In a rare display of political courage and bipartisanship last week, Rep. John Katko (R-N.Y.) filed the Discharge Student Loans in Bankruptcy Act with Rep. John Delaney (D-Md.). This bill will return standard bankruptcy protections to all student loans, both federal and private. Katko is well ahead of the conservative curve on this issue and has a unique opportunity to revitalize the Republican party in the current session by stepping up to lead the fight on this. President Obama federalized the student loan system, and during his eight years in office, nearly $1 trillion was added to the nation’s student debt tab. Today, the federal government profits well over $50 billion per year on the program, and even makes a profit on defaulted student loans. This is something that no other lender for any other loan in this country can claim. This is, in fact, a defining hallmark of a predatory lending system. During the same time period, the price of college rose far faster than any other market, including healthcare, and this trend is only accelerating today.
The total debt held by American households reached a record in early 2017, exceeding its 2008 peak after years of retrenchment against a backdrop of financial crisis, recession and modest economic growth, The Wall Street Journal reported yesterday. Much has changed over the past eight-and-a-half years. The economy is larger, lending standards are tighter and less debt is delinquent. Mortgages remain the largest form of household borrowing but have become a smaller share of total debt as consumers take on more automotive and student loans. “The debt and its borrowers look quite different today,” New York Fed economist Donghoon Lee said. “This record debt level is neither a reason to celebrate nor a cause for alarm.” The total-debt milestone, announced by the Federal Reserve Bank of New York, was a long time coming. Americans reduced their debts during and after the 2007-09 recession to an unusual extent: a 12 percent decline from the peak in the third quarter of 2008 to the trough in the second quarter of 2013. New York Fed researchers described the drop as “an aberration from what had been a 63-year upward trend reflecting the depth, duration and aftermath of the Great Recession.” The data weren’t adjusted for inflation, and household debt remains below past levels in relation to the size of the overall U.S. economy. In the first quarter, total debt was about 67 percent of nominal gross domestic product versus roughly 85 percent of GDP in the third quarter of 2008. Balance sheets look different now, with less housing-related debt and more student and auto loans. As of the first quarter, about 68 percent of total household debt was in the form of mortgages; in the third quarter of 2008, mortgages were roughly 73 percent of total debt. Student loans rose from about 5 percent to around 11 percent of total indebtedness, and auto loans went from roughly 6 percent to about 9 percent.
A divided U.S. Supreme Court ruled that debt collectors can use bankruptcy proceedings to try to collect liabilities that are so old the statute of limitations has expired. Voting 5-3, the court said companies don’t violate the U.S. Fair Debt Collection Practices Act when they file bankruptcy claims on that type of years-old debt. Justice Stephen Breyer joined the court’s conservative wing in the majority. Critics accused debt collectors of violating the law by filing tens of thousands of outdated claims with bankruptcy courts in the hope that some debtors won’t object. “The result of decision appears to give creditors a free pass to file stale claims without fearing FDCPA liability,” Andrew Muller, a partner at Stinson Leonard Street LLP, said in an interview. “The flip side is that trustees and debtors’ lawyers may be under increased pressure to more closely review claims to determine whether the claims are subject to a statute of limitations defense,” Muller said.
President Donald Trump is weeks away from naming anyone to the board of the Federal Reserve, meaning that it could be the fall before three currently empty seats are filled, Reuters reported yesterday. The vacancies on the Fed's seven-member Board of Governors include the position of vice chair in charge of banking oversight, a critical role in Trump's plan to revamp financial rules. The White House wants to get all nominees vetted by the Federal Bureau of Investigation and the Office of Government Ethics before they name them publicly and that process can take months. If the vetting drags on, it runs the risk of delaying those people from taking their jobs until sometime this fall, complicating Trump's plan to reshape regulation of Wall Street. The Fed positions require confirmation by the Senate and could be delayed further by a five-week congressional recess from the end of July to the beginning of September.
House Republicans took a major step toward their goal of unwinding the stricter financial rules created after the 2008 crisis, pushing forward sweeping legislation that would undo much of President Barack Obama's banking law, the Associated Press reported today. A House panel approved Republican-written legislation that would gut much of the Dodd-Frank law enacted in the wake of the financial crisis and the Great Recession. The party-line vote in the Republican-led House Financial Services Committee was 34-26. "I can't do a good James Brown, but I feel good," said Rep. Jeb Hensarling, referring to the singer often called the godfather of soul. Hensarling wrote much of the overhaul legislation. Republicans argued that the Dodd-Frank law is slowing economic growth because of the cost of compliance and by curbing lending. President Donald Trump has denounced Dodd-Frank and promised that his administration would "do a big number" on it. Still, getting the new bill to Trump's desk could be a hard road. It now goes to the GOP-dominated House for a vote, but supporters admit that the path will be much more difficult in the Senate, where Democratic support will be needed. The bill would repeal about 40 provisions of the Dodd-Frank Act.
