CLO Yawn

posted by Adam Levitin

There's a big story in the NY Times about how the financial structures being used to finance many corporate loans—so-called Collateralized Loan Obligations or CLOs—look very similar to those used to finance mortgages during the housing bubble.  Yup.  That's true. CLOs are a securitization structure, like MBS.  (If you want to know more gory details, see here.)  But that's really where the similarities end.  While the financing transactions are similar, the asset class being securitized is fundamentally different in terms of the risk it presents, and that's what matters.  The financing channel might be more vulnerable to underpricing than other financing channels because of opacity and complexity, but is the underlying asset class that matters in terms of societal impact.  This is for (at least) four reasons. 

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CFPB "Abusive" Rulemaking?

posted by Adam Levitin

Acting BCFP CFPB Director Mick John Michael Mulvaney announced this week that the CFPB would be undertaking a rulemaking to define "abusive," the third part of the UDAAP triad. The CFPB's key organic power is to prohibit unfair, deceptive, and abusive acts and practices.  Unfair and abusive have statutory definitions, whereas deceptive does not, but "abusive" is a new addition to the traditional UDAP duo of unfair and deceptive.  Mr. Mulvaney suggests that a definitional rulemaking is necessary so that regulated entities will know what the law is. 

Actually, it's very clear what "abusive" means, at least as applied by the CFPB to date.

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Trump socialism and housing finance

posted by Alan White

Various tax law scholars have commented on the tax fraud allegations in the recent New York Times story. Equally important is the story's reminder that our housing finance system, and the real estate fortunes it has spawned, have depended for nearly a century on the largess of government.

Fred Trump, the president's father, built the fortune that Donald Trump inherited after avoiding or evading millions in estate and gift taxes.  Fred's fortune was almost entirely due to his savvy exploitation of federal government housing subsidies. When Roosevelt's New Dealers struggled to put the economy back on its feet, they invented the FHA mortgage insurance program, and Fred Trump was one of FHA's first profiteers. As recounted in Gwenda Blair's wonderful book, Fred went from building one house at a time to building Huge middle-class apartment complexes when he was first able to tap into government-backed FHA loans.  Screen Shot 2018-10-15 at 10.40.49 AM

 In his fascinating 1954 testimony before the Senate Banking Committee (begins at p. 395), Fred Trump explains how he purchased the land for the Beach Haven apartments for roughly $200,000, put the land in trust for his children and paid gift taxes on a $260,000 land valuation, and then obtained a a $16 million FHA mortgage to build the apartments.  Fred's corporation owning the buildings netted $4 million from the loan proceeds above and beyond the construction costs, and the land belonging to the Trump childrens' trust was valued by the City tax assessors at $1.3 million as a result of the FHA mortgage transaction and apartment construction. In other words, Fred Trump parlayed his $200,000 investment into a $4 million cash profit for his business and a $1.3 million ground lease producing $60,000 annual income for his children. In his testimony he conceded that this would have been impossible without the FHA government loan guarantee.

Peter Dreier and Alex Schwartz have written a nice exposé of the irony in President Trump's proposals to slash the very government housing finance subsidies to which he owes his personal fortune.

More on PSLF fail

posted by Alan White

The US Education Department is assigning the complex task of monitoring the employment and the on-time payments of Public Service Loan Forgiveness aspirants to its worst-performing servicer. USED has contracted with servicing company FedLoan, affiliate of the Pennsylvania Higher Education Assistance Agency (PHEAA), to administer the Public Service Loan Forgiveness program. PHEAA/FedLoan has performed its contract obligations poorly. At the end of 2017 the Department ranked FedLoan 9th out of 9 servicers based on a combination of delinquency rates and customer satisfaction survey results.  Based on this poor performance, US Ed will allocate only 3% of new loan servicing to FedLoan. However, all public servants who are applying for Pubic Service Loan Forgiveness are assigned to FedLoan for loan servicing.

FedLoan's application of the Department's "every month by day 15" payment rule has led to truly absurd impediments to public servants qualifying for PSLF. Borrowers who make an extra monthly payment, and therefore cause all subsequent payments to be posted to the month BEFORE the payment was made, are told those payments don't count, because they are not made in the month they are due. Other borrowers find that while they continue making on-time payments and are trying to correct FedLoan's recordkeeping errors, FedLoan will place their account in administrative forbearance. Administrative forbearance means that no payments are due, so that even if the borrower continues making a payment called for by their income-based repayment plan, the payment will not count towards the 120 needed to qualify for forgiveness.

The servicers are paid for each month they continue to service a loan (more for a performing loan, less for a delinquent loan.) While this makes some sense as a contract design, it does create a disincentive for servicers to approve public service loan forgiveness and other discharges (like permanent disability.)  Servicing contracts also create incentives for servicers to put borrowers into forbearance rather than income-based repayment. The PSLF fail comprises a combination of regulatory failure, contract design failure and contract supervision failure.

