postings by Dalié Jiménez

Reparations Claims by the Herero and Nama Against Germany

posted by Mitu Gulati

About two years ago, in 2017, an intriguing lawsuit was filed under the Alien Tort Claims Act in New York. It was filed by members of the Herero and Nama tribes for the genocide of their ancestors that took place in what is now known as Namibia. In March this year, Judge Laura Taylor Swain, who readers of this blog may know from the Puerto Rican financial drama, ruled that the claims against Germany were barred by that nation’s right of sovereign immunity. As an aside, having oversight of the Puerto Rican debt debacle is not Judge Swain’s only connection to sovereign debt lore – she also sits in the judgeship vacated by none other than Judge Thomas Griesa of pari passu infamy. For accounts of the above mentioned class action by the Herero and Nama, see here and here. (Lawsuits on roughly similar grounds had been attempted earlier as well; see here).

This outcome is probably not surprising for anyone who has followed the fate of human rights litigation over the past few years brought under the Alien Tort Claims Act. Basically, under the direction of the Supreme Court, the possibilities for victims of human rights violations that took place overseas to foreigners with no more than minimal connections to the US (in terms of the claims themselves) have been severely curtailed.

My reason for bringing this up is that this is a history that I knew little about until I started coming across references to the genocide in Namibia in accounts of the Congo where, similar horrors were taking place in the 1890s and early 1900s under King Leopold of Belgium (Joseph Blocher and I have been working on the question of contemporary implications for international law of the transfer of control that took place after the genocide in the Congo (here)). Still though, these references didn’t give me anything close to a sense of how horrific things had been there.

That is, until I came across this case and began reading the filings in more detail. And one of the most interesting pieces I’ve found is by German scholar Matthias Goldman that both uses original archival research to describes the events that took place and uses them to question our contemporary understanding of the law of sovereignty. The law of sovereignty, as with all of customary international law, is based on assumptions (often faulty – as Matthias shows in this case) about history. The article, “The Entanglement of Property and Sovereignty in International Law”, is short and eminently readable (here). Matthias, who many slipsters know because of his work on sovereign debt matters, has not only been writing on the topic of the genocide in South Western Africa but has also been involved in the court case (he filed an affidavit in the Herero and Nama lawsuit).

I hope that Judge Swain’s decision is not the end of the road for the claims of reparations by the Herero and Nama. Maybe they will have better fortune with a filing in a German court?

The Mad Mad World of "No Contest" Provisions in Wills

posted by Mitu Gulati

It has been almost twenty-five years since I got hooked on the puzzle of why boilerplate financial contracts, even among the most sophisticated parties, have inefficient terms. Steve Choi and I were taking Marcel Kahan’s Corporate Bond class and we couldn’t understand why the classical model with its highly informed repeat players (with everyone hiring expensive lawyers) wasn’t working to produce the optimal package of contract terms. Marcel presented a very coherent set of explanations for this phenomenon of contract stickiness having to do primarily with network and learning externalities.  And under that model, it was plausible to have equilibria where sophisticated commercial parties and their lawyers could know that they had suboptimal contract terms and yet be somehow unable to change them easily (thereby creating the phenomenon of “sticky” contracts).  Marcel though repeatedly emphasized to us that he had but scratched the surface of a topic worthy of much more investigation (for the classic Kahan & Klausner (1997) paper and its equally wonderful predecessor by Goetz & Scott (1985), see here and here).

Over the past two decades, since the publication of Kahan & Klausner’s sticky boilerplate paper, there have been a number of advances to our thinking about the phenomenon of sticky boilerplate. Most of them, however, have been focused on the worlds of mass market contracts of sophisticated finance or transactions where one of the sides to the transaction is a big repeat player (corporate bonds, sovereign bonds, M&A contracts, insurance). 

A wonderful new boilerplate paper though takes on an altogether unexpected area where I had always thought of the contract-type instruments as being highly tailored: that of Wills. The paper is “Boilerplate No Contest Clauses” posted about a month ago by David Horton (UC Davis) and Reid Weisbord (Rutgers). 

The paper identifies a persistent inefficiency in Wills – an area that I suspect most contract boilerplate scholars are utterly unaware to. That itself is interesting. But this paper goes beyond the traditional boilerplate contract scholarship which, as noted, identified the stickiness problem in mass market contracts.  Wills, as I understand the story that David and Reid tell, tend to always have both an element of tailoring for the individual client and an element of blind unthinking cutting and pasting from prior standard forms. What David and Reid show beautifully in their paper is that the boilerplate portion of the contract (and specifically, the “No Contest” provision) can often undermine the tailored portion that more specifically reflects the intent of the party making the Will.

For those not familiar with these clauses, the following is typical:

If any beneficiary under this Will in any manner, directly or indirectly, contests or attacks this Will or any of its provisions, any share of interest in my estate given to that contesting beneficiary under this Will is revoked . . . . “

Basically, this says: Don’t you dare challenge this Will. If you do, you might lose everything.

Problem is, as David and Reid explain, that there are situations where complications arise with the Will and someone has to go to court to get the complications resolved. That then presents the risk that some dastardly beneficiary will claim that the No Contest clause has been triggered vis-à-vis the innocent beneficiary who is just trying to solve a problem with the Will that the testator didn’t take into account. End result: The intentions of the testator are undermined. Even if the court ultimately tosses the challenges being made on the basis of the No Contest clause, time and money gets wasted.

Why does this clause persist?  The answer given by Reid and David is straightforward: These clauses are cut and paste from prior Wills without thought. They are part of the boilerplate that neither the lawyers nor their clients pay any attention to.  But why not?  The standard explanations from the boilerplate literature such as network/learning externalities, first mover disadvantages, negative signaling, status quo bias, inadequate litigation, etc., do not seem to apply particularly well.  Nor do explanations about big firms who are repeat players exploiting innocent customers who are one shot players.  So, given that the standard explanations do not work, why is the subset of the market for legal services not working?  Are the lawyers not being paid enough to read the boilerplate portions of the Wills and think through the contingencies?  (Best I can tell, the lawyers do actually understand the problem, since there has been lots of litigation over these types of clauses).

Continue reading "The Mad Mad World of "No Contest" Provisions in Wills" »

Lowdermilk on Family Farmers in Financial Trouble - new paper!

posted by Melissa Jacoby

Jamey Mavis Lowdermilk has just posted an article of interest to Credit Slips readers -- lawyers, judges, journalists, policymakers, and more. The article uses a case study of a chapter 12 family farm bankruptcy in North Carolina to ask bigger questions about farming finances and how public policy on farming is set. Extending the early work of now-Representative Katie Porter, Lowdermilk brings her own perspective and expertise to this topic. Before law school, Lowdermilk obtained a masters degree in applied economics and statistics with a specific interest in agriculture as well as rural development, and held a variety of positions related to farms, forestry, and credit. During law school, she started this chapter 12 project in my advanced bankruptcy seminar. After law school, Lowdermilk continued to work on the project and revise the paper for publication as a law review article. Several wonderful bankruptcy judges graciously offered feedback as her first footnote documents. Please check it out!

New Guide to Money Judgment Collection/Defense

posted by Jason Kilborn

EyesonthePrizecoverI excitedly tore into a small box this morning containing the first printing of my new book, Eyes on the Prize: Procedures and Strategies for Collecting Money Judgments and Shielding Assets (Carolina Academic Press 2019). Since the advent of the Bankruptcy Code in 1979, the study of how one collects a money judgment (or arbitral award) in law schools has become as rare as an involuntary bankruptcy petition against an individual debtor. But my students (and local lawyers) clamored for treatment of the topic for years, so I decided to do what I could to revive the subject. I was surprised at the diversity of approaches I found among the states (whose enforcement law applies to federal judgments, too, as described in the book), but I think I fairly survey the key variants by concentrating on a detailed exposition of the laws in New York, California, and Illinois, with a smattering of other salient state laws thrown in here and there (Texas, Florida, Pennsylvania, Iowa, etc.). In the past, I've used my state's statutes and a series of hypothetical practice problems (both of which included in this book) for years in my Civil Procedure classes, and the students have voraciously devoured that material. More detailed comparative knowledge has also sharpened my appreciation for how the battle between judicial lienholders and secured creditors works. I tried to offer soup-to-nuts coverage here, from discovery to asset protection to bankruptcy, so I think a lot of readers will find something useful, especially new practitioners who likely learned none of this in law school. A bit more of a preview than appears in the "Look inside" link on CAP's website is available for free download on SSRN, as well. Check it out--and let me know what you think!

PROMESA heads to the U.S. Supreme Court?

posted by Melissa Jacoby

In February 2019, the United States Court of Appeals for First Circuit held that the selection process of the Oversight Board in PROMESA, the rather bipartisan Puerto Rico debt restructuring law (and more), is unconstitutional. The reason: its members were not selected with advice and consent of the Senate, in violation of the Appointments Clause. In other words, it held that the Appointments Clause applies even when Congress created the positions through plenary power over territories, and that Oversight Board members constitute "Officers of the United States." The First Circuit also used the de facto officer doctrine to avoid a complete do-over; it did not dismiss the Title III petition of Puerto Rico (parallel to the filing of a bankruptcy petition), it did not invalidate the already-taken acts of the Board, and the Board could continue to act, at least until the court's stay runs out (originally 90 days, then extended to July 15). 

Given that last remedial twist, even the prevailing parties found reasons to dislike the First Circuit's ruling. Like the Jevic case, the PROMESA dispute invites unlikely bedfellows. Joining Aurelius Capital Management in challenging the First Circuit's ruling on the remedy is the labor union UTIER. They likely have little in common other than wanting a new Oversight Board, or, even better, no Oversight Board. A full bouquet of certiorari petitions followed, including one by the United States/Solicitor General predicting dire consequences if the Appointment Clause ruling stands. On June 20, 2019, the Supreme Court consolidated and granted certiorari on the various petitions. Argument is to take place in October.

