Interest by Any Other Name Would Cost Just as Much

Some odd news has reached my desk about Illinois's Predatory Loan Prevention Act (PLPA) and efforts to clarify its application to pawnbrokers. As many Credit Slips readers will know Illinois passed a 36% APR cap on consumer lending in 2021. The cap applies "notwithstanding any other provision of law" and specifically excepts banks but no other other lenders.

Despite this language, the pawnbroker industry filed suit claiming it was not covered by the law. Every state has a specialized law regulating pawnbrokers. It was not frivolous to claim the PLPA did not apply, but it did not seem like a winner given the PLPA's clear statutory directive. Nonetheless, a state trial judge granted a preliminary injunction preventing the Illinois Department of Professional and Financial Regulation from enforcing the PLPA against pawnbrokers. It was perhaps a lucky break they drew the same state trial judge that had issued a temporary restraining against the vaccine and testing mandates by the Chicago Public Schools only to be reversed twelve days later. Two years has passed since the preliminary injunction was issued, and that litigation still languishes (which is another story for another day).

There have been efforts for legislative action to clarify the application of the PLPA to pawnbrokers. This is where the odd news comes in because the story is that there is squabbling over whether pawnbrokers are already subject to a 3% per month/36% per year cap. To understand that, we need to dig a bit into the Illinois Pawnbroker Regulation Act.

Creative Destruction in Small Business Bankruptcy

Two distantly related items caught my eye this morning, as both reinforce the need for "creative destruction" as a response to all-too-common small business failure.

The first was a NYT piece on the travails of a female entrepreneur in China. It tells a heart-wrenching story of a system in which the state brutally represses honest but unfortunate debtors, including via the infamous blacklist that prevents defaulters from using air and train travel (effectively curtailing re-entry into business, even if financial and economic factors might otherwise allow this). This is a story about what it looks like when there is no bankruptcy backstop, no reset button to start fresh and undertake a new venture with the hard lessons of failure firmly in mind.

The other item explores the transition from such an unforgiving system--in Spain--after the introduction of a discharge for (most) small business debt. The linked Bank of Spain working paper offers further evidence of the salutary effects of small business bankruptcy that discharges individual entrepreneurs and encourages them to restart. The reform fostered the "creative destruction" of these entrepreneurs' ventures, with the failed firms exiting the market (rather than lingering as productivity-depressing zombies), which "leads to technological change and higher productivity growth" as "the introduction of the fresh start policy promoted firm creation among Spanish micro-firms, especially in companies with a high share of intangible assets, which are likely to be involved in innovation activities, and in sectors with high productivity." Nicely linking the two contrasting accounts from China and Spain, the Bank of Spain paper concludes, "This finding also suggests that a starkly pro-creditor personal bankruptcy law with no real fresh start, like the Spanish one before 2015, may be an important barrier to entry for small businesses." Indeed.

It still surprises me that lawmakers around the world continue to resist this long-established truth for small business, powerfully undermining the most important driver of economic development worldwide. Worse yet, the mere introduction of a personal bankruptcy law with a debt discharge is not enough--the system actors have to actually support a fresh-start policy rather than actively undermining it, which turns out to have been the disappointing result of the first two years of such a system in Shenzhen, China. One hopes that national legislatures, like small entrepreneurs, can learn from failure and move forward with proper personal bankruptcy laws when given a fresh opportunity to do so.

Nondebtor Releases and the Future of Mass Torts

Certain members of the bankruptcy academy and bar seem to have their knickers in a twist over the Supreme Court’s grant of certiorari to review the nonconsensual nondebtor releases in Purdue. Conventional wisdom is that SCOTUS is going to find that there's no statutory authority whatsoever for nonconsensual nondebtor releases outside of the asbestos context (expressio unius and Congress doesn't hide elephants in mouseholes....).

Let's be clear: nonconsensual nondebtor releases are not necessary to resolve mass tort cases.

Unhappy Campers and Their Credit Cards

This story about the failure of a company that ships duffel bags to/from sleep-away camps has an interesting payment systems meets bankruptcy angle that got me particularly excited given that I'm teaching payment systems this fall:

Parents are disputing the Camp Trucking fees with their credit card companies, but so far there haven’t been any resolutions. “We told them they’ll probably become creditors in a liquidation and get 20 cents on the dollar in five years,” said Mr. Aboudara [a camp network director].

Credit cards offer better purchase protection than any other payment medium, but it's not absolute, and this situation seems to fall into one of TILA's crevasses. 

Treasury in the Red... with Yellow

Freight company Yellow is on the verge of bankruptcy. It's not a company whose financial distress would normally stand out but for the fact that it received $700M in national security loans from the US Treasury in 2020, and, oh man, are taxpayers going to take it on the chin. 

The Treasury financing was one of a eleven of national security loans made as part of the CARES Act, and it accounted for 95% of the total dollar amount of those loans.  These weren't PPP loans, but were supposed to play a sort of analogous role, ensuring that companies critical to national security would be able to keep operating. There are really two loans from Treasury to Yellow:  a Tranche A loans and a Trache B loan. 