World Bank Group's Proposals on Small Business Insolvency

posted by Jason Kilborn

At long last, the World Bank Group's insolvency and debt resolution team has finally released to the public its report on the treatment of the insolvency of micro-, small-, and medium-sized enterprises, Saving Entrepreneurs, Saving Enterprises : Proposals on the Treatment of MSME Insolvency. The team worked for over a year on this report, concluding with a meeting of its Insolvency & Creditor/Debtor Regimes Task Force in May in Washington, D.C., where the report and its proposals were vetted. There was a surprising degree of consensus on the proposals developed here, and the final version reflects a fairly widely shared viewpoint on three key points.

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No comment

posted by Stephen Lubben

In this morning's email:

Moody's Investors Service downgraded its Probability of Default Rating (PDR) for American Tire Distributors, Inc. ... following the company's announcement that it had initiated Chapter 11 bankruptcy proceedings...

Million public servants counting on broken PSLF program

posted by Alan White

Screen Shot 2018-09-29 at 7.16.15 AMThis week we learn from the GAO that more than 1 million public servants have applied to certify their work and their student loan payments as qualifying for Public Service Loan Forgiveness. The number seems to be growing by about 300,000 annually. These teachers, child care workers, firefighters, soldiers, police officers, nurses, prosecutors, and public defenders, are facing a gauntlet of needlessly complex and exacting rules to receive the debt relief Congress promised them.

According to the GAO report, 40% of the tens of thousands of rejected applicants were found not to have made the required 120 monthly payments. The Department of Education's regulations for the program, 34 CFR 685.219, require that there be 120 "separate" monthly payments, that every payment be made within fifteen days of the due date, in the required amount, and under a qualifying repayment plan. This creates all sorts of problems, for example, when a servicer delays posting a timely payment until day 16, or a borrower has an emergency and makes 2 payments in a lump sum, or especially for borrowers who receive employer or law school assistance in making their payments. The "every month by day 15" rule was not written by Congress. The statute, Section 455(m) of the Higher Education Act, requires only that public servants have made 120 monthly payments under a qualifying plan. A less procrustean payment rule would be an easy regulatory fix.

Only Federal Direct loans qualify, not private or guaranteed loans. However, borrowers can use a Direct Consolidation loan in many cases to convert ineligible student loans into eligible loans.

The statute also requires that the public servant have been in a qualifying full-time job "during the period in which the borrower makes each of the 120 payments. . . ."  This requirement has also been interpreted strictly by the Department, and may create problems for public servants changing jobs or job assignments, teaching for only part of the year, and so forth. It also appears that some simple technology fixes could go a long way towards fixing the problems. For example, a public servant's monthly loan statement could show a running total of months earned towards the 120 total required, perhaps with two check boxes for timely payment, and qualifying work.

Another obvious fix is to provide assistance for public servants whose applications were rejected, to calculate exactly what they need to do to finish making 120 qualifying payments and receive their discharge. The problems with this program are being widely reported.  What is needed now are solutions from Congress, the Education Department, and the servicer (PHEAA/FedLoan.)  

 

 

 

ISDA Promotes a Race to the Bottom

posted by Stephen Lubben

Frustrated that Congress did not decide to collapse the CFTC and SEC as part of Dodd-Frank, and facing the reality that the SEC is still working on its rules under Title VII of Dodd-Frank, ISDA, the swaps industry trade group, is out with a white paper that urges the adoption of a "safe harbor."

This is not the infamous bankruptcy safe harbors, but rather a rule that would be adopted by both regulators. The basic idea is that compliance with one regulator's rule is "good enough." That is, swaps traders could choose which regulator they want.

What could possibly go wrong?

Public Service Loan Forgiveness Fail

posted by Alan White

20,521 applications rejected as ineligible. 96 borrowers approved.  Those are the early results for the Public Service Loan Forgiveness program. PSLF promised student borrowers with federal Direct Loans who worked in qualifying public service jobs that they would have their loan balances discharged after 10 years of income-based repayment. The first cohort of PSLF borrowers applied beginning in the Fall of 2017, so these results reflect the first year of borrower attempts to receive the benefits they were promised. The three eligibility requirements were to work in a qualifying public service job, make all income-based payments for 10 years, and have a federal Direct loan. The Education Department's report does not break down the rejections by failed eligiblity criteria. It has been widely reported that what U.S. Ed. considers a "public service" job has been a moving target, and servicers have misled borrowers about the program, but that surely cannot explain these dismal results. Perhaps some Congressional oversight is in order.

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