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Seventh Circuit Smackdown of City of Chicago

posted by Jason Kilborn

The Seventh Circuit Court of Appeals this week released its opinion in In re Fulton, the highly anticipated consolidated appeal of four Chapter 13 cases involving debtors whose cars had been impounded. The City of Chicago had refused to release them to the debtors (exercising the rights of trustee under section 1303) after the petition filings, as clearly required by section 542 and Seventh Circuit precedent, Thompson v. GMAC, 566 F3d 699 (7th Cir. 2009). The Court rejected the City's arguments in favor of repealing Thompson or recognizing a stay/turnover exception for the City to maintain its possessory lien on impounded cars by keeping, well, possession.

The Court reached the right result here, in my view, and two things really jumped out at me. First, the Court explains several times that the case should be governed by "the purpose of bankruptcy - 'to allow the debtor to regain his financial foothold and repay his creditors.'" The Court's emphasis on the debtor-salutary purpose of bankruptcy is refreshing, even in cases where the repaying-creditors purpose is likely to be largely defeated.

More striking were the first lines of the portion of the opinion recounting the facts of Fulton's case. She used the car "to commute to work, transport  her young daughter to day care, and care for her elderly parents on weekends." You can already anticipate where the Court is heading in the case, but then it gets better: "On December 24, 2017, three weeks after she purchased a 2015 Kia Soul, the City towed and impounded the vehicle for a prior citation of driving on a suspended license." Really??!! The City towed and impounded her new car on Christmas Eve!!?? It probably still had a temporary plate indicating it was new. And it got towed for what? A prior citation having nothing to do with the car at all. Note to self, City of Chicago: When the Court opens the fact section with a smackdown recounting @$$hole behavior like this, you can just skip to the end. You lose. Three cheers for the Seventh Circuit again!

The Meaning of "Abusive" in the UDAAP Triad

posted by Adam Levitin

On June 25, the CFPB will be holding a symposium on the meaning of "abusive" in the Consumer Financial Protection Act.  "Abusive" is an expansion of the traditional FTC Act couplet of "unfair or deceptive" acts and practices (UDAP) to a triad of "unfair, deceptive, or abusive" acts and practices (UDAAP). Although the Bureau has operated for the past eight years without defining the term "abusive", it has indicated in its long-term rulemaking agenda that it intends to undertake a rulemaking to define "abusive"—presumably in response to US Chamber of Commerce complaints about legal uncertainty chilling business.

The symposium will have two panels, one of academics, one of practitioners.  Credit Slips will be well represented on the first panel by me and our former guest blogger, Patricia McCoy.  We'll be joined by Howard Beales of GW University's Business School, and the inimitable Todd Zywicki of Scalia Law School.    

My (lengthy) written submission (a/k/a everything you wanted to know about "abusive" but were afraid to ask) is here.  Bottom line, there's no reason for the Bureau to undertake a definitional rulemaking, its legal authority to do so is suspect, it cannot bind state AG's to any definition... but if it does do so, there's no scienter requirement, no cost-benefit analysis required, and "taking unreasonable advantage" sounds in unjust enrichment.   

Reverse Mortgage Meltdown ... and Gov't Complicity?

posted by Jason Kilborn

USA Today just came out with an interesting expose about reverse mortgages and their negative impact, especially in low-income, African American, urban neighborhoods (highlighting a few in my backyard here in Chicago). I have long been interested in reverse mortgages, touted in TV ads by seemingly trustworthy spokespeople like Henry Winkler and Alex Trebek as sources of risk-free cash for folks enjoying their golden years, and I am always on the lookout for explanations of the pitfalls. Most of these breathless critiques strike me as overkill, but the USA Today story reveals fairly compelling real stories of a few of the ways in which a combination of financial illiteracy and sharp marketing tactics can lead to bad outcomes ranging from rude awakening (heirs having to buy back their childhood homes) to tragedy (simple missed paperwork deadlines leading to foreclosure and an abusive accumulation of default and attorney fee charges).

One line really jumped out at me. In defense of their seemingly hard-hearted and Emersonian-foolish-consistencies-being-the-hobgoblins-of-little-minds conduct, an industry spokesperson deflects, "lenders would prefer to extend the deadlines for older borrowers but fear violating HUD guidelines." Another bank official chimes in, “No matter how heinous or heartbreaking the case, it’s not our call. There’s no wiggle room,” adding that the stress of being unable to behave in a commercially and morally reasonable manner “takes a toll on employees.” [Yes, the unquoted characterization of the rigid lender behavior is mine, not the bank official's].

"Really??!!," I wondered. I wouldn't put any outrage past the Trump administration these days, but forcing banks to foreclose because an elderly surviving spouse overlooked a single piece of paperwork and is prepared to fix the problem a few days past the deadline strikes me as ... hard to believe. Is the government complicit in these reverse mortgage tragedies because it forces lenders to observe rules and deadlines rigidly? If so, how sad and frustrating, and yet another sign of the failures of our modern political stalemate between rational compromise and hysteria, where the latter seems to be winning on all sides.

The New Bond Thing: Sub Sovereign Masala Bonds?

posted by Mitu Gulati

Bored on my flight into Kerala, India’s southern most state, a few weeks ago, I picked up a newspaper lying on the empty seat next to me.  Most of the news was either about the Indian elections and how the nationalist BJP party had swept to power or about or India’s prospects in the cricket World Cup.  What caught my eye though was a little piece in the back section with a photo of luminaries from Kerala’s Marxist party at the London stock exchange. Kerala, for those who don’t know, has a long tradition of cycling between electing the supposedly anti-market Marxists and their pro-market Congress opponents. But here, I was seeing the Kerala Marxist party leaders at the London Stock Exchange.  My first thought was: This is a gag. Turned out not to be though.  The occasion was a five-year rupee denominated bond issued by Kerala, with a Canadian pension fund as its anchor investor (For more, see here).

The celebration at the London exchange was for Kerala having issued the first ever sub sovereign “masala” bond issue on the LSE.  Masala bonds are rupee-denominated bonds issued overseas (like Dim Sum, Samurai and Yankee bonds) and there are almost fifty of these masalas out there.  This though was the first one ever issued by an Indian state on the international market. I was intrigued for multiple reasons.

First, this was the first international sovereign bond of any variety from post-independence India that I had ever seen.  India has long had an enormous capacity to borrow on the international markets.  But its sovereign entities, state and federal, have staunchly refused tap this capacity until now.   

Second, I’ve long been fascinated by the question of why some countries borrow internationally at both the national and state (or sub sovereign) level (e.g., Spain), and others do their international borrowing only at the national level and effectively constrain the states to borrow from domestic markets (e.g., U.S.).  Here, we appear to have a new third category:  tapping the international market at the state level and not doing so at the national level. 

Third, I had had the vague impression that the Indian constitution barred the states from tapping the overseas markets (the language of the constitution, best I can tell, is not crystal clear on the matter).  And yet here it was: a bond issued by a wholly owned corporation of the state of Kerala (the Kerala Infrastructure Investment Fund Board or KIIFB), fully backed by a state guarantee with a rating from Fitch of BB.

Continue reading "The New Bond Thing: Sub Sovereign Masala Bonds?" »

Home Contract Financing and Black Wealth

posted by Alan White

A remarkable new quantitative study finds that over two decades, African American home buyers in Chicago lost between $3 and $4 billion in wealth because of credit apartheid. The study authors from research centers at Duke, UIC and Loyola-Chicago reviewed property records for more than 3,000 Chicago homes. During the 1950s and 1960s, up to 95% of homes sold to black buyers were financed with land installment sale contracts rather than mortgages. Mortgage loans were largely unavailable due to continued redlining by banks and the Federal Housing Administration (FHA). Instead, a limited group of speculators bought homes for cash and resold them with large price markups to newcomers in the Great Migration. The interest rates for  land installment contracts were several points higher than comparable mortgage loans offered to whites. Thus, black home buyers were overcharged for the home price and the interest rate they paid compared with similar white home buyers. The authors quantify this as a 141% race tax on housing.

Buyers financing homes with installment land contracts also face greater risks of losing their homes and accumulated equity than buyers with a deed and mortgage purchase, for reasons we teach, or ought to teach, in any Property Law or Real Estate class in law school. A missed payment on a land contract can mean quick eviction, while a homeowner behind on a mortgage is protected in many states by foreclosure procedures and redemption rights. More importantly, when a bank, FHA or other lender finances a home, the lender has strong incentives to protect the buyer and itself from defective home conditions or title problems. Those protections are missing from the installment land contract financing structure. The Duke study did not include the cost of premature evictions, home repairs, and title problems experienced by black contract buyers, all of which would further magnify the wealth gap between white and black home buyers. 

St. Petersburg Int'l Legal Forum & Insolvency Forum

posted by Jason Kilborn

I've just returned from a really fantastic conference, the entire recorded proceedings of which are available online and might be of interest to Credit Slips readers. The St. Petersburg International Legal Forum takes place annually in the marvelous city of St. Petersburg, Russia, and nestled within the broader forum is a two-day International Insolvency Forum. The numerous panels for this forum were recorded, both in English with Russian simultaneous translation and in Russian with simultaneous English translation--it was a magnificently well-organized undertaking. The insolvency forum was held on Thursday and Friday (May 16 and 17) in the main auditorium, with an agenda including panels on implementation of a rescue culture in business reorganization (chaired by INSOL Europe), digital technology in insolvency proceedings, enforcement proceedings and involuntary bankruptcy petitions (which included a great introduction to Israel's new personal insolvency procedure by the Official Receiver of Israel, the always impressive David Hahn), consumer insolvency (chaired by a member of the State Duma, and including presentations by a Supreme Court justice and other impressive Russian and foreign experts--this was the panel on which I presented on the sticky issue of financing low-value personal insolvency cases), and asset tracing.

