Analysis: Although Student Loans Delinquencies Declining, Borrowers Still in Distress

Analysis: Although Student Loans Delinquencies Declining, Borrowers Still in Distress

Late payments on student loans, when measured by loan balances in arrears, have fallen significantly in recent years, according to a Bloomberg analysis on Monday. In 2013, a quarter of student loans were at least 31 days late. Delinquency rates have steadily dropped since then, falling to about 19 percent as of June 30. However, less than $3 of every $5 is being repaid on time. More than 42 percent of loan balances are either delinquent, temporarily postponed, in default or in bankruptcy, or borrowers are seeking to shed the debt by convincing the feds that their disability prevents them from ever repaying what they owe. More than 1.1 million borrowers defaulted last year on Education Department student loans.

Commentary: Puerto Rico Bonds Risk Court Workout if Consensus Eludes Panel

The seven-member federal control board just appointed to address Puerto Rico’s $70 billion of debt may ultimately leave it up to a court to force investors to accept losses if they don’t do so willingly, according to a Bloomberg News commentary today. The panel appointed by President Barack Obama yesterday consists of a former bankruptcy judge (Arthur Gonzalez) who oversaw the workouts of Enron Corp., Chrysler LLC and WorldCom Inc., a former president of the island’s Government Development Bank, a woman who oversaw California’s budget after the recession, and a law professor (David Skeel) who has argued that states should be given legal power to impose haircuts on bondholders, according to the commentary. In addition to cutting Puerto Rico’s debt, the panel is tasked with ending recurring budget deficits and addressing $43 billion of unfunded obligations to its employee pension plans. Bringing together the island’s bondholders, insurance companies and public workers may be too complex to be resolved without the power imposed by a court, said Matt Fabian, a partner at Concord, Mass.-based Municipal Market Analytics. “Any board doesn’t want to fight with stakeholders,” Fabian said. “So what the board proposes, a lot of it will likely have to be validated in the courts and so you don’t have to worry so much about individual predispositions or preferences.” The island isn’t authorized to file for bankruptcy and Puerto Rico Governor Alejandro García Padilla was unable to get bondholders to voluntarily accept less than they’re owed, which prompted Congress to step in with legislation giving it the tools to cut its obligations. “The board will undoubtedly encourage voluntary settlements, but it’s almost certain that there will be lots of holdouts,” said Phil Fischer, head of municipal research at Bank of America Merrill Lynch.

The financial control board is controversial on the island and in Congress. Protestors this week blocked a street in front of a hotel hosting a conference of finance executives holding a sign that read: “The people before the debt.” Meanwhile, Rep. Luis Gutierrez (D-Ill.), an opponent of the law creating the oversight role, referred to the board as a “federal junta.”

For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage.

New ABI Video Takes a Look at Ch. 11 Filing Trends over the Past 35 Years

Watch ABI's Ed Flynn as he provides insight on chapter 11 filing trends since 1980, and a forecast for 2016's chapter 11 totals.

Bank Groups Weigh Legal Challenge to Fed Stress Tests

Bank trade groups and industry advisers are debating the possibility of legally challenging the Federal Reserve in an attempt to force changes to annual “stress tests” of the biggest U.S. lenders, the Wall Street Journal reported today. Over the past several months, industry advisers and representatives from some big U.S. banks have been involved in several calls discussing the possibilities, with the latest occurring a few weeks ago. The discussions have centered on legal strategies that would allow a challenge to the stress tests, with much of the focus on their opacity and how the Fed changes certain aspects of the exams each year. Additionally, participants in the talks have weighed how the Fed and tests could be influenced by the outcome of the presidential election and whether they would argue for a more cautious course of action. The Fed-administered stress tests are the centerpiece of the post-financial-crisis regulatory overhaul and affect firms with more than $50 billion in assets. Last year, 33 firms took them.

Banks May Face RICO Claims on Payday Loans

An Aug. 29 federal appeals court ruling on arbitration means that two banks may have to face claims that they violated federal anti-racketeering laws by unlawfully facilitating high-interest payday loans, Bloomberg BNA reported on Tuesday. The U.S. Court of Appeals for the Second Circuit upheld a district court that refused to appoint a substitute arbitrator when the arbitrator designated in a contract became unavailable (Moss v. First Premier Bank, 2d Cir., No. 15-cv-02513, 8/29/16). The court, saying that it's bound by a 1995 ruling on that question, said that the federal circuits have come to different conclusions on what to do in such cases. The decision, if it stands, allows plaintiff Deborah Moss to resume her putative class suit against First Premier Bank of South Dakota and Bay Cities Bank of Florida. The two banks served as the originating depository financial institutions for a payday loan that Moss obtained from SFS Inc., an online payday lender. Moss alleged violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) against the two banks, saying that they “facilitate payday loans to consumers residing in states that banned the practice and collect usurious interest rates in violation of state law.” The banks moved to compel arbitration, citing an arbitration agreement that named the National Arbitration Forum (NAF) as the arbitrator. However, the NAF declined to handle the case, saying it was barred from doing so by a 2009 consent judgment reached with Minnesota authorities, which had alleged consumer fraud by the NAF.

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