The Tranche A loan is for $300M and is secured by a junior lien on Yellow's accounts receivable, cash, and various other squishy stuff. Tranche B is for $400M and is secured by the vehicle fleet it financed—something like 1,100 tractors, 1,600 trailers, and 140 containers.  Both loans are cross-collateralized with each other, meaning that the collateral for Tranche A supports Tranche B and vice-versa. The Tranche A and Tranche B loans sit behind approximately $1B of pre-existing debt in the form of (1) a revolver that's secured by the accounts receivable and cash and (2) a term loan (Apollo) secured by Yellow's terminals and rolling stock (other than those financed by Tranche B). Treasury also took an approximately 30% equity stake in Yellow.

There's no way to sugar coat this:  Treasury's screwed on the Yellow loans.

Axos Bank--More Sketchiness?

The Washington Post has a big piece up about Axos Bank being the lender-of-last-resort for Donald Trump. But those us who work in the consumer finance space, know of Axos as a notorious bank partner in rent-a-bank arrangements. Axos is the bank parter of World Business Lenders, an outfit that charges small businesses incredibly high rates of interest (268%!), deceptively disclosed as daily percentage rates rather than annual rates. And of course these loans are backed by personal guaranties from the owners, so they are in many ways like consumer loans. 

Axos is a federal savings association, regulated primarily by the OCC, and headquartered in San Diego, California. So you'd think that Axos would only be able to export California interest rates, which would not in most circumstances allow for interest rates anywhere above 10% on business loans. But there's a set of OCC opinion letters from the 1990s that says that the relevant usury rate is the rate in the state in which the branch of the bank making the loan is located, not the location of the bank for chartering purposes. That's how Chase is an Ohio charter, but can charge Delaware rates. As for Axos, it claims that it makes its loans out of its Nevada branch, and Nevada law does not generally have a usury rate for written contracts, so Axos claims it can charge what it wants. 

The OCC opinion letters are only about national banks, not federal savings associations, which is an opening for the OCC, if it cared to do something about this problem. Plus, even for national banks, the opinion letters are hardly ironclad legal reasoning and could readily be repealed without notice-and-comment rulemaking. In other words, the OCC could solve rent-a-bank tomorrow if it wanted to do so. 

Putting aside the legal standard, the factual application of the OCC opinion letters to Axos seems sketchy. Axos's claim to be making the loans out of its Nevada branch, which is supposedly a "full service branch", but it's located on the 4th floor of a Vegas office park building that seems to generally be virtual offices and shared office space. (Does it remind anyone of the old trick of using a Westchester, NY, virtual office for getting bankruptcy venue in White Plains?) To be sure, there's an Axos sign on the building, but the 4th floor of an office park is a very strange place to locate a "full service branch"--it doesn't exactly invite walk-in business. Whether the loans are really being made out of the Nevada branch--meaning, I'd think, that the personnel involved in the underwriting are all in Vegas--is the sort of thing I would hope an OCC examiner would examine.... 

Consumer Law Scholars Conference--Call for Abstracts

The Center for Consumer Law & Economic Justice at Berkeley Law has announced the call for abstracts for the 2024 Consumer Law Scholars Conference. Abstracts are due by September 8, 2023, for the conference scheduled for February 29-March 1, 2024. The conference welcomes abstracts from a wide array of methods and virtually any topic involving consumers in the marketplace. More information about abstract submission is here. 

The Puzzle of Diaspora Bonds: A Case Study of Israel's Program

Many countries have attempted to tap their diasporas by issuing bonds.  This has particularly been the case in times of dire need (wars, pandemics, international sanctions, financial crises, and more).  Ukraine is the most recent to have attempted to do this and failed.  Other recent failures include Pakistan, India, Ethiopia and Greece, some of whom turned to bank deposit schemes when attempts to do full scale bond issuances did not succeed

A superb new paper by Doug Mulliken, motivated by the many failures to issue diaspora bonds, does a deep dive into the one program that has not only been successful, but has remained so for over a seventy-five year period: The Israel Bonds program.  

Doug's paper, titled, "It’s not just money; you are investing in your identity”: Israel, the Jewish Diaspora, and the Israel Bonds program,is on ssrn.com.

The abstract reads:

Israel has been selling diaspora bonds for almost as long as the country has been in existence, with the original 1951 Independence Bonds being issued just three years after the State of Israel’s establishment as an independent nation. For over 70 years, both in times of crisis and times of strength, Israel has used the Israel Bonds program to call on the Jewish diaspora — most significantly in the United States but also in Canada and across the world — to provide the country with a layer of financial security that is, in many ways, unprecedented in modern history. The importance of Israel’s diaspora bond sales has evolved over time: it functioned as a load-bearing support of Israel’s economy in the program’s early days when, in the aftermath of World War II, sovereign debt markets had essentially disappeared; it now serves a far more important symbolic function, allowing Jews across the world to develop a connection with Israel by contributing some modest amount to the country’s well-being.

This analysis considers the social and historical context of the Israel Bonds program, taking into consideration the almost emotional connection that the bonds allow members of the Jewish diaspora to feel towards the State of Israel. Most importantly, this study examines the terms of the bonds themselves, comparing both how Israel Bonds mirror traditional Eurobonds and, in particular, how the two types of issuances differ. With this, the analysis hopes to shine a light on an under-studied, but incredibly significant, aspect of Israel’s economic development.