The hosts and attendees of the forum were very grateful for and receptive to the exchange of ideas and opinions from non-Russian experts, and they seem eager to recruit more of this kind of exchange in the coming years. If you're interested in participating and/or presenting in May of next year, please let me know, and I'll coordinate and pass on the info to the organizers. St. Petersburg is an absolutely gorgeous place, and it is a very European-ized Russian city (as was Peter the Great's goal in founding the new capital there in the early 1700s). It has changed dramatically since I lived and studied there in college in the early 1990s; today, it is safe, clean, and easy to navigate, there is English on all the signs, most shop and restaurant employees speak English, and the restaurant scene is accessible, varied, and delicious, to say nothing of the world-class cultural opportunities.  Consider it!

Counting Healthcare Chapter 11 Filings: Are There More Than Expected?

posted by Pamela Foohey

This post is co-authored with my student, Kelsey Brandes, rising 3L, IU Maurer School of Law

Reports of hospitals, physician practices, healthcare systems, and clinics filing for bankruptcy have become seemingly increasingly well publicized in recent years. At the beginning of this year, Pew released a study detailing why rural hospitals are in greater financial jeopardy in non-medicaid expansion states in the wake of the ACA. This may foreshadow more hospital closures and possibly more bankruptcy filings. With this in mind, one of my students at Indiana University Maurer School of Law, Kelsey Brandes (with whom I'm co-posting), decided to survey healthcare businesses that had filed chapter 11 between the beginning of 2008 and the end of 2017 with the goal of assessing how many healthcare businesses filed chapter 11 and why they filed, as based on their disclosure statements and other filings.

This survey found that, after combining jointly-administered cases, on average, 38 healthcare organizations filed per year during the study's ten year period, as shown by year on this graph.

Healthcare Post Graph

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Is Cryptocurrency What Makes Ransomware Possible?

posted by Adam Levitin

The story about Baltimore's entire municipal IT system being held hostage by ransomware has two angles that might be of interest to Slips readers. 

First, among the services that are affected is the city's lien recordation system (the city is treated as a county; confusingly there is a separate Baltimore county). That means you can't readily get a lien search, and that's gumming up property transactions.  To me this underscores the risk of electronic property records. They are vulnerable to disruption in a way paper is not. One has to worry about fire and water with paper, but we know how to deal with those risks pretty well. Electronic systems are vulnerable in other ways.  Indeed, if a system can be taken hostage, what prevents data from being altered without Baltimore's knowledge?  I don't want to be a Luddite here, but the convenience of electronic systems comes with some scary risks. 

Second, the payment demanded is in Bitcoins. Ransomware seems very dependent upon cryptocurrencies (particularly Bitcoin). Did ransomware even exist before Bitcoin? (That's a serious question. Maybe someone knows.) The only reason to take data hostage is to get paid. But payment is the dangerous moment for the hostage-taker:  if the payment can be traced to the hostage-taker, the long arm of the law can likely get him too.  This means that a bank-based payment system doesn't work well for the ransomware model. Banks are required to "know their customer," and while false fronts can be used that still creates a possible route for law enforcement, as the beard may know who hired him, etc.  Prepaid cards and cash present similar problems because they have to be physically delivered.  But crypto, ah, crypto seems perfectly made for ransomware, particularly when the hostage takers are overseas.     

If I'm right about this, it leaves me wondering first, why there isn't much more stringent regulation of crypto-currency markets for AML? Not all the players can base themselves off-shore. Even if an exchange is in Ruritania, US consumers need to have a wallet provider. Someone's going to be doing business in the US and using a US bank. If the US can squeeze state actors with its AML regime, why can't it similarly squeeze crypto markets into compliance?   

Second, is there any positive social value to crypto currencies? They seem to be used primarily for two purposes:  money-laundering (I'm including ransom payments in this bucket) and speculation.  Other than the occasional odd case, they aren't being used to hedge, for payments, or for any other socially beneficial purpose that I can tell. Maybe I have this wrong, but I'm having trouble seeing why crypto currencies should be tolerated by the law. 

Payday Rule Comments

posted by Adam Levitin

Because the ALI Consumer Contracts Restatement plus grading hasn't given me enough to do this week, I thought I would gin up some brief comments on the CFPB's proposed repeal of the Payday Rule.  My comments are here.   

Podcast on ALI Consumer Contracts Restatement

posted by Adam Levitin

I did a podcast for the Consumer Finance Monitor Podcast about the American Law Institute's Consumer Contracts Restatement project.  It's not often that you will see me on the same side of an issue as the podcast's host, Alan Kaplinsky, an attorney at Ballard Spahr who represents financial services firms.  Indeed, I suspect the next time Alan is sitting across a table from me asking me questions, it will be at a deposition.  Given what a great radio voice Alan has, that might almost be fun. But our collaboration on this podcast goes to an important, but hard to understand thing about why both consumer groups and business groups are opposed to the Restatement.  

Both consumer and business groups are uncomfortable with the ALI acting as a private legislature, unchecked by any constituency.  But the real issue is that for consumer advocates, the Restatement is a bad project because it would bind all consumers to contractual terms that they do not agree with or even know about.  

In contrast, the concern for business groups is that the Restatement gives that small subset of consumers who litigate somewhat stronger tools.  These tools aren't strong enough to change the balance of power, but they are enough to be a pain for businesses, specifically a jettisoning of the parol evidence rule (i.e., it doesn't matter what the written contract says, the salesman's representations are admissible evidence) and a contract defense of deception that will apply to some contracts where UDAP would not (again, you've gotta worry about the sales rep's communications).  In other words, the concerns here aren't symmetrical, so this is not a situation where the Restatement is a moderate neutral position.  It's bad for all consumers, and it creates more litigation problems for businesses without creating meaningful consumer protections.   

 

ALI Consumer Contracts Restatement--More Problems with the Legal Research

posted by Adam Levitin

More problems are emerging with the legal research underlying the American Law Institute's Consumer Contracts Restatement project.  The Consumer Contracts Restatement has been the subject of scholarly criticism for a while because of its novel quantitative empirical approach (case counting).  The Restatement stands on six empirical studies of consumer contracts.  While the current draft claims that these studies merely serve as confirmation for the Restatement's positions, which were supposedly arrived at through the traditional method of reading and distilling the law from the cases, all of the early drafts of the Restatement said nothing about this traditional method and only relied on the empirical studies, which now conveniently arrive at exactly the same positions.  

The first two scholarly works to examine the legal research underlying the Restatement were one by Professor Gregory Klass at Georgetown Law and another by yours truly with seven other ALI members.  These studies were basically looking for "false positives"--cases claimed to be relevant by the Restatement that aren't.  Both studies found an incredibly high rate of false positives--over 50% in some instances.  The Restatement had included in its case count, among other things, completely irrelevant cases, such as business-to-business cases, cases not involving common law contract disputes, duplicate cases, and vacated cases.  These types of errors were pretty shocking in what should be a document based on unimpeachable legal research.  A nice summary write-up of these studies by Professor Martha Ertman can be found over at JOTWELL (the Journal of Things We Like Lots).  

Now Professor William Widen at the University of Miami has done some digging on the Restatement's treatment of pay-now, terms-later contracts. Professor Widen's preliminary research has found that there's also a false negative problem--the Restatement has missed a number of state Supreme Court cases, many of which are contrary to its position.  Additionally, the Restatement seems to have missed a substantial number of state Supreme Court cases that make clear that providing "notice" in consumer contracts means actual knowledge, not merely notional notice.  In short, there is increasing evidence of serious problems with the legal research underlying the Restatement, both false positives and false negatives.  My sense is that with more time, research will adduce even more false negatives.  Given that the ALI likes to present itself as the gold standard of legal research, these problems should give ALI membership pause when considering approving the Restatement.  

ALI Consumer Contracts Restatement-What's at Stake

posted by Adam Levitin

The American Law Institute's membership will vote next Tuesday (the 21st) on whether to approve the ALI's Consumer Contracts Restatement project.  Let me recap why you should care about this project:  it opens the door for businesses to use contract to abuse consumers in basically any way they want.  The Restatement would do away with the idea of a "meeting of the minds," as the touchstone of contract law for consumer contracts, and allow businesses to impose any terms they want on consumers, even if the consumers are unaware of the terms and haven't consented to them.  

Under the proposed Restatement, a consumer would be bound by any and all of a business's standard form terms if the consumer (1) assented to a transaction, (2) had notice of the terms, and (3) had a reasonable opportunity to review the terms.  In other words, the consumer would not actually have to know or agree to any of the terms to be bound by them.  The Restatement would replace meaningful assent with a legal fiction of notice.  That opens the door to consumers being deprived of all sorts of rights by contract, starting with arbitration, but then going on the privacy rights and continuing to disclaimer of warranties, etc.  If you think I'm being paranoid, go look at Walmart.com's Terms of Use. Few, if any, of those terms exist when you buy something from Walmart at a storefront, but the cost of larding on an extra term on the Internet is so low, that there's no reason for a business not to bury its whole Christmas wishlist in linked on-line terms and conditions.  

The Restatement strangely believes that courts will somehow police abuses of contract through unconscionability and deception, but this presumes (1) that consumers will litigate in the first place, and (2) that courts will stretch these constrained doctrines to prevent the enforcement of not just outrageous terms, but also quotidian unfair terms.  Do I have a nice bridge to sell you in Brooklyn if you think that's a trade-off that will help consumers....

A bipartisan group of 23 state Attorneys General has recently written publicly opposing the Restatement. That sort of opposition is unprecedented and is a sign that something is seriously amiss with the project. 

So, if you know an ALI member, urge them to attend the Annual Meeting session and vote against the Restatement!

ALI Engages in Cheap Intimidation Tactics in Its Attempt to Ram Through the Consumer Contracts Restatement

posted by Adam Levitin

As Credit Slips readers know, I've been fighting the American Law Institute's Consumer Contracts Restatement project for several years.  I think it started with good intentions, but it's unfortunately turned into a remarkably anti-consumer project.  The ALI has accused yours truly of a copyright violation for making the draft Restatement available through Dropbox to other ALI members in the context of a link in a letter urging those ALI members to vote against the Restatement.    

