Madden v. Marine Midland Funding

posted by Adam Levitin

In a recent case called Madden v. Marine Midland Funding, the Second Circuit ruled that a loan owned by a debt collector violated New York's usury statute.  The loan had been originally made by a national bank and was subsequently sold to the debt collector when it was in default.  There's no question that the state usury law was preempted when the loan was held by the national bank.  The Supreme Court's (awful) Marquette National Bank v. First of Omaha Service Corp. decision from 1978 makes that very clear.  (The Court suddenly discovered in 1978 that over a century of legal understanding of the 1864 National Bank Act was somehow wrong and that banks had been leaving lots of money on the table.)  

The debt collector argued that because the loan had been made by a national bank, it carried preemption of state usury laws with it as a permanent, indelible feature.  "Applesauce!" proclaimed the Second Circuit:  National Bank Act preemption of state usury laws extends no further than National Bank Act regulation.  Preemption is part of a package with regulation, but once the loan passes beyond the hands of a National Bank, it loses its preemption protection and becomes subject to state usury laws.  (Some of you might recognize that this is an argument I made several years ago. Plaintiff's counsel sent me a very nice email to this effect.  You owe me a citation, 2d Circuit!).  

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Notifying Potential Claimants in Diocese Chapter 11 Cases

posted by Pamela Foohey

Since 2004, 12 Catholic dioceses have filed under Chapter 11. The latest case is that of the Archdiocese of St. Paul and Minneapolis, which filed in January 2015. The claims bar date is set for August 3. How should the Archdiocese go about notifying potential claimants -- clergy abuse survivors who have not yet come forward and who may feel ashamed and alone -- that they need to file a claim by the bar date?

Yesterday the official unsecured creditors' committee (which is comprised of five clergy abuse survivors) filed a motion requesting that the bankruptcy court order all 187 parishes to play a 7 minute video in which three abuse claimants explain the necessity of filing a claim by the bar date and talk about, from their unique perspectives, why coming forward, however hard it may be, is important, both for survivors and for the church. (The motion also requests that parishes publish the video on their websites.)

The video is hard to watch. The motion states that the committee tried to come to an agreement with the debtor and the parishes about the video. The motion identifies "cooperation clauses" in insurance contracts that require insured parties (the parishes) to limit the liability of the insurers to the greatest extent possible as the main problem that stalled negotiations. It also is understandable that parishes might not want to show the video or put it on their website simply because it is hard to watch. But ultimately I think that the video is a very worthwhile idea, as a legal and community-building matter.

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Gelpern on Puerto Rico and Greece on Rehm

posted by Bob Lawless

Credit Slips blogger, Anna Gelpern, was on the Diane Rehm Show this morning discussing the financial problems in Puerto Rico and Greece. Gelpern of Georgetown University was joined by Greg Ip of the Wall Street Journal and Matthias Matthjis of Johns Hopkins. A link to the full audio program can be found here

Searching CFPB Consumer Narratives

posted by Pamela Foohey

Yesterday the Consumer Financial Protection Bureau (CFPB) went live with its consumer complaint database, publishing over 7,700 consumer narratives detailing problems they have faced with banks, debt collectors, and other creditors. The CFPB also issued a request for information seeking public input on how it can make the data more useful to the public, including how to normalize the narratives to make them more comparable. Which prompted me to search through some of the narratives.

The website allows for viewing of the narratives online by products and services, as well as downloading of data. Some of the products are broken down by sub-product--such as medical specific debt collection and payday loan specific debt collection. The narratives in each product category seem to be searchable by words and phrases. For instance, I searched the payday loan product category by the name of a notorious lender.

