4 trillion this year — and the industry is able to bring in “tens of billions of dollars” from debt past the statute of limitations every year, according to a report by the Receivables Management Association International. The efforts to collect on old debts often focus on getting consumers to reset the statute of limitations through a variety of means, including sending them credit cards that let them pay off their old debts or by allowing them to make a small payment to halt debt collection calls. The efforts have contributed to the flood of debt-collection lawsuits clogging courts across the country, consumer advocates say. In New York City, the number of debt-collection lawsuits surpassed 100,000 last year, compared with 47,000 in 2016, according to data from the New Economy Project, an advocacy group. Texas and Washington state passed legislation this year making it more difficult to revive debt past its statute of limitations, but the industry successfully fought efforts in other states, including New York. And consumer advocates worry that new rules proposed by the Consumer Financial Protection Bureau — the first major update to the Fair Debt Collection Practices Act in more than 40 years — could further bolster the industry.

America’s Pension Funds Fell Short in 2019

Public pension plans fell short of their projected returns this year, adding to the burden on governments struggling to fund promised benefits to retired workers, the Wall Street Journal reported. Public plans with more than $1 billion in assets earned a median return of 6.79 percent for the year ended June 30, the lowest since 2016, according to Wilshire Trust Universe Comparison Service data released Tuesday. Public pension plans project a median long-term return of 7.25 percent, according to data collected by Wilshire Associates in 2018. Overall, a decade-long bull market in stocks has been good for pensions. Large public plans had five years of double-digit returns and a 10-year annualized return of 9.7 percent for the year ended June 30, according to Wilshire. But those returns still haven’t brought pension funding levels close to what is needed to pay for future benefits. State and local pension plans have about $4.4 trillion in assets according to the Federal Reserve, $4.2 trillion less than they need to pay for promised future benefits.

A Growing Problem in Real Estate: Too Many Too Big Houses

Large, high-end homes across the Sunbelt are sitting on the market, enduring deep price cuts to sell, the Wall Street Journal reported. That is a far different picture than 15 years ago, when retirees were rushing to build elaborate, five or six-bedroom houses in warm climates, fueled in part by the easy credit of the real estate boom. Many baby boomers poured millions into these spacious homes, planning to live out their golden years in houses with all the bells and whistles. Now, many boomers are discovering that these large, high-maintenance houses no longer fit their needs as they grow older, but younger people aren’t buying them. Tastes — and access to credit — have shifted dramatically since the early 2000s. These days, buyers of all ages eschew the large, ornate houses built in those years in favor of smaller, more-modern looking alternatives, and prefer walkable areas to living miles from retail.

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New on ABI’s Bankruptcy Blog Exchange: State Regulators Scrutinize Payroll Advance Firms

New York and 10 other states are looking into whether companies in the fast-growing sector are violating payday lending laws, 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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66 Canal Center Plaza, Suite 600
Alexandria, VA 22314
 

Commentary: Legislation Aims to Tackle the Student Loan Crisis in Bankruptcy Court

ABI Bankruptcy Brief

May 16, 2019

 
ABI Bankruptcy Brief
 
NEWS AND ANALYSIS

Commentary: Legislation Aims to Tackle the Student Loan Crisis in Bankruptcy Court

Legislation introduced last week seeks to allow student loans to be discharged in bankruptcy without the difficulty of proving the "undue hardship" standard, according to a Washington Post commentary. The legislation has drawn bipartisan support with two Republican co-sponsors in the House, including Rep. John Katko (R-N.Y.), who introduced a similar bill in the last session of Congress. It would, as sponsor House Judiciary Chair Jerrold Nadler (D-N.Y.) put it in a statement, “ensure student loan debt is treated like almost every other form of consumer debt." In the Senate, Sen. Elizabeth Warren (D-Mass.), along with fellow presidential candidates Sens. Bernie Sanders (I-Vt.), Kamala Harris (D-Calif.) and Amy Klobuchar (D-Minn.), are all co-sponsoring companion legislation. Americans owe a collective $1.5 trillion in student loan debt, an amount that’s increased from $90 billion over the past two decades, according to the commentary. In 2018, more than two-thirds of college graduates graduated with student loans. The average amount borrowed (from all sources) by a 2018 graduate is just under $30,000. The burden is impacting people from early adulthood to those in retirement: Some senior citizens are using their Social Security checks to pay back student loan bills, according to the commentary. Restoring bankruptcy could protect borrowers in another way, too, by potentially acting as a check on the careless treatment of debtors by student loan servicers, according to the commentary. In 2017, the Consumer Financial Protection Bureau sued Navient, claiming that the student loan giant repeatedly did not tell borrowers experiencing financial difficulties about income-based repayment options and instead pushed them into forbearance, a strategy that resulted in further interest charges and increased the amount borrowers owed.