ALI's actions on this are the pettiest sort of bullying to try and quash the "vote no" campaign against a project that would seriously harm consumer rights.  ALI filed a DMCA takedown notice with Dropbox that resulted in Dropbox preventing me from sharing all my files, not just the one file in question. (Damages, damages...) ALI even went so far as to freeze me out of its website, which prevented me from reading comment letters about the draft or filing motions to amend it.  

Fortunately, there's a good way to deal with bullies, and that's get a lawyer.  ALI restored my website access after hearing from my righteous copyright counsel, and has in fact since made the draft Restatement publicly available, even while still insisting (on a completely factually misinformed basis, but ALI never bothered to ask me) that what I did was somehow outside of fair use and refusing to rescind the DMCA takedown notice. It's become clear that ALI desperately needs to finish its Restatement of Copyright so it can understand how fair use actually works.    

The fact that ALI is making the draft publicly available now just shows what nonsense its claim was—it was nothing but a cheap intimidation tactic. ALI ought to be ashamed for acting this way. Is this kind of thug behavior really how the nation's preeminent law reform organization rolls?  

Round 2 -- Do the Euro CACs Have to be Used if There is a Need to Restructure a Euro Area Sovereign's Debt?

posted by Mitu Gulati

The intriguing question raised by Mark Weidemaier’s superb new paper posted a few weeks ago (here) was whether, if a Euro area country hits a debt crisis, it would be mandatory for it to use the Euro CACs that are now part of the majority of Euro area sovereign bonds.  Mark’s paper says no (for more, see also Tyler Zellinger, here; and Buchta, Shan, Plambeck & Shufro, here).

About ten days ago, this question came up at a conference at the EUI organized by Franklin Allen, Elena Carletti and Jeromin Zettelmeyer. The plan for the conference hadn’t been to discuss this particular topic, but CACs and restructurings in the Euro area more broadly. But Mark’s paper had just come out and it turned out that almost everyone there had strong views about it; particularly in the context of thinking about Italian sovereign debt.

The panel of CAC/sovereign debt experts was: Yannis Manuelides, Anna Gelpern, Aitor Erce and Giampaolo Galli.  And the discussion – helped by interventions from experts in the audience who included Jeromin Zettelmeyer, Ignacio Tirado, Richard Portes, Lee Buchheit and Elena Carletti -- was fascinating.  Bottom line:  While experts have strong views about this topic, there is zero clarity in terms of what the policy intent was -- we are all reading the tea leaves.  Mark’s view is that the existing Euro CACs are but an option; and he makes a strong argument for that position (one that I buy).  Ignacio, however, is equally convinced of the opposite position; that the Euro area countries are stuck using the CACs if they hit a debt crisis and need to restructure (this does not mean that he thinks this is the efficient solution; just the legal mandated one).  And I have learned over the years that Ignacio is a very careful thinker and knows his European treaty law better than almost anyone.  Yannis, for his part, was – as he always is – nuanced and took a position somewhere in between.  Put differently, he refused to say whether he agreed with Mark or Igancio.  Anna too, didn’t take a side on this (although she knows the history of what was originally intended by the policy makers better than anyone).  Perhaps most interesting – especially since I had not heard his views before – was the wonderfully gracious and wise Giampaolo Galli (Economics Dept, Cattolica University, Roma), who talked explicitly and in detail about the debt situation in Italy.  For those who don't know him yet, here is his Wikipedia page (it is an understatement to say that he has had an impressive career).

My reason for putting up this post is that Giampaolo has just posted his conference draft, “Collective Action Clauses and Sovereign Debt Restructuring Frameworks: Why and When is Restructuring Appropriate” to ssrn.com (here).  The draft both addresses the question raised by Mark in a nuanced way (while also reporting the views of those in the legal department of the Italian Treasury) and goes further to ask whether the primary task of the Italian government now should be thinking of restructuring techniques or figuring out ways to improve growth and get spending under control.  Giampaolo argues persuasively that focus should be on the latter problems and not the former.  Clever restructuring techniques, he explains, may eventually be needed. But they are not the solution to the problem with the giant Italian debt.

Given the strong disagreements on this matter, and the utter lack of clarity as to what was intended by Euro area policy makers in the first place, it sure would be helpful to have some kind of legislative history as to what was intended when the Euro CACs were adopted in late 2012.   Alternatively, maybe the European authorities could tell us what they were thinking?  Or what they are thinking now about what they should have been thinking then?

Ouch. (Puerto Rico Edition)

posted by Stephen Lubben

The First Circuit responds to the Oversight Board's request for a stay until the Supreme Court can rule on their cert. petition, with regard to the Constitutionality of the Board's appointment (emphasis added):

ORDER entered by Juan R. Torruella, Appellate Judge; Rogeriee Thompson, Appellate Judge and William J. Kayatta, Jr., Appellate Judge: In accordance with Federal Rule of Appellate Procedure 41(b), this Court ordered the withholding of its mandate in this case for a period of 90 days so as to allow the President and the Senate to appoint members of the Financial Oversight and Management Board for Puerto Rico in accordance with the Appointments Clause. With that 90-day stay set to expire on May 16, 2019, the Board informs us that the President has announced his intent to nominate the current members to serve out their terms, but that the nominations have not yet gone to the Senate. The Board has also filed, apparently with no sense of any urgency, a petition for certiorari. The Board seeks a further stay of our mandate, this time under Federal Rule of Appellate Procedure 41(d)(1), which would stay the mandate indefinitely until the Supreme Court's final disposition of the case. That request is denied. Instead, the stay of our mandate is extended sixty (60) days, until July 15, 2019.

Middle Class Homeowners Are the Biggest Winners from Student Loan Forgiveness

posted by Adam Levitin

A lot of the criticism of Senator Elizabeth Warren’s student loan forgiveness proposal has focused on how it's not fair to give loan forgiveness to current borrowers when past borrowers repaid their debts.  That criticism overlooks the enormous boost Senator Warren's proposal would give to the real estate market. Many previous borrowers are homeowners, and homeowners are going to be one of the major beneficiaries of any student loan debt forgiveness as their home equity value will increase because of the increase in housing demand from deleveraged student borrowers.  

By my calculations Senator Warren's proposal for $640 billion in student loan forgiveness could readily translate into $1 trillion of increased home equity value plus an additional $320 billion to $680 billion in GDP growth. That's an amazing win-win-win for student loan debtors, for homeowners, and for those in the home building and furnishing trades.  

Continue reading "Middle Class Homeowners Are the Biggest Winners from Student Loan Forgiveness" »

The Student Loan Tax

posted by Alan White

Democrats’ policy proposals have sparked a vital and overdue debate on our system to pay for post-secondary education, and how that system burdens and redistributes income. The existing system combines a small share of taxpayer funding (via the Pell Grant) with a large share from the student loan tax. The student loan tax requires the students themselves to pay a percentage of their income for 20 to 25 years, collected not by the IRS but by private contractors for the US Education Department. The Clinton and Obama administrations converted a clunky loan system involving banks and state guarantee agencies into a direct federal “loan” program. The federal government issues funds to colleges and universities, and then outsources to collection contractors to tax the earnings of college grads and noncompleters. Although not all students participate in income-dependent repayment, greater numbers are expected to do so if nothing changes. Not only are student loans different, they are looking less and less like loans at all.

The current system is a tax on future earnings, rather than a true loan program, for several reasons. First, the income-dependent payment programs tie “borrower” payments to their disposable income, and cancel debt at the end of 20 or 25 years. Second, borrowers who are declared in default end up having wages garnished at a fixed percentage of income, as well as tax refunds intercepted, both of which are essentially taxes on earned income (or cancellation of earned income tax credits.) Third, a few (and so far badly administered) loan forgiveness programs allow students to stop repayment after 10 years if they remain in low-paying and socially valued jobs.

When we talk about canceling student loan debt, we are really just talking about how much of college students’ future earnings we will tax. As I have noted previously, some, especially graduate degree holders, repay far more than the cost of their own education, because of above-cost interest rates. Others benefiting from various “forgiveness” programs repay less, at least on a present-value basis.

The problem with costing out a one-time loan cancelation program is that each year a new cohort of students is assigned nearly $100 billion in new federal loans to repay. The combined federal payments under the major loan and grant programs (DL, Perkins and Pell) total about $125 billion annually. The issue going forward is whether to tax individuals and corporations in the present year, or the students in future years, and in what combination. There is also the problem of the disappearing role of states in funding public higher education, a topic I will write about separately.

This is why the policy choices are not binary (full debt cancellation and free college, i.e. 100% taxpayer financing, versus the status quo.) A notable benefit of our expanded policy debate is some real attention to the distributive consequences of major changes in higher education funding. We could, for example, offer new and less onerous income-dependent repayment, taxing a lower percentage of earnings, setting a higher exemption than the poverty level, or shortening the 20-year repayment period. We could, as some have proposed, reduce student repayment even further for borrowers engaged in public service or national service, although as we have seen, defining eligibility categories creates big process costs. We can, and should, abolish “default” and re-evaluate payment obligations for borrowers who did not complete their college education. We could examine the pros and cons of IRS or private contractor collection. The value of elements of our existing system is the ability to apply income progressivity as measured both by students’ pre-college family income as well as their post-graduation income to allocate the burden of their college costs.

How Chaotic Would an Italian Debt Restructuring Be? (Not Very)

posted by Mark Weidemaier

Mark Weidemaier & Mitu Gulati

Wolfgang Munchau’s column in the FT yesterday identifies a possible Italian debt crisis as one of the biggest worries for the Eurozone. This makes sense, given Italy’s huge debt stock (upwards of 130% of GDP), seemingly irresponsible politicians, and low growth. An Italian debt restructuring would be the biggest in history, yet it might prove necessary. Munchau highlights the economic consequences of a debt restructuring (e.g., for Italian and other European banks) and also asserts that Europe’s “legal systems are not prepared.” The general sense is that an Italian debt crisis will be a disaster.

