postings by David Lander

Counseling Help for Distressed Student Loan Borrowers?

posted by david lander

As always, it has been very enjoyable to be a guest here. Three thoughts until next time.

1. At least two major organizations are about to join or have recently stepped into the effort to provide help to distressed student loan borrowers. National Foundation for Credit Counseling is launching an effort that was piloted by several of their larger members. Also,Neighborworks is launching an effort. We need high quality counseling for these borrowers, but the counseling programs face many challenges including the following

            a. Training must include not only the very complicated technical issues, but also counseling and interpersonal techniques; trainers must know both areas;

            b. These will hopefully be more than just diagnosis and pointing to the right program; digging into each individual case to help the borrower find the best option is complicated and takes time and skills;

            c. This counseling requires more than a single session and previous NFCC programs have not accommodated follow up sessions;

            d. The programs require serious quality control; and    

            e.  Finally,each provider MUST have a relationship with a legal services program or law school clinic that has expertise in student loan borrower programs so that referrals are smooth;

        2. Use of adjuncts at many law schools is undergoing major changes. In a few months I hope to start on a factual review of what is happening and comment on what that means for legal education. The fall in number of students the last several years at most law schools and the continuing pressure by the Bar for more practice-oriented education are two factors. And then there is the question of the most effective way of integrating adjuncts with the full time faculty and the general curriculum. More on this topic down the road after more numbers are in. 

        3. AFCPE (Association for Financial Counseling & Planning Education) has just received accreditation for its financial counselor certification from the National Commission for Certifying Agencies.  This is an important development for the field and i hope to comment in the future more fully on its meaning and impact. CFPB and many funders have been watching to see if the certification would be approved.

The Weight To Be Given To Comments From Bankruptcy Judges On Proposed Bankruptcy Rules and Forms

posted by david lander

 The Advisory Committee on Bankruptcy Rules (and forms) has been quite active and successful over the past decade in improving the practice of law in the Bankruptcy Courts.  Some of their major innovations such as the overhaul of the process for appealing a decision of the bankruptcy court have engendered little comment and have been deemed important contributions to justice.  Others, such as the responses to changes in the consumer credit and consumer mortgage industries have engendered very active comment from both the creditor and debtor communities and the Committee has endeavored to evaluate carefully all such comments to make certain the proposed rules and forms are not only well written and thought through but also fair to both sides.  In the business bankruptcy  realm the proposed rules governing Informal Committees (2019) engendered significant comment from the claims buying industry and the Committee made numerous changes in response to those comments.

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What Would Effective Counseling for At Risk Student Loan Borrowers Look LIke?

posted by david lander

As the CFPB and Department of Education and others struggle with how best to provide effective help to at risk student loan borrowers, here is one example of a program that provided these services. For full disclosure I am the chair of the advisory committee of the organization that oversaw and funded the project.

The Center for Excellence in Financial Counseling (“CEFC”) at the University of Missouri St Louis was founded and funded to develop ways to improve the quality of education and counseling for consumers in financial distress. For its first program, the organization has been exploring ways to help consumers who are at risk on the repayment of student loans. This is the first such program in the country and CEFC is encouraged about the results thus far and for the prospects going forward.

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The Future of Bankruptcy Work for Lawyers

posted by david lander

As expected, as the number of consumers filing bankruptcy has continued to decrease, the revenue of the consumer bankruptcy debtor and creditor bar has been hit hard. Over the past several years billable hours of business bankruptcy (including insolvency, workout or reorganization) lawyers have been dropping and many mid-level partners at large firms are looking for work in related or unrelated specialties. 

We would expect consumer bankruptcy work to increase when:

  1. Filing has a better chance of discharging some or all student loan debt;
  2. Filing has a better chance of helping consumers modify the terms of their first mortgages;
  3. Filing has a better chance of helping consumers modify the terms of their car loans; and/or
  4. Credit card debt and/or defaults increase.

The future is harder to call for the business bankruptcy field. Everyone expects the number of business failures and loan defaults to increase when interest rates tick up and those businesses that are surviving only because of the low rates cannot service their debts or find alternative financing.  Even though the economy had not been vibrant, with the exception of specific industries such as coal or oil defaults are low.

The challenge is to predict to what extent law work in this area is down because of structural and legislative changes.  For example, the shift from traditional financial institution lenders to “Loan to Own” lenders has reduced the amount of law work related to default and/or restructure on both the debtor and the creditor side. Partly related to that change, the shift from chapter 11 reorganizations to “chapter” 363 sales has significantly reduced bankruptcy court work. One of the factors in the shift to 363 sales rather than true reorganizations was the legislative changes to Article 9 in all fifty states. When the ALI –ULI drafting committee made it much easier to take and enforce in bankruptcy court a security interest in just about every conceivable type of asset they reduced the reorganization leverage.