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

Trump Readies Up to $20 Billion More in Aid to Rescue Farmers from Trade War

The Trump administration could make as much as $20 billion available to farmers in a second round of assistance designed to help offset losses from China's latest retaliatory tariffs, Agriculture Secretary Sonny Perdue said yesterday, Politico reported. The second installment of trade aid is being modeled after the one last year. USDA pledged up to $12 billion in assistance for 2018 production, mostly in the form of direct payments to farmers stung by retaliatory duties, as well as commodity purchases. Perdue said that the second round of assistance would likely include more direct payments and commodity purchases. “Our calculations initially probably range between $15 and $20 billion,” he said of the estimated economic damage to farmers and the scope of the potential aid package, but he reiterated that many details are still being decided. In terms of timing, Perdue didn’t give an estimate of when the plan would be announced, but he said USDA was “expediting” its work at President Donald Trump’s request. The secretary said the program would comply with WTO limits on agricultural subsidies.

Slowdown in U.S. Housing Market Is Helping Landlords Raise Rents

Data from Zillow released yesterday shows that home-price appreciation continued to slow in April from a year earlier, driven in part by softening West Coast metros like San Jose and Seattle, Bloomberg News reported. The company also reported the first nationwide monthly price dip in more than seven years — albeit just 0.1 percent. At the same time, rent growth accelerated, climbing by 2.6 percent on an annual basis after a lull in 2018. More broadly, the challenge for the U.S. housing market is scarcity. As millennials — one of the largest U.S. generations — reach prime homebuying age, they’re finding that the supply of entry-level houses hasn’t nearly kept pace with their numbers. That could force them to rent for longer as they save up to buy the homes that are available, Olsen said.

U.S. Corporate Pension Funding Level Rises to 91.4 Percent in April

Consulting firm Milliman said that the 100 largest U.S. corporate defined benefit pension plans’ funded status increased $29 billion to 91.4 percent in April from 89.7 percent at the end of March, spurred by strong investment gains and a rise in the benchmark corporate bond interest rates used to value pension liabilities, Chief Investment Officer Magazine reported today. April’s healthy 1.09 percent investment gain increased the plans’ aggregate asset value by $13 billion to $1.536 trillion at the end of April. Meanwhile, the plans’ aggregate deficit fell to $145 billion from $174 billion at the end of March, a result of an increase in the benchmark corporate bond interest rates. The projected benefit obligation for the plans decreased $16 billion during April to $1.681 trillion due to a seven-basis-point increase in the monthly discount rate in March. Over the last 12 months, the cumulative asset gain for the pensions has been 5.19 percent, and the funded status deficit has grown by $5 billion. Milliman said the main reason the funded status deficit worsened was because of a decline in discount rates over the past 12 months.

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New on ABI’s Bankruptcy Blog Exchange: Small-Business Lending Is Changing Fast

Former SBA head Karen Mills said that the forces reshaping small-business lending are also leading to “a moment of reckoning” for small banks, 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
 

Puerto Rico’s Bankruptcy Case Casts a Shadow on Billions in Municipal Bonds

ABI Bankruptcy Brief

May 23, 2019

 
ABI Bankruptcy Brief
 
NEWS AND ANALYSIS

Puerto Rico’s Bankruptcy Case Casts a Shadow on Billions in Municipal Bonds

Moody’s said last week that it is reviewing $14 billion of municipal special-revenue bonds, because the bonds’ issuers are rated several notches higher than the cities where they operate, Barron's reported. It has an Aa3 rating on the electric utility that serves Sheffield, Ala., while the city of Sheffield itself is rated A3, three tiers below that. Analysts at Fitch are reviewing their ratings on seven series of special-revenue bonds, including the debt issued by the Chicago Board of Education. The court ruling that caused the reviews is part of Puerto Rico’s sprawling bankruptcy case. It concerns roughly $6 billion of debt owed by the Puerto Rico Highways and Transportation Authority, or PRHTA. The PRHTA bonds are backed by transportation-related revenue such as gas taxes, highway tolls and vehicle license fees. The Commonwealth hasn’t made payments on that debt since mid-2017, when the island’s Financial Management & Oversight Board approved a plan to divert PRHTA revenue into its general revenue account. In short, the ruling undermines the market’s view that special-revenue bonds were reliable safe harbors in a municipal bankruptcy. The bonds have provided higher recoveries than other bonds in previous municipal bankruptcies, Moody’s said.



U.S. Card Delinquency Starts to Tick Upward

U.S. card delinquency among the Top 100 U.S. issuing banks gained another five basis points in the first three months of 2019, CardTrak.com reported. Robert McKinley, Senior Analyst for CardTrak, CardFlash and CardData, noted that the explosion in the issuance of sub-prime credit cards to consumers with credit scores below 660, and the possibility of rising unemployment in late 2019 and through 2020, is especially concerning to U.S. issuers. Major credit card issuers have begun to tighten underwriting and boost loan-loss reserves, according to RAM Research.