It won’t be good, that is for sure. But if planned properly, an Italian debt restructuring can be done relatively smoothly. Why? Because Italy has an enormous “local law advantage,” combined with an enormous set of captive (aka local) holders who have been, to quote an old friend in the sovereign restructuring business, “rolling over their Italian bonds since Hadrian died.”

One might ask, Didn’t Greece have the same local law advantage and wasn’t that a chaotic restructuring? Our reply is that the source of chaos in the Greek case was the unwillingness of key institutions to acknowledge that the debt was unsustainable until very late in the process. The restructuring itself was relatively smooth (for more, see here). In any case, the restructurers this time can learn from the Greek experience. Plus, the local law advantage is significantly bigger in Italy.

Students in our joint class on sovereign debt worked intensely this semester on what an Italian debt restructuring might look like, and they have recently posted their work to ssrn.com. From our informal conversations with European colleagues and friends, we understand that lawyers at various official sector institutions take the position that they do not have the power to do the things our students suggest. But we have yet to hear convincing reasons for this position. Indeed, our impression is that these lawyers are mostly worried that they will spook investors if they publicly acknowledge having the power to restructure (on the theory that investors might take this as a sign that restructuring is likely).

Continue reading "How Chaotic Would an Italian Debt Restructuring Be? (Not Very)" »

About the Student Loan Forgiveness Price Tag...

posted by Adam Levitin

Senator Warren's student loan forgiveness proposal has a lot of scolds moaning about the immorality of debt forgiveness, the unfairness to those who paid their debts, and complaining about the price tag. It's pretty obvious that none of those folks know anything about how the federal student loan system works. If they did, they'd know the we crossed the debt forgiveness Rubicon long, long ago. There is already enormous debt forgiveness baked into the federal student loan program.

The only real difference between Senator Warren's proposal and the existing forgiveness feature in the student loan program is whether the forgiveness comes in a fell swoop or is dribbled out over time. Given the federal government's infinite time horizon, the difference is really just an accounting matter. It's not a matter of principle in any way, shape, or form.  

Continue reading "About the Student Loan Forgiveness Price Tag..." »

Student Loan Borrowing Is Different

posted by Adam Levitin

Education finance and student loan forgiveness have been getting a lot of attention the last couple of days because of our former co-blogger's loan forgiveness proposal.  I'm not going to address the merits of that proposal here.  Instead, I want to make a simple point that many of the critics of Senator Warren's proposal don't seem to understand:  student loan borrowing is materially different from other types of borrowing, such that the borrower has no idea what s/he is getting into.

When I borrow to buy a car or a home, it is a one-and-done deal with a single loan product.  With the car or home, I also know what I’m getting and I know what it costs.  These aren’t perfect markets, but the work on a broad level.  Education finance does not.  That’s why criticisms of student debt relief plans that claim that borrowers know what they’re getting into or the sacredness of the contract just irk me.  Student borrowers have no clue what they’re getting into and if a party doesn’t really understand a deal, it’s hard to see why it should be treated as sacrosanct. (Not to mention, as any good bankruptcy lawyer knows, basically all deals are made subject to the possibility of a bankruptcy discharge.). There is a fundamental market failure in student lending and that is that borrowers simply don't materially understand the nature of the obligations they are assuming...and probably can't.  

Continue reading "Student Loan Borrowing Is Different" »

The Second Circuit Got It Right in Madden v. Midland Funding

posted by Adam Levitin

Professor Peter Conti-Brown of the Wharton School has written a short article for Brookings decrying the Second Circuit’s 2015 Madden v. Midland Funding decision. Professor Conti-Brown doesn’t like the Madden decision for two reasons. First, he thinks its wrong on the law. Specifically, he thinks it is contrary to the National Bank Act because it "significantly interferes" with a power of national banks—the power to discount (that is sell) loans. Second, he's worried about Madden from a policy standpoint both because he fears that it is unduly cutting of access to credit for low-income households and because he thinks it is reinforcing the large bank’s dominance in the financial system and impairing the rise of non-bank “fintechs”. I disagree with Professor Conti-Brown on the law and think that attacking Madden is entirely the wrong way to address the serious policy question of what sort of limitations there ought to be on the provision of consumer credit. As for fintechs, well, I just don't see any particular reason to favor them over banks, and certainly not at the expense of consumers.  

Continue reading "The Second Circuit Got It Right in Madden v. Midland Funding" »

Plan Optionality: Extreme Edition (A Pick-Your-Own-Adventure Restructuring with Shopko)

posted by Adam Levitin

I've seen some Chapter 11 plans that include some optionality, such as allowing the debtor, based on subsequent market conditions or litigation outcomes to undertake a transaction or change the way a class is paid.  Such optionality has always troubled me because I don't think a disclosure statement can provide "adequate information" in the face of debtor optionality--a hypothetical investor might understand that the debtor has options A or B, but the uncertainty about which option will be selected makes it hard to make an "informed judgment about the plan":  the investor might like option A, but dislike option B--without knowing the likelihood of A or B, how can the investor make such an informed decision?  To be sure, it is possible to get two disclosure statements approved, one for option A and one for option B, but then creditors would be able to vote separately on each plan, rather than voting on a plan that gives the debtor optionality.  

A disclosure statement I looked at today, however, takes such optionality to an extreme I've never previously seen.  Specifically, Shopko's proposed disclosure statement is for a plan that "contemplates a restructuring of the Debtors through either (a) a sponsor-led Equitization Restructuring or (b) an orderly liquidation under the Asset Sale Restructuring."  As explained:  

The Plan includes a "toggle" feature which will determine whether the Debtors complete the Equitization Restructuring or the Asset Sale Restructuring. The Plan thus provides the Debtors with the necessary latitude to negotiate the precise terms of their ultimate emergence from chapter 11.  

In other words, what is being disclosed is "we might liquidate or we might reorganize, our pick."  The plan has, of course, two separate distributional schemes, depending on which restructuring path is chosen.   I really don't get how such a single disclosure statement for a single plan with optionality can be approved given the huge difference between these two paths.  A creditor can't know what outcome it is voting on and might like one, but not the other.  Maybe others have seen this move before, but I suspect this will be a first for the Bankruptcy Court for the District of Nebraska.  

Consumer Bankruptcy Reform ... and American Xenophobia?

posted by Jason Kilborn

I hope I'm not stepping on Bob's toes in announcing the public release of the long-awaited report of the ABI Commission on Consumer Bankruptcy. The Commission, with Credit Slips' own inimitable Bob Lawless as its reporter, was formed in December 2016 to explore revisions to the US consumer bankruptcy system that would improve the operation of its existing structure; that is, evolution, not revolution. With this explicitly limited charge, one would not necessarily expect to find much high-level discussion of how the US approach squares with or fits within the many recent global developments in consumer insolvency relief, and one would expect to see a concentration on local solutions for local stumbling blocks.

That being said ... and in no way to detract from the monumental amount and truly impressive nature of the work the Commission has done here ... one might have expected to see a bit of discussion, if not even a touch of inspiration, from comparative sources. In 1970, the Bankruptcy Commission rejected any consideration of foreign developments in consumer bankruptcy, in part because there were few such developments, and in part because so little was known about the operation of non-US bankruptcy law at the time (for those younger than I, note that neither home computers nor the public Internet existed in 1970 ...). Nearly 50 years later, we now have at our fingertips a mountain of comparative data and analysis on the development, operation, and revision of consumer insolvency systems around the world, much of it reported in English specifically to make it widely available to law reformers like the ABI Commission. Again, one would not have expected this comparative material to occupy center stage in a reform of largely US problems in the uniquely US consumer bankruptcy system. But in a bit part here and there, some comparative observations might have supported the Commission's already compelling recommendations.

Continue reading "Consumer Bankruptcy Reform ... and American Xenophobia?" »

DebtCon3: A Curtain Raiser and a Love Story

posted by Anna Gelpern

DebtCon3, the Third Interdisciplinary Sovereign Debt Research DebtconXand Management Conference, is starting in just a few hours at Georgetown Law. This year's DebtCon takes place in parallel with IMF and World Bank Spring Meetings. When we first launched the DebtCon project in the snowstorms of 2016, the idea was to have a giant party -- a sovereign debt Coachella -- channeling nerdy energy across different academic disciplines and institutional ecosystems, gathering everyone willing to obsess over public debt to help solve a handful of concrete problems. Mitu wanted to serve frozen pizza, but kind souls chipped in for dinner, and we had fish. The Argentina (!#@%*!) panel was snowed out. Nobody got the Sovereign Debt Research and Management joke ...but the temporary tattoos worked on key demographics, and we came back. In 2017,   Ugo Panizza and his colleagues at the Graduate Institute put on a fabulous DebtCon2 in Geneva, which set an impossibly (Swissly!) high bar for organization, and here we go again. At last count, the star-studded DebtCon3 program has some 120 speakers, plus over 200 registered guests from around the world -- a humongous number for what is often considered a narrow topic. So what is it about sovereign debt? ... and what is it about DebtCon?

Continue reading "DebtCon3: A Curtain Raiser and a Love Story" »

P2P Payments Fraud

posted by Adam Levitin

AARP has a nice piece (featuring yours truly) about the consumer fraud risks with peer-to-peer (p2p) payment systems like Zelle and Venmo.  

Both Zelle and Venmo expressly state in their terms of use that they are not for commercial use, yet there is certainly a healthy segment of their use that is commercial.  Some of it is sort of "relational" commercial--paying a music teacher or a barber--someone whom the payor knows, so there's a social mechanism for dealing with disputes and which protects against fraud.  But there is also some use for making commercial payments outside of a relational context--paying for goods purchased on the Internet--and that is very vulnerable to fraud.  