While farming has changed in many ways since the 1980s, many aspects of agricultural bankruptcy are similar today, although some are now questioning whether the provisions of chapter 12 have kept pace with the growth of modern agriculture, the (Iowa) Globe Gazette reported Friday. Joseph Peiffer, a bankruptcy attorney in Iowa, said more than half of the farmers that have been coming into his office over the past two years have not qualified for chapter 12 because they had aggregate debts in excess of the current inflation-adjusted limit of $4,153,150. The debt limit for chapter 12 became tied to inflation in 2005. Before that, the limit was $1.5 million. “The debt of family farmers has increased far faster than the rate of inflation,” Peiffer said. “That’s why the debt limit, I believe, is too small.” He added that nearly half of his clients who do not qualify for the current debt limit would still not qualify with a $10 million limit.
The House Committee on the Judiciary is expected to consider H.R. 2266, the "Bankruptcy Judgeship Act of 2017," at a markup session this morning. The bipartisan bill, introduced recently by Rep. John Conyers (D-Mich.) and Bob Goodlatte (R-Va.), would convert some 14 temporary judgeships (located in Delaware, Southern District of Florida, Maryland, Eastern District of Michigan, Nevada, Eastern District of North Carolina, Puerto Rico and the Eastern District of Virginia) into permanent positions. Under current law, more than two dozen judgeships in the system have a lapse date of May 25, 2017. Without congressional action by that time, the positions could be eliminated should a sitting judge in one of these positions create a vacancy by death, retirement or disability. Temporary positions were created by BAPCPA in 2005 with a goal to tie judicial positions to where the caseload burden was greatest. There is a similar bill pending in the Senate. The House bill would fund the positions through an increase in the chapter 11 quarterly filing fee found in § 1930(a)(6).
The U.S. Supreme Court has agreed to hear a case that could make it easier for creditors to claw back cash that was paid out by a company before it went bankrupt, Bloomberg reported yesterday. Bankruptcy law offers a “safe harbor” to financial institutions that perform securities transactions. The provision was intended to protect trades from creditor claims, to promote stability in financial markets in the face of complicated corporate reorganizations. The justices are being asked to consider whether the shield should apply when a financial institution merely acted as a conduit for a transaction. FTI Consulting Inc., the trustee of Valley View Downs LP, contends that creditors are entitled to recover money paid for shares in rival Bedford Downs in 2007. Merit Management Group received $16.5 million in the transaction, which was carried out through Citizens Bank of Pennsylvania and Credit Suisse. The trustee sued Merit, saying that Valley View should get the money back because the company did not get equivalent value in exchange and was insolvent at the time of the deal. A district judge, invoking safe harbor, ruled that Merit could keep the money, but an appeals court reversed, saying the financial institutions involved in the trade were just conduits for the deal. Two federal appeals courts have reached the same conclusion, while five have gone the other way. The case is Merit Management Group v. FTI Consulting Inc., 16-784.
New consumer protections requiring financial advisers to put their customers’ interests ahead of their own — at least when handling their retirement money — will take effect next month, putting to rest the question of whether they would be delayed further, the New York Times reported today. The fate of the so-called fiduciary rule, created under the Obama administration, was called into doubt when President Trump signed an executive order seeking a review of it, prompting regulators to delay its implementation to June from April. On Tuesday, Alexander Acosta, the Labor Department secretary, said that the basic principles of the rule would indeed take effect on June 9, even as his agency continues to review its finer details. After careful review, the Labor Department has “found no principled legal basis to change the June 9 date while we seek public input,” Acosta wrote in an opinion piece published Monday in The Wall Street Journal. “Respect for the rule of law leads us to the conclusion that this date cannot be postponed.”
The U.S. Supreme Court cleared the way for General Motors Co. to potentially face billions of dollars in legal claims over a deadly ignition-switch defect, turning away the carmaker’s appeal in a clash connected to its 2009 bankruptcy sale, Bloomberg News reported yesterday. The justices, without comment, left intact a federal appeals court ruling that said the bankruptcy accord didn’t block GM from lawsuits over accidents that happened before the sale or claims that the flaw caused vehicles to lose value. Plaintiffs’ lawyers have estimated that claims against the company may total as much as $10 billion. The Supreme Court’s action is a setback for GM Chief Executive Officer Mary Barra, whose first year in the job was consumed by the ignition flaw linked to at least 124 deaths and recalls of 2.59 million vehicles. The Supreme Court’s decision creates a small risk that GM will have to reach a legal settlement that could interfere with paying out its dividend or buying back stock, said David Whiston, a Morningstar Inc. analyst.