Trump Administration Unveils New $16 Billion Aid Package for American Farmers Hit in Trade War

The Trump Administration announced a new $16 billion farm aid package to offset losses from the U.S. trade war with China, the Washington Post reported. According to Agriculture Secretary Sonny Perdue, “China is going to pay for this $16 billion through tariffs coming in” and that “the revenue we’re receiving is what the president has intended to fund the farmers who are being hurt by these retaliatory tariffs.” It will be the second bailout for farmers connected to Trump’s tariff showdowns with China, Mexico and other countries. The Trump administration announced $12 billion in emergency measures last July. Perdue acknowledged today that U.S. farmers have been hit hard by the escalating trade fight with Beijing, and accused China of targeting the president in advance of his 2020 re-election bid.



The "Family Farmer Relief Act of 2019" has been introduced in both the Senate (S. 897) and the House (H.R. 2336) to increase the debt limits from $3.2 million to $10 million for family farmers looking to file for chapter 12 protection. To view the full bill text of both pieces of legislation, please click here.

In related news, the new round of tariffs will cost the typical American household an extra $831 annually, according to research from the New York Federal Reserve. Tariffs on $200 billion of U.S. imports from China subject to earlier 10 percent levies increased to 25 percent beginning May 10, 2019, after a breakdown in trade negotiations. A previous New York Fed study found that the 2018 tariffs imposed an annual cost of $419 for the typical household. Click here to read more.

SEC Accuses Major U.S. Landlord of Running ‘Ponzi Scheme-Like’ Scam

The federal government accused one of the nation’s largest landlords of running a “Ponzi scheme-like” effort using cash from small investors and of misleading banks to obtain bigger loans by using fake loan documents, the Wall Street Journal reported today. The Securities and Exchange Commission filed civil charges against Robert C. Morgan, who amassed an empire of more than 140 properties and 34,000 units across 14 states, according to the website of his firm, Morgan Management. The Justice Department yesterday also unveiled criminal charges accusing Morgan of conspiracy to commit bank fraud, wire fraud and money laundering. The SEC said Morgan raised $110 million from more than 200 mostly small investors beginning in 2013, promising them a target return of 11 percent. Morgan used most of the cash as a “fraudulent slush fund” to pay previous investors, the SEC said. In one instance, the SEC said cash was used to pay off an $11 million loan that Morgan allegedly obtained by falsifying financial information on a property in Pennsylvania. (Subscription required.)

Dismissal of Suit Against Debt-Collection Firm Was Premature, Third Circuit Rules

The U.S. Court of Appeals for the Third Circuit has reopened a suit claiming a law firm specializing in consumer collections tacked unauthorized charges onto the amounts owed by debtors, the New Jersey Law Journal reported. The appeals court said a U.S. District Court judge in Camden, N.J., dismissed the suit against Lyons, Doughty & Veldhuis of Mount Laurel without giving the plaintiff’s lawyer a chance to respond to an argument made on the firm’s behalf. And the Third Circuit judges disagreed with the assertion by lawyers for Lyons Doughty that any error made by the judge below was a harmless one. The suit, filed in January 2017 by Nestor Saroza on behalf of himself and others similarly situated, claims that Lyons Doughty inflated the amount owed, in violation of the Fair Debt Collection Practices Act. When the firm sued Saroza in Hudson County Superior Court for a $9,971 balance on his Capital One credit card, it added an unitemized charge of $82 for filing and service costs onto the amount owed, in violation of the FDCPA, Saroza’s suit claimed. Lyons Doughty filed a motion to dismiss, or, in the alternative, a motion for summary judgment. The motion referenced a consumer agreement stating that Capital One was entitled to recover its court costs from Saroza. The motion raised two claims — that Saroza failed to allege that the matter concerned a consumer debt, as required by the FDCPA, and that a collection letter sent to Saroza, which added the $82 fee to the amount owed by Saroza, was accurate because of the Capital One statement. But Lyons Doughty later withdrew the second claim, leaving only the aspect of the Lyons Doughty motion to dismiss based on Saroza’s failure to allege a consumer debt.

ABI Podcast #230 Features Experts Discussing the SCOTUS Decision in Tempnology

ABI Editor-at-Large Bill Rochelle talks with Bankruptcy Judge Kevin Carey (D-Del.; Wilmington), Paul Hage of Jaffe Raitt Heuer & Weiss (Southfield, Mich.) and Lindsay Milne of Bernstein Shur (Portland, Maine) about the Supreme Court's decision in Mission Product Holdings Inc. v. Tempnology, LLC (17-1657). On May 20, the Court held that rejection of an executory trademark license does not bar the licensee from continuing to use the mark. Ms. Milne represented the party that prevailed in the Supreme Court. Click here to listen to the podcast.

For further analysis of the case, past petitions and brief, please click here.

Former ABI President Releases EP on Spotify/iTunes

As chair of Pachulski Stang Ziehl & Jones’s postconfirmation 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. He has just released an EP of his work on Spotify and iTunes.

Click here to listen on Spotify.

Click here to listen on iTunes.

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New on ABI’s Bankruptcy Blog Exchange: FDIC, Payday Lenders Agree to Settle Choke Point Lawsuit

As part of the deal, the agency summarized its policy on account terminations and issued a letter acknowledging that some employees “acted in a manner inconsistent with FDIC policies with respect to payday lenders,” 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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