I wish p2p payments systems would do a bit more to highlight to consumers their prohibition on commercial use, including flagging the fraud risk, but I suspect that they have no interest in doing so--while the systems disclaim commercial use, they nonetheless benefit from it, and have little reason to discourage it.  

The Local Law Advantage in the Euro Area: How Much of a Constraint are the Existing CACs?

posted by Mitu Gulati

Collective Action Clauses for the Euro Area were mandated, starting in January 2013.  Yes, bizarrely, even though the introduction of Euro CACs was literally the single biggest innovation in sovereign bond contract terms in the history of this market, no one seems to have a clear idea of how these CACs (contractual restructuring mechanisms) are actually going to operate.  Specifically, if a Euro area country needs to restructure some day soon (e.g., Italy?), and it has a subset of bonds with these CACs (by next year, Italy will have something close to a super majority of its bonds with these Euro CACs), is it required to use the CACs to do the restructuring or can it use other mechanisms? That is, regardless of the presence of these CACs, can the sovereign still take advantage of the fact that almost all of its multi trillion dollar debt stock is governed by Italian local law to engineer the restructuring (the "local law advantage" in the words of sovereign debt guru Lee Buchheit - see here)?

Most people I know in the European sovereign debt world take the view that the CACs will have to be used if they are in the bonds (it is a different question altogether as to what can be done with the subset of bonds without CACs and also under local law).  And, indeed, that may be why there is currently a move to reform and improve the first-generation of Euro CACs (they appear, on their face, quite vulnerable to hold outs).  But do the Euro CACs have to be used to engineer the restructuring, if the bond that needs to be restructured has them?

As an aside, some of you may remember this question recently came up in the context of measuring redenomination risk in Euro area bonds, where because of the assumption that the bonds with CACs were protected against unilateral redenomination of the currency on the bonds by the sovereign, some were trying to use the CAC bond versus No CAC bond yield differential as a measure of redenomination risk.  (See here and here, for articles from the FT along; there are many  more) [This is not at all a crazy position, since the CAC bonds require a supermajority approval of creditors (roughly) for a change to the currency of the bond; and this is indeed the view that the market appears to have taken -- see the link/graph above from the FT - but has Mark Weidemaier demonstrated that the market was wrong in a big way?  If so, that's a big deal]

To cut to the chase, our fellow slipster, Mark Weidemaier, has a superb new paper, "Restructuring Italian (or Other Euro Area) Debt: Do Euro CACs Constrain or Expand the Options?", that suggests the foregoing thinking is misguided. Best I know, Mark's paper is the first one to address this central question about Euro CACs under local law head on (although I'm optimistic that some of our students will have good papers exploring this very question in greater depth soon).  My prediction is that there are many who will disagree strongly with Mark; particularly those who see the Euro CACs as representing some sort of holy European treaty promise.  But Mark makes a powerful argument that that view is more smoke than fire.  Euro CACs, according to him, are nothing but an option for the sovereign.  That's it, he tells us; they are nothing more. The sovereign can choose not to use this option and take an alternative (easier) route to doing its restructuring.

Continue reading "The Local Law Advantage in the Euro Area: How Much of a Constraint are the Existing CACs?" »

Nonpartisan Supreme Court Expansion

posted by Adam Levitin

My latest argument for a substantial nonpartisan expansion (i.e., not a partisan "packing") of the Supreme Court, which would require the Court to sit in randomly assigned panels, is up on Bloomberg Law.   Among other benefits, it would enable the court to hear more cases, so the bankruptcy world might finally rid itself of some of the lingering circuit splits (e.g., equitable mootness or actual vs. hypothetical test for assumption). 

Student Loan Fixes

posted by Alan White

While presidential candidates propose sweeping new policy initiatives, a few simple legislative fixes could go a long way to alleviate the student loan crisis. Three numbers set by Congress have a huge impact on the burden borne by millions of borrowers: the Stafford loan interest rate, the income-driven repayment plan income share, and the number of years to balance forgiveness. These three numbers (currently 5%/6.6%, 10%/15% and 20/25 years, respectively) essentially allocate the burden of funding postsecondary education between students and taxpayers. The interest rate, for example, has produced a net profit for the Treasury for many years, meaning that former students pay more than the cost of loan administration and loss recoveries, essentially paying a surtax. Some income-driven repayment plans require borrowers to pay 10% of disposable income, while others call for 15%, and of course several numbers go into defining disposable income. Finally, income-driven repayment plans call for debt balance cancellation at the end of 20 or 25 years. Reducing the interest rate, the income percentage and the repayment period are all means to shift the funding of an educated workforce from graduates (and noncompleters) to the broader taxpaying public. Student loan costs can be reduced incrementally; the choices are not limited to the status quo or free college for all.

While some Democrats propose to "refinance" student loans, Congress can reduce interest rates on existing loans at any time, saving borrowers and federal contractors lots of transaction costs. Loan defaults could be virtually eliminated by making income-driven repayment the default, automatically enrolling borrowers, and authorizing IRS income reporting. In lieu of creating new national service programs, the existing public service loan forgiveness program could be fixed to allow enrollment on graduation and automatic employer certification and payment progress reporting. The current 10-year PSLF repayment period could also be shortened. Finally, the Pell grant amount could be set to cover the full cost of attendance for low-income students at public 2-year or 4-year colleges in each state.

A New Proposal for Restructuring Venezuelan Debt

posted by Mitu Gulati

The Venezuelan debt crisis has dragged on for so very long now that there are literally dozens of proposals out in the public domain (aka ssrn.com) on how Venezuela should do its restructuring.  Given how quickly the situation on the ground is changing, the plausibility of these various proposals also has been moving with great speed. 

A new and interesting one just showed up today from Daniel Osorio of Andean Capital (available here).  Daniel is someone who knows the Venezuelan situation inside out and has a lot of experience distressed debt workouts.  I don't think we agree on the optimal way to peel this onion, but Daniel is super smart and I always take his views seriously.  His proposal, as I understand it, is to do an debt exchange where investors are given what he calls Patient Capital Bonds. Basically, investors are being asked to be patient and cooperate with the Venezuelan government by giving them a lot more time to repay them (much more than say the proposals for a Venezuelan reprofiling (which would just buy the time for the IMF to do an estimate of the economic situation) have been asking for). The benefit to investors, that Daniel is positing will attract them to his proposals, is that there is a big potential upside if Venezuela is able to get economically healthy.

A couple of questions though.  First, is Daniel being unduly optimistic in assuming that the holdout problem can be easily solved?  (after all the amount of litigation on the defaulted debt is increasing on a daily basis and specialist holdout firms are the opposite of "patient" capital). Second, can Venezuela get back to health in a reasonable amount of time without imposing significant cuts on the principal obligations on its debt stock? (maybe, if the stretch out of payments is long enough, but that then brings its own problems in terms of getting investors to be that patient).

I do agree with Daniel though that stretching out payments will ultimately have to be part of the equation and that whatever mechanism that is used will need to ensure that the majority of creditors come in voluntarily (that is, the non holdouts). I also agree with him that the post-Saddam restructuring of Iraqi debt has lessons to teach us.

Here is the abstract of Daniel's nice and short paper (six pages):

Regime change in Venezuela is imminent. The transition may take longer than what most Venezuelans would like, but when it occurs it will be faster than most expected. The challenges of the reconstruction of Venezuela and its economy will be more similar to those faced by a country after a vicious war or a violent natural disaster than the aftermath of an economic and/or political crisis. First and foremost, this reconstruction must start by addressing Venezuela’s urgent humanitarian needs. This initial phase of the normalization of Venezuela must be done in a collaborative fashion between the private and public sector as well as Venezuelans and the international community. However, this spirit of collaboration must not end there, but continue in order to meet the economic challenges that Venezuela will face.

He also talked about this on the telly, on Bloomberg News. 

Senate Banking Committee Testimony on Housing Finance

posted by Adam Levitin

I'll be testifying on Tuesday at a Senate Banking Committee hearing on housing finance that is focused on Chairman Crapo's reform outline.  My written testimony may be found here.  Suffice it to say, I'm skeptical.  I argue that a multi-guarantor system is a path to disaster and that the right approach is a single-guarantor system with back-end credit-risk transfers.  Oh wait, we already have that system in all but name.  The system has been totally reformed since 2008.  So why are we looking to do anything major with housing finance reform?  Hmmm.  

Restatement of Consumer Contracts—On-Line Symposium

posted by Adam Levitin

The Yale Journal on Regulation is holding an on-line symposium about the draft Restatement of the Law of Consumer Contracts, which is scheduled for a vote at the American Law Institute's annual meeting this May.  The launching point for the symposium are a pair of articles in JREG that take sharp issue with the empirical studies that underlie the draft Restatement.

The American Law Institute (ALI) is a self-appointed college of cardinals of the American legal profession.  It's a limited size membership organization that puts out various publications, most notably "Restatements" of the law, which are attempts to summarize, clarify, and occasionally improve the law.  Restatements aren't actually law, but they are tremendously influential.  Litigants and courts cite them and they are used to teach law students.  In other words, this stuff matters, even if its influence is indirect. 

The draft Restatement of Consumer Contracts is founded on a set of six quantitative empirical studies about consumer contracts.  This is a major and novel move for a Restatement; traditionally Restatements engaged in a qualitative distillation of the law.  Professor Gregory Klass of Georgetown has an article that attempts to replicate the Reporters' empirical study about the treatment of privacy policies as contracts.  He finds pervasive problems in the Reporters' coding, such as the inclusion of b2b cases in a consumer contracts restatement.  

A draft version of Professor Klass's study inspired me and a number of other advisors to the Restatement project to attempt our own replication study of the empirical studies of contract modification and clickwrap enforcement.  We found the same sort of pervasive problems as Professor Klass.  While the ALI Council completely ignored our findings, we wrote them up into a companion article to Professor Klass's.  