What percentage of the drop off in work involving defaults, workouts and restructure is related to these factors will determine to what extent the work will grow when defaults rise.

A Different and Better Type of Financial Counseling For Low and Moderate Income Consumers May be on the Horizon

posted by david lander

After many years of lingering between mediocrity and dishonesty there may be early signs of improvement in the industry that provides financial counseling or coaching for low and moderate income consumers in financial difficulty. Sparks started by Single Stop/Robin Hood Foundation in the NYC area and Cities for Financial Empowerment in NYC and several other cities may have the potential to provide much needed help. This comes at a particularly important time since the search is on for providers to help consumers wend their way through the student loan default maze. There is considerable concern that dollars will go to mediocre providers who see their bottom line as more important that the needs of their customers and/or which do not have sufficient quality or quality controls.

Many of the sparks of hope are located within a multi-service center, often a community development corporation or well-established neighborhood non-profit organization. Because there has not been a well-established career line for high quality professional financial counselors, the academic ladder into these jobs is slippery and has more holes than pegs. Likewise, the credentialing has been uneven. Over the past several decades there have been moments when quality research was undertaken but in the past decade such research as there has been has focused on financial literacy or savings and not this segment of the safety net. For these sparks to kindle it will be necessary for the academic preparation programs that do exist to step up. The bulk of the teaching has been at land grant universities in programs that send most of their graduates to financial planning where salaries are better or to the military which has generated a healthy career line since they have realized how important financial stability is to the psyche of their members. There is also some noise in the social work academy to infuse greater emphasis on things financial and perhaps create a relevant field of concentration. The development of a new set of courses at the City University of New York is a welcome first step, but it is crucial that quality control be maintained as those courses are expanded to institutions of learning at other Financial Empowerment cities. And it is crucial that PhD programs be developed to provide quality research and writing that is not subject to the conflicts of interest that have dominated in this field as the very credit counseling providers fund or otherwise control most of the research and writing that does exist.

Servicers Serve the Interests of the Lender, NOT the Student Loan Borrower

posted by david lander

I have enormous respect and appreciation for the CFPB and the wonderful and talented and committed folks who work there. Thus I am mystified that in their efforts to improve servicing of student loans and directing of student loan at-risk borrowers to the window that would help them, they continue to misunderstand the basic nature of capitalism and its profit motive and the borrower-lender relationship. Certainly, the fatally flawed structuring of the credit counseling industry by the credit card lenders in the 1970’s and the still ongoing dismal efforts of mortgage loan servicers to “help” borrowers in default should have taught us the lessons that those who serve the lender cannot and may not and will not serve the interests of the borrower. Capitalism does not work that way whether the lender is a traditional profit incented financial institution in the case of credit card and mortgage loans or a mix of private and public lenders as in the case of student loans. Think IRS and SBA for other government collector examples. If the notion of inclusive capitalism or Robert Reich’s notion of saved capitalism takes hold, perhaps it will invent a way for this to work, but today such efforts are poisonous because they delay creative solutions and punish borrowers and the American economy both of which desperately need such solutions to thrive. Of course servicing must be improved as much as possible and it is tempting to try to rely on the servicers since they are the ones with contacts with the borrowers, but servicers are collectors by another name. It is well past time to stop putting our faith in the collectors. There is currently no high quality network of financial counselors who can help student loan borrowers at risk.All of us including the Department of Education and the CFPB need to start work immediately to develop that effective network and make certain that this crucial job is not delegated to mediocre providers without sufficient quality or quality controls. More on that in a later post.

Consumer Protection and Bankruptcy; How Do They Relate?

posted by david lander

Every other year Richard Alderman holds an extraordinary conference at the University of Houston Law School for faculty from around the world who teach in the consumer law area. It mixes a super learning experience with networking and with a lot of fun. Most of the folks in attendance do not teach in the bankruptcy area but at each of the last two conferences there has been a healthy minority of people who teach in both fields. So, what is the relationship between consumer protection faculty and bankruptcy faculty and what should it be?

