NEWS AND ANALYSIS
COMMENTARY: WHY THE "LIVING WILL" PROCESS SETS BANKS UP FOR FAILURE
Through the review of orderly resolution plans, or "living wills," required annually by the Dodd-Frank Act, regulators have a gateway to change the company itself, according to a commentary in today's American Banker. If companies' living wills are not to regulators' liking, regulators can require the institutions to restructure, raise capital, reduce leverage, divest or downsize. The Federal Reserve and the Federal Deposit Insurance Corp. on Aug. 5 rejected the living wills of 11 of the biggest bank holding companies in the U.S. The 11 bank holding companies have until July 2015 to "rewrite their living wills" to the regulators' satisfaction. This exercise is complicated by the fact that it is unclear what an "acceptable" living will should look like, according to the commentary. Dodd-Frank does not include any objective thresholds or standards for living wills. Read the full commentary.
In a related commentary, Prof. Stephen Lubben of Seton Hall University of Law, writing in the New York Times DealBook blog, says he was not surprised that the "living will" plans were rejected. The basic question is whether this exercise is ever going to work, according to Lubben. Unlike the orderly liquidation authority, chapter 11 has no mechanism for government financing, with Lubben stipulating that there would be no private funding for the bankruptcy case of any of the big banks. All of which leads to the likely conclusion that the big financial institutions, as currently constituted, probably cannot come up with a reasonable resolution plan under the Bankruptcy Code, as currently constituted. Lubben says that leaves two basic options: change the financial institutions, or change the Bankruptcy Code. Lubben questions whether changes to the Bankruptcy Code won't simply recreate orderly liquidation authority in a new guise. Read the full commentary.
Why are chapter 11 reforms needed now? Watch here.
U.S. FINDS FRESH USE FOR SELDOM-USED STATUTE IN SUBPRIME AUTO LOAN CASES
The Justice Department is using a powerful civil fraud provision to investigate potential wrongdoing in the marketing of securities backed by risky auto loans, the New York Times DealBook blog reported today. This opens up a new front for the government to pursue large monetary penalties against companies that package loans made without paying too much attention to whether the borrowers are creditworthy. General Motors Financial, the lending arm of the carmaker, and auto finance company Santander Consumer USA disclosed last week that they had received subpoenas from the Justice Department for information about the securitization of subprime loans since 2007. The subpoenas seek documents related to possible violations of the Financial Institutions Reform, Recovery, and Enforcement Act, better known as Firrea, which is currently being wielded to great effect these days. Firrea was adopted in 1989 during the height of the savings and loan crisis when thrifts that were created to make standard home mortgages had shifted into risky lending that drove many into insolvency. The primary goal of the statute was to overhaul the banking system by getting rid of the Federal Savings and Loan Insurance Corporation, which had run out of money, and expand the power of regulators to protect against abuses by insiders who often treated savings and loans as their own personal piggy banks. Read more.
STUDENT DEBT THREATENS THE SAFETY NET FOR ELDERLY AMERICANS
Student debt is growing faster for seniors than for any other age group, according to the latest data gathered by the Federal Reserve Bank of New York, Bloomberg News reported today. Lingering student loan debt is part of a broader and, many elder-care lawyers say, devastating accumulation of debt among older Americans. While people aged 50 and older hold only 17 percent of all U.S. student debt, this group has nearly three times as much debt as it did in 2005, according to the New York Fed data. By comparison, student debt for people under 40 is about one and a half times as high it was then. The numbers don't distinguish between older Americans who took out loans to finance their education and those who did so to put their children through college. A Gallup report released this month showed that people who took out loans decades ago are more likely to report low levels of health and financial well-being than their debt-free peers are. Read more.
In related news, data released by the U.S. Department of Education shows that less than half of borrowers with the most common type of federal student loan are repaying their debt on time, the HuffingtonPost.com reported yesterday. About 51 percent of Americans with student loans made directly by the Education Department, known as Direct Loans, have either fallen behind or are not making expected payments, according to data on the $686 billion portfolio. Borrowers who aren't making expected payments for reasons that include temporary financial hardship or a return to school are included in the tally. Not included are borrowers who are not expected to pay back their loans because they've either never left school or are less than six months out of school. The figures are based on dollar amounts, rather than the number of borrowers. Of the roughly $300 billion in direct loans in repayment, one in six, or about 17.2 percent, are at least 31 days delinquent, data show. By comparison, just 3.3 percent of all loans and leases held by U.S. banks are at least 30 days late, according to the Federal Reserve. Read more.
For an analysis of college loan debt and bankruptcy, be sure to pick up a copy of ABI's Graduating with Debt, available in the ABI Bookstore.
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NEW CASE SUMMARY ON VOLO: TRUDEL V. U.S. DEPARTMENT OF EDUCATION (IN RE TRUDEL; 6TH CIR.)
Summarized by Chapter 13 Trustee Thomas DeCarlo
The Sixth Circuit found that student loans were not dischargeable where the debtor proved that current income was not sufficient to pay the loans and maintain a minimal standard of living, but the debtor did not present any evidence that current conditions were likely to continue for a substantial duration of the repayment period, and the debtor lacked good faith by failing to make any payments and to accept an income-contingent repayment plan because the debtor was concerned about the impact their credit rating.
There are more than 1,300 appellate opinions summarized on Volo, and summaries typically appear within 24 hours of the ruling. Click here regularly to view the latest case summaries on ABI's Volo website.
NEW ON ABI'S BANKRUPTCY BLOG EXCHANGE: FOR LOW- PERFORMING BANKS, IT'S FOLD OR BE SOLD
Higher capital requirements, sluggish GDP growth and antiquated cost structures are stymying banks' efforts to boost returns to investors. This will likely lead to a boom in mergers and acquisitions over the next decade, according to a new post on ABI's Blog Exchange.
Be sure to check the site several times each day; any time a contributing blog posts a new story, a link to the story will appear on the top. If you have a blog that deals with bankruptcy, or know of a good blog that should be part of the Bankruptcy Exchange, please contact the ABI Web team.
ABI Quick Poll
Consumer collateral should be valued at liquidation value in chapter 13 confirmations, even when the debtor retains the property.
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