Some of the pieces posted to the symposium so far have been focused on replication study methodology (sort of beside the point given the very basic nature of the problems we identified) or defenses of the Reporters including mixed statutory-contract decisions in their data sets (which is no defense to inclusion of b2b cases or duplicate cases or vacated cases, etc.). But Mel Eisenberg has contributed an important piece that highlights some of the substantive problems with the draft Restatement, namely that it guts consumer protections.  For example, it would require findings of both procedural and substantive unconscionability for a contract to be unconscionable, while many states only require substantive unconscionability. Not surprisingly, I am unaware of any consumer law expert (other than the Reporters) who supports the project.  

But this thing that should really be a wake up call that something is very, very off with this Restatement project is the presence of outside opposition, which is virtually unheard of in the ALI process.  Every major consumer group (also here, here, and here), weighed in in opposition as well as 13 state attorneys general (and also here), and our former co-blogger (and also former ALI Vice-Chair), Senator Elizabeth Warren.  Nor has the opposition been solely from consumer-minded groups.  The US Chamber of Commerce and the major trade associations for banking, telecom, retailers, and insurers are also opposed (albeit with very different motivations).  Simply put, it's hard to find anyone other than the Reporters (and the ALI Council, which has a strong tradition of deference to Reporters) who actually likes the draft Restatement.  

So, if you're an ALI member, get informed.  If you know an ALI member, make sure that s/he is informed.  This is coming for a vote in May and if enacted would be bad policy, based on the legal equivalent of "junk science."  This isn't what the ALI should be doing.  

Puerto Rico, the Board, and the Appointments Clause

posted by Stephen Lubben

As many will have seen in the press, the First Circuit has said that PROMESA's Oversight Board was appointed in violation of the Appointments Clause. In short, while PROMESA allowed President Obama to appoint members of the Board without Senate confirmation, the Court says such confirmation was required.

The Board has decided to appeal to the Supreme Court, and the First Circuit's decision is on hold for 90 days. But what happens in 90 days?

In short, chaos. The title III "bankruptcy" cases for Puerto Rico and its affiliates are all run by the Board. Without the Board, the cases would seem to grind to a halt. If they remain that way for an extended period of time – and who really thinks this Congress and this President are going to get their act together in 90 days? – the District Court may have little choice but to dismiss the cases.

The appeal was brought by old-friend Aurelius. They presumably assume that they will get better treatment outside of title III.

But is that right? Maybe Congress will decide to enact a streamlined insolvency process for Puerto Rico, one that "cuts to the chase." After all, even the current President (hardly a friend to the Commonwealth) once suggested it might be necessary to simply cancel Puerto Rico's debt

Congress has a lot of power under the Bankruptcy Clause – and perhaps even more under the Territories Clause. Be careful what you wish for, and all that.

Pug Repossession

posted by Bob Lawless

If you missed it, Thursday's New York Times had a story about a debt collector who seized the family's dog over unpaid bills. The pet, a purebred pug, was sold for the equivalent of $800 on eBay which apparently meant it could be seized under German law which allows valuable pets to be seized in repayment of debts. Mutts are exempt.

In the United States, there are businesses who will give purchase-money loans for pets, which are often structured as financing leases. The consequence of nonpayment is the usual for nonpayment -- repossession of the collateral even if it is the family's beloved Fido or Fluffy. There is legislation in Nevada, California and New York that tries to ban the practice, although the statutes are far from a model of clarity about what they make illegal.

Continue reading "Pug Repossession" »

The Curious Persistence of Plan B (Bankruptcy Lite)

posted by Jason Kilborn

I've come across a phenomenon numerous times over the years, again recently, that reveals the purpose of and resistance to discharge as the ultimate solution/relief for bankruptcy. In a discussion of the Chinese Supreme People's Court's struggles with "the enforcement difficulty" (执行难), the writers observe that, if a judgment debtor is found by the court enforcement division to have no available assets against which to collect a judgment, the enforcement action is terminated ... but "the court will automatically check every six months whether the involved judgment debtors have new property." On the one hand, the termination of fruitless enforcement actions sounds something like bankruptcy relief. Assuming the process actually works like this, and assuming the court enforcement division is not overly aggressive in pursuing "new property," this seems to me to take some of the pressure off of the Chinese system to adopt a proper bankruptcy discharge to alleviate the suffering of insolvent judgment debtors. On the other hand, without a discharge, the "checking for new property" part ensures that debtors' incentives to be productive will remain perpetually depressed, and official resources will be perpetually wasted in interminable pursuit of phantom new assets. These debtors' productivity and entrepreneurialism is forever lost to Chinese society in an era in which global competition continues to heat up.

Continue reading "The Curious Persistence of Plan B (Bankruptcy Lite)" »

Deleveraging Is Over

posted by Alan White

An unsustainable run-up in consumer housing debt and other debt was a fundamental structural cause of the 2008 global financial cScreen Shot 2019-02-26 at 11.59.42 AMrisis. Following four years of painfully slow decline, total U.S. consumer debt has now risen back above its 2008 peak, with the growth led by student loan and auto loan debt. Mortgages outstanding are not quite at their 2008 levels, but student loan and auto loan growth more than makes up for the modest home loan deleveraging. Americans are back up to their eyeballs in debt, but now some of the debt burden has shifted from baby boomers to millennials. While the cost of health care may be a key electoral issue for the over-50 crowd, under-40s will be listening for policymakers to offer solutions on student loans.

CDS Strikes Again (Aurelius and Windstream)

posted by Stephen Lubben

Long ago I warned that the growth the of the CDS (credit default swap) market represented a threat to traditional understandings of how workouts and restructurings are supposed to happen. The recent Windstream decision from the SDNY shows that these basic issues are still around, notwithstanding an intervening financial crisis and resulting regulatory reform.

Windstream is a corporate group in the telecommunications sector. In 2013 it issued some senior unsecured notes due in 2023. Under the indenture for those notes, specific legal entities in the Windstream group agreed not to engage in any sale-leaseback transactions, presumably to maintain legal title to the groups’ assets available for the noteholders to collect against.

But the indenture did not prohibit the creation of new affiliated entities, nor did it bind such new entities to the prohibition on sale-leasebacks. Windstream did exactly that – popping up a new holding company to enter into the lease, and dropping down a new REIT subsidiary to be the owner of the leased assets. A clear end-run around the probable “intent” of the parties (whatever that means in the context of a bond indenture), but not against the express terms of the indenture, which legions of New York Court of Appeals decisions suggest is the only place to look for intent when reading an indenture.

Nonetheless, Aurelius Capital Master, Ltd., a fund managed by Aurelius Capital Management, LP and its affiliates, instructed the indenture trustee to bring suit against Windstream for breaching the terms of the indenture. As the holder of more than 25% of the notes, the Aurelius fund was entitled to give the trustee such instructions.

As many Slips readers will already appreciate, Aurelius is well-known in the restructuring community for its fondness for a robust sort of litigation. To put it mildly. And it is alleged that Aurelius has fully hedged its Windstream position with CDS, meaning that it can afford to be quite aggressive, because damage to Windstream will actually increase the value of the CDS position.

I’ll try to condense this as much as possible, but readers can see that we are headed into one of my longest posts in a while …

Continue reading "CDS Strikes Again (Aurelius and Windstream)" »

Alix-McKinsey Update

posted by Stephen Lubben

Lots of news in the restructuring area this week, and I hope to blog about Puerto Rico and Windstream before the week is out. But first, a quick update about everyone's favorite professional retention litigation.

As predicted, arbitration has proved to be somewhat less than satisfying in this matter. We still don't really know if McKinsey violated the Code/Rules on disclosure, and nobody has really addressed why it took the Wall Street Journal to notice that McKinsey's retention applications were extremely light on disclosures, relative to other bankruptcy professionals.

The U.S. Trustee is crowing about the $15 million dollars that McKinsey has agreed to pay – although at $5 million per chapter 11 case, that won't go very far will it?

And McKinsey's press release shows that it has an altogether different take on the settlement agreement:

Following a successful mediation overseen by Judge Marvin Isgur of the U.S. Bankruptcy Court for the Southern District of Texas, McKinsey & Company has reached an agreement with the United States Trustee Program regarding McKinsey’s prior disclosures in a set of bankruptcy cases from 2001 to 2018. The settlement does not opine in any way on the adequacy of McKinsey’s prior disclosures and, as Judge Isgur noted, the proposed settlement resolves “good faith disputes concerning the application of Bankruptcy Rule 2014.” McKinsey has agreed to this settlement in order to move forward and focus on serving its clients.

In reaching the agreement, McKinsey did not admit that any of its disclosures were insufficient or noncompliant, and the settlement does not in any way constitute an admission of liability or misconduct by McKinsey or any of its employees, officers, directors or agents.

McKinsey thanks Judge Isgur for his help in putting the historical disagreements regarding disclosures with the Trustee behind us. With Judge Isgur’s guidance, this process has also provided additional clarity for the filing of future disclosures. McKinsey will be filing additional disclosures in the Westmoreland case and looks forward to working with the bankruptcy courts to continue to deliver value to debtors and stakeholders.

A New Development on the CAC v. No-CAC Question in Euro Area Sovereign Bonds

posted by Mark Weidemaier

Mitu Gulati and Mark Weidemaier

We have previously discussed how Euro area sovereign bonds with Collective Action Clauses or CACs (issued after Jan 1, 2013) and without CACs (issued prior to Jan 1, 2013) potentially differ in their vulnerability to debt restructuring. For anyone trying to draw up plans to tackle a future Euro area sovereign debt crisis (e.g., in Italy), it will be crucial to decide whether the CAC and no-CAC bonds are in fact different from a restructuring perspective. Conversely, for investors trying to predict which bonds to avoid and which to buy, the matter is equally important – and indeed, should be reflected in prices (for recent empirical papers, see here, here and here).