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Is There a Student Loan Debt Crisis?

posted by Adam Levitin

I've been a skeptic for some time about claims that we have a student loan "crisis" in the United States. For individuals mired with student loan debt, it is very much a crisis, of course.  But my reluctance to term growing levels of student loan debt a crisis reflects the fact that student loan debt is highly concentrated within the population and is generally structured in a way that does not create sharp liquidity crises:  long (and often deferrable) maturities, no sharp repayment shocks, and often offers established repayment and forgiveness programs. (This is more true of government loans than private loans.) And, while student loan debt is growing rapidly, it is still only about a 9th of the size of the mortgage market. All of this has kept the student loan kettle from boiling over.  

Yet at the same time it is precisely because of the concentration of student loans in the younger population that it is concerning.  Large debt loads at the beginning of one's adult life are likely to have very different effects on than debt spread out over a life time.  Moreover, student loans are not incurred based on current income, but on assumptions of future income (if that), so student loan debt burdens are more likely to be poorly calibrated to borrower's actual earning capacity. Additionally, because student loan debt is not dischargeable in bankruptcy (except in extreme circumstances), unlike other types of debt, it likely to stick around.  And, unlike various types of secured debt, there is no "put" option. A homeowner who runs into trouble with a mortgage or a cash-strapped auto loan borrower can always sell the house or car (or let them be repossessed) to pay off part or all of the debt. That's not possible with unsecured debt.  

The real concern with student loans is not an acute liquidity crisis, like a mortgage payment resets or a massive surge in defaults, as with underwater homeowners.  Instead, the systemic danger from student loans is a debt overhang problem in which consumers' consumption habits are altered by the constant drag of debt service. That's not a "crisis" yet, but it's a problem that needs to be addressed before it becomes one. 

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More on AIG: Between Hysteria and Complacency

posted by Anna Gelpern

I agree with Adam about all that post-Starr hyperventilation. No, it does not mean that bailouts are over, that the Fed has been slapped down, or any of that lurid stuff. (Though tabloidness does feel strangely gratifying in financial journalism.) Nevertheless, we should be careful not to dismiss the AIG decision as a realist vignette. Its implications for crisis management will become clearer over time, and may well turn out to be important.

At first blush, Starr feels like a stock crisis move by the Court of Claims, evoking the Gold Clause cases in 1935, where the U.S. Supreme Court held that the Congress violated the 14th amendment when it stripped gold clauses from U.S. Government debt, but denied Court of Claims jurisdiction because the creditors suffered no damages. Had they gotten the gold, they would have had to hand it right over to the Feds. And if you measured the creditors' suffering in purchasing power terms, getting their nominal dollars back still put them way ahead of where they had been in 1918 thanks to all the deflation.

Putting this history together with Starr, I wonder about two implications. First, it would have to be awfully hard for a firm getting federal rescue funds in a systemic crisis to prove damages. See also the car bailout stuff. By definition, the firm's best case is the gray zone between illiquidity and insolvency (I called it "illiquency" back then). If you accept that a court is unlikely to enjoin a caper like AIG in the middle of a crisis, this gives the government a fair amount of scope to act, even if it turns out to be off on authority after the fact.

Second, the Greek mess makes me think that the real concern in crisis is not with ex ante constraints on bailouts working as planned, but rather with accidental institutional malfunction. At some point (not yet), all the sand in the wheels will create enough friction that policy makers will not be able to respond to a tail event in a sensible way. No institution would have the authority to do "whatever it takes," and no decision-maker would be willing to take the risk. Maybe this is as it should be, but it does give me pause. 

Relief Delayed for Russian Consumer Debtors?

posted by Jason Kilborn

BlindbearI studied Russian in college because I thought a post-Gorbachev Russia was poised to become an economic superpower. I've been bitterly disappointed to see that country's leaders taking one step forward and two back for years now. The latest disappointment concerns my new academic focus: consumer bankruptcy.

First, Russian lawmakers seem to have ignored the rest of the world as they drafted a new law on "rehabilitative procedures" for "citizen-debtors." The law reflects neither direct input from international experts nor indirect analysis of the challenges and successes that dozens of other countries have encountered over the past 30 years with consumer insolvency systems. That Russia would ignore the 120-year-old U.S. consumer bankruptcy system is understandable; that it would ignore 30 years of recent trial and error in Europe and the rest of the world is ... disappointing.