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A Quick Look at Revised Article Nine; Seven and a Half Years in.

posted by david lander

Although the Revised Article Nine drafters were severely and justifiably criticized for increasing the complexity and length of the statute and for destroying the work of art that was Grant Gilmore’s Magnus Opus, their product has so far been very successful in meeting the drafters’ goal of increasing certainty for business lenders and borrowers. Their lightning fast and complete ratification by the fifty state legislatures was nothing short of miraculous. Their decision to abandon the general principles of the original version of Article Nine and replace them with a host of specific rules backed up by comments and, if necessary, commentaries or even phone calls from the drafters has made the rules clearer to borrowers, lenders and particularly to judges. This system of rules will, however, require that as new or unanticipated types of transactions or issues arise the Code must be amended rather than expecting these unanticipated  issues or transactions to be decided under the general principles of the Code. Let’s look briefly at two issues, the Code’s treatment of individual names and its effort to integrate agricultural statutory liens into Article Nine. 

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What Is The Effect of Having So Many Adjuncts Teaching Bankruptcy Law Courses?

posted by david lander

Two surveys show that a high percentage of bankruptcy courses is taught by adjuncts rather than full time faculty. A 1997 survey by an ABA Committee looking soly at bankruptcy courses and completed by bankruptcy teachers showed that over half the 100 schools that replied made major use of lawyers or judges in teaching their bankruptcy courses, 20% made occasional use and 30 % made little or no use. In a 2007 survey which covered a dozen or so law school subject areas and completed by law school associate deans one third of the 75 reporting schools indicated that adjuncts taught one or more of the bankruptcy courses in the curriculum. (See Lander, Are Adjuncts a Benefit or a Detriment? 33 U. Dayton L. Rev. 285 (2008). The key question is whether this high use of adjuncts helps or hinders the teaching of bankruptcy law and whether it helps or hinders bankruptcy scholarship.

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It Is Time to “Sunset” Preference Law As We Have Known It Or at Least To Test Its Underlying Basis Empirically .

posted by david lander

It is time to “sunset” preference law as we have known it or at least to test its underlying basis empirically .

Ten years ago or so Lynn Lopucki helped to focus our attention on the unfairness of the treatment of unsecured creditors vis a vis secured creditors.  In the past decade things have only become worse for unsecured business creditors as Revised Article 9 tightened the hold of secured business creditors, but that topic has seemed to have fallen  off of the radar screen.

This is a good jumping off point for examining the one area of technical bankruptcy law that most unsecured creditors love to hate “preference law.“ Preference law has outlived whatever usefulness it might have  had. The effort to separate the wheat from the chaff  is not worth the energy.  The litigation costs and aggravation costs far outweigh the benefits.  What are the benefits?  The recoveries are intended to be redistributed among all unsecured creditors. Although few studies have been done it does not appear that this redistribution is meaningful when the litigation costs, extorted settlements and bad feelings of defendants are measured against those net redistributions. Moreover, the courts have held that those recoveries may be pledged to a DIP Lender and in those cases the general unsecured creditors have money taken out of their pockets and receive no benefit from this “redistribution.” Some commentators feel that the threat of preference recovery limits the potential preference payments that a failing debtor may make, or that overreaching creditors may demand and collect, but there is simply no evidence that this is accurate and the only study indicates that this is not true.  Finally, some preference aficianados justify preference recoveries on the basis of equality of distribution and fairness and justice.  Just ask unsecured creditors that are caught in a bankruptcy and  you are likely to find that the opposite is true; the efforts at recovery are deemed unfair and unjust. The only lobby for current preference laws seems to be people who are outraged by apparent  unfairness of one creditor receiving more than others, or who believe that the existence of these laws promotes “better” conduct among debtors and creditors in the wake of financial distress, those who benefit from the litigation spawned by preference laws and perhaps bondholders who believe these avoidance actions increase their recoveries.

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Toward a World with Rational National Consumer Credit Public Policies

posted by david lander

The current economic downturn started in the consumer credit area. One of the glaring failures during the build up of the factors that led to the current mess was the lack of sufficient economic or sociological analysis from within the academic communities. There are simply too few funded prestigious institutions that study consumer credit issues. It is interesting that law school bankruptcy professors who operate outside of funded centers and may or may not have credentials in economics and sociology have provided a significant percentage of the analysis that does exist. The current economic recession is hurting many many people and will hurt many more before it comes to rest, but perhaps one benefit to which it could give rise would be more regular and effective analysis of the micro and macro economic and sociological issues that inhere in the supply and demand sides of the consumer credit world, including housing finance, car finance and credit card debt. Such an analysis might lead to a more well informed public and more well informed legislators and other public policy makers. We need this in the United States and the rest of the world. 

As a starting point let’s think about the spending and borrowing habits of both Americans and of the hundreds of millions of potential likely consumers and spenders in China and India and other emerging Asian economies. Ronald Mann has written insightfully about the preferences for debit or credit cards in Japan and Korea and perhaps now it is time to look at China and India, particularly since the numbers of people who will have either money in their pockets or credit available to them is so staggering.

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