Last week, a research note by two Dutch researchers made its way to our desks (via reporters who found the claims intriguing). These researchers, looking into investment treaties entered into by the EU with Singapore, Canada and Vietnam, were concerned about two aspects relevant to future sovereign debt restructurings (among other things). To quote their abstract:

On the eve of the vote in the European parliament on the new investment treaty between Singapore and the European Union, SOMO publishes an analysis on the risks for managing government bonds and money flows. The analysis explains how the EU-Singapore Investment Protection Agreement (IPA) negatively impacts the policy space the EU, EU member states and Singapore have to manage financial instability and prevent financial crises.

(Note:  As per the Dutch research note, the EU-Singapore Investment Agreement has not been ratified by the EU parliamentary authorities yet). The issues of concern were:

First, the treaty seemed to include government bonds within its ambit (which is not the case in all such bilateral investment treaties).

Second, the treaty has specific vote requirements that differ from other treaties (e.g., 75% in the EU- Singapore agreement; 66.67% in the EU-Canada one) and that, if not followed, allow investors to bring treaty-based claims.

One concern raised by the report is that such treaties – perhaps inadvertently, perhaps intentionally – can make future restructurings of Euro area sovereign bonds harder by granting investors in certain countries additional rights that could enable them to block restructuring attempts.

Here are our preliminary thoughts, focusing on the EU-Singapore treaty:

Continue reading "A New Development on the CAC v. No-CAC Question in Euro Area Sovereign Bonds " »

Arbitration in Bankruptcy -- Discharge, the Easy Case

posted by Bob Lawless

Now that the major work of the ABI Commission on Consumer Bankruptcy is done, I seem to have this thing called "time" again. One of the topics that I have been wanting to post about is arbitration in bankruptcy. If I follow through on my intentions, this will be the first of a few posts on arbitration in bankruptcy.

Arbitration has come to the bankruptcy courts. In the coming years, how the Federal Arbitration Act intersects with the Bankruptcy Code will become an increasingly prominent issue. What I want to talk about in this post is arbitration of a violation of the discharge injunction itself. In the typical factual set-up, a debtor alleges a violation of the discharge injunction, and the creditor moves to send the question to an arbitrator under a predispute arbitration clause, almost always embedded in a form contract. Given the ubiquity of these form contracts in consumer transactions, the only thing at stake is the effectiveness of the consumer bankruptcy system.

We can first exclude one approach to the topic that I occasionally see. It goes something like this. The Supreme Court keeps sending disputes to arbitration and thus has signaled repeatedly it favors arbitration. Therefore, the Court would hold that bankruptcy disputes can be arbitrated. This is not how law works. The Court's tendencies are not "law." One of the Supreme Court justices has famously declared he favors a certain malted beverage, but that hardly makes it the drink of the land (although I also would not be against making it so).

Continue reading "Arbitration in Bankruptcy -- Discharge, the Easy Case" »

ABI Consumer Commission Report Is Nearly Finished

posted by Bob Lawless

For the past two years, the American Bankruptcy Institute's Commission on Consumer Bankruptcy has been hard at work. As the Commission's reporter, I am very happy to say that the work is nearly finished. All of the drafting is completed, and we are in the final stages of the editing process.

The report will be released on April 11. If you want to learn about the report, come to the ABI's Annual Spring Meeting where there will be a number of sessions about the report.

The Commission's charge was to recommend "improvements to the consumer bankruptcy system that can be implemented within its existing structure." The recommendations represent the work of a broad group of bankruptcy professionals across all types of roles and types of practice. The report will have forty-nine sections across five chapters, with multiple recommendations in many of the sections. Although the substance of the recommendations will not be released until April 11, the topic list is public. You can expect recommendations on student loans, attorney compensation, the means test, rights in repossessed collateral, chapter 13 plans as well as many other topics.

Student Loan Servicing Fail (continued)

posted by Alan White

The U.S. Education Department is doing a lousy job of overseeing the private companies servicing $1.1 TRILLION of federal student loans. That is the gist of the Inspector General's findings in a new report. Among other problems, the IG found that servicers were not telling borrowers about available repayment options, and were miscalculating income-based repayment amounts. When USED found these problems, they did not use contractual remedies to force servicers to improve their performance. To quote the report: "by not holding servicers accountable, [USED] could give its servicers the impression that it is not concerned with servicer noncompliance with Federal loan servicing requirements, including protecting borrowers' rights."

Meanwhile, borrowers with 49,669 loans have applied for Public Service Loan Forgiveness as of 9/30/2018. 206 borrowers with 423 loans have been approved. So, 99% denial rate.

More Data, Please!

posted by Jason Kilborn

Effective reform requires detailed knowledge of exactly what's being reformed. This is especially true of complex systems like corporate and individual insolvency regimes, with numerous inputs and outputs and carefully counterbalanced policy objectives. Two recent papers accentuate an acute weakness in global insolvency reform development--a lack of reliable and comprehensive data on the operation of existing systems, which will of course infect future planned procedures, as well. The global insolvency team at the IMF notes this problem in the context of its current advisory operations, and Adam Feibelman anticipates this problem with respect to India's developing insolvency and bankruptcy law. Both suggest a solution in more careful attention to data production and tracking. Both papers are interesting reading for those concerned with a more responsible approach to global insolvency policy-making, where for far too long it seems the old joke about empirical analysis has rung true: anecdote is not the singular of data.

New (From the Archives) Paper on Determinants of Personal Bankruptcy

posted by Melissa Jacoby

This working paper is a longitudinal empirical study of lower-income homeowners, including a subset of bankruptcy filers, produced with an interdisciplinary team of cross-campus colleagues, including Professor Roberto Quercia, director of UNC's Center for Community Capital. We just posted this version on SSRN for the first time yesterday in light of continued interest in its questions and findings. The abstract does not give too much detail (see the paper for that), but here it is:

Personal Bankruptcy Decisions Before and After Bankruptcy Reform

Abstract

We examine the personal bankruptcy decisions of lower-income homeowners before and after the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Econometric studies suggest that personal bankruptcy is explained by financial gain rather than adverse events, but data constraints have hindered tests of the adverse events hypothesis. Using household level panel data and controlling for the financial benefit of filing, we find that stressors related to cash flow, unexpected expenses, unemployment, health insurance coverage, medical bills, and mortgage delinquencies predict bankruptcy filings a year later. At the federal level, the 2005 Bankruptcy Reform explains a decrease in filings over time in counties that experienced lower filing rates.

New Paper: Consumer Protection After the Global Financial Crisis

posted by Melissa Jacoby

Historian Ed Balleisen and I have just posted a paper of interest to Credit Slips readers who are interested in consumer protection, financial crises, and inputs into post-crisis policymaking more generally. I will let the abstract speak for itself:

Consumer Protection After the Global Financial Crisis

Edward J. Balleisen & Melissa B. Jacoby

Abstract

Like other major events, the Global Financial Crisis generated a large and diffuse body of academic analysis. As part of a broader call for operationalizing the study of crises as policy shocks and resulting responses, which inevitably derail from elegant theories, we examine how regulatory protagonists approached consumer protection after the GFC, guided by six elements that should be considered in any policy shock context. After reviewing the introduction and philosophy of the Bureau of Consumer Financial Protection, created as part of the Dodd-Frank Act of 2010, we consider four examples of how consumer protection unfolded in the crises’ aftermath that have received less attention. Our case studies investigate a common set of queries. We sought to identify the parties who cared sufficiently about a given issue to engage with it and try to shape policy, as well as the evolving nature of the relevant policy agenda. We also looked for key changes in policy, which could be reflected in various forms—whether establishing an entirely new regulatory agency, formulating novel enforcement strategies, or deflecting policy reforms.


The first of our case studies focuses on operations of the Federal Trade Commission in the GFC’s aftermath. Although the Dodd-Frank Act shifted some obligations toward the CFPB, we find that the FTC continued to worry about and seek to address fraud against consumers. But it tended to focus on shady practices that arose in response to the GFC rather than those that facilitated it. Our second case study examines the Congressional adoption of a carveout from CFPB authority for auto dealers, which resulted from strong lobbying by car companies worried about a cratering sales environment, and the aftermath of the policy. Here, we observe that this carveout allowed a significant amount of troubling auto lending activity to continue and expand, with potentially systemic consequences. Loan servicer misbehavior, particularly in the form of robosigning, is the focus of our third case study. Although Dodd-Frank did not explicitly address robosigning, the new agency it created, the CFPB, was able to draw on its broad authority to address this newly arising problem. And, because the CFPB had authority over student loan servicers, the agency could pivot relatively quickly from the mortgage context to the student loan context. Our fourth and final case study is the rise and fall of Operation Choke Point, an understandably controversial interagency program, convened by the U.S. Department of Justice, which, with the GFC fresh in mind, attempted to curtail fraudulent activities by cutting off access to online payment mechanisms. Here, we see an anti-fraud effort that was particularly vulnerable to a change in presidential administration and political climate because its designers had invested little effort in building public awareness and support for the program.

The Article concludes with an overall assessment and suggestions for other focal points for which our approach would be useful. The examples span a range of other domestic and global policy contexts.

 

 

 

Liked Evicted? -- Read Maid

posted by Pamela Foohey

MaidStephanie Land recently tweeted this depressing statistic: "a single parent would have to work 140 hours a week at minimum wage to pay for basic necessities." And Land would know. Her new memoir -- Maid: Hard Work, Low Pay, and a Mother's Will to Survive -- chronicles her time as a single mother working as a house cleaner and just scraping by on the combination of her paycheck and various forms of government assistance. In telling her story of ending up a single mother living in a homeless shelter with effectively no family or friends to turn to for help, of figuring out how to make a little money working insanely hard, and of dealing with the stigma of asking for government "handouts," Land weaves a narrative about life on the financial precipice that sticks with you. And embedded in her story are glimpses into the lives of her clients, through which Land creates portraits of the trials of (usually) better off families who nonetheless struggle in different ways.

In short, read her memoir. It's fantastic. And if you're not totally convinced that you must read it right now, there's more after the jump.

Continue reading "Liked Evicted? -- Read Maid" »

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

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