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Andrew Ross Sorkin in SO Wrong about Starr v. Board

posted by Adam Levitin

Andrew Ross Sorkin is waiving his arms about the Starr v. Board of Governors ruling being the "end of bailouts." And he is SO wrong.  Sorkin writes that "Legal experts say that the ruling, coupled with certain provisions of the Dodd-Frank financial overhaul law enacted after the crisis, makes it unlikely the government would ever rescue a failing institution, even if an intervention was warranted." 

I don't know which "legal experts" Sorkin is referring to (not least as he doesn't name any), but anyone who has imbibed the slightest draught of legal realism will recognize that bailouts are never constrained by law. The prime directive in a financial crisis, as Anna Gelpern has taught us, is to prevent the ship from sinking.  All other concerns--legality, moral hazard, expense, etc.--are jettisoned the moment they get in the way. Afterwards there's inevitable finger waging and cases like Starr, but whenever there's trouble again, we'll be right back at it. Put another way, the Fed is not Superman, but Batman. It will break the rules to protect Gotham, no matter what.  And that's probably the way we want it deep down.  

So what does Starr mean? The ruling is a justly deserved embarrassment for the Fed. There were a lot of ugly details that emerged during the trial that Sorkin doesn't want to mention, but in the end, the case really doesn't matter when one looks at the big picture. It is going to have ZERO effect on future bailouts. So Sorkin and others can be outraged that the mighty Fed was called to task for the imperious way it conducted the bailouts, but this judicial tonguelashing is just that and nothing more. 

After Hey Hey, Ho, Ho, Mary Jo It's Time to Go

posted by Adam Levitin

Senator Warren has written a pretty stinging rebuke of the ineffectiveness of Mary Jo White as SEC Chair. The take-away from Senator Warren's letter is that it's time for MJW to go: the SEC needs new and effective leadership. The SEC was asleep at the switch during the lead-up to the financial crisis and its post-crisis performance has been less than impressive. In a target-rich environment, the SEC has not notched any major enforcement wins and its rulemaking has been milquetoast (and in many cases continues to be delinquent, five years after Dodd-Frank required the rules). The SEC has also been unwilling to seriously discipline large financial institutions, creating a double standard in which insider traders and boiler room operators are treated much harsher than recidivist institutions.  

I don't know if MJW will be out the door in a month or if she'll tough it out until the next administration. But I think it's useful to ask why things went so wrong with MJW and how not to repeat the mistake of her appointment.  

My view is that MJW had entirely the wrong background to be running the SEC. MJW's background was as a litigator:  a US Attorney and defense counsel at Debevoise Plimpton. She's got impressive litigation chops.  The SEC Chair, however, is not a litigation position. It's a policy and administrative position. The SEC Chair doesn't run litigation and cannot single-handedly direct litigation. The SEC in general does a lot more than litigation, including rulemaking and oversight. It's ambit extends far beyond the stupid, but headline grabbing insider trading cases and reaches into much more important things like regulation of rating agencies and safety-and-soundness issues with clearinghouses and broker-dealers.  So why would a litigation resume be what we want in an SEC Chair?  Many of the most important issues before the SEC never end up in litigation. In fact, the stuff that gets litigated is often the more minor stuff, like prosecution of penny stock frauds. 

I'm not sure what the ideal resume for an SEC Chair is, but I think it has to be someone who has some policy chops, not another former prosecutor or securities litigator. Unfortunately, a President who wants to indicate that s/he'll be tough on Wall Street often thinks the best way to signal this is to appoint a former prosecutor.  Hopefully we won't fall for that trick again. If we want better securities regulation, a prosecutor is probably the wrong choice to head the SEC. 

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