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Commentary: The Small Business Reorganization Act Arrives in February 2020; Here's What You Need to Know



With President Trump’s signature on Aug. 23, the "Small Business Reorganization Act of 2019" (SBRA) will officially take effect in February 2020. The SBRA is designed to fill a gap in the current bankruptcy laws by providing a framework for small businesses to successfully reorganize in bankruptcy court, according to a recent commentary in the National Law Review. Under the SBRA, the Bankruptcy Code will be amended to ease the procedural burden on small businesses seeking reorganization. The SBRA amends the Bankruptcy Code with the addition of a new subchapter V to chapter 11, defining a small business debtor as an entity with an aggregate of noncontingent liquidated secured and unsecured debt of not more than $2,725,625. The SBRA mandates that a standing trustee be appointed in every small business chapter 11, similar to the existing statutes for chapter 12 and chapter 13. Among other provisions, the new subchapter will now allow a small business to confirm a plan over the objections of creditors, which is a significant change and should greatly increase the overall success rate for small businesses.







Also, don't miss the ABI Talk at the Winter Leadership Conference on Dec. 6, "New Reorganization Hope for Main Street Debtors," to be delivered by Bankruptcy Judge Michelle Harner (D. Md.; Baltimore). Register here.

Student Borrowers ‘Preyed Upon’ by Loan Servicers, but Lawmakers Want to Change That



A House Financial Services Committee hearing on Tuesday tackled the issue of student lending and its ramifications for 45 million American student loan borrowers, CNBC.com reported. Both Democrats and Republicans on the committee agreed there are problems with the current student lending system. Specifically, lawmakers and consumer advocates criticized student loan servicing companies such as Navient, saying that student borrowers need more assistance and protections from these for-profit corporations. Democrats unveiled eight draft bills on Tuesday for discussion that would, among other things, establish a student borrowers’ bill of rights, strengthen credit-reporting standards, block debt collectors from unfairly going after student borrowers, protect private student loan borrowers and help borrowers with student debt purchase their first home. Seth Frotman, executive director of the Student Borrower Protection Center, says that student loan borrowers have a “bullseye” on their back and are subjected to “predatory tactics” from servicing companies from the day they take out their loan until the day they pay it back. He claims that’s because student borrowers have less rights than nearly any other type of borrower. “You have more protections if you’re paying back your credit card or your mortgage,” Frotman said.







The issue of student loan debt and bankruptcy is the first problem addressed in the Final Report of the ABI Commission on Consumer Bankruptcy. Click here to download your copy.

More Americans Going Without Health Coverage Despite Strong Economy, Census Bureau Finds



The proportion of Americans without health insurance grew significantly last year for the first time this decade, even as the economy’s strength pushed down the poverty level to its lowest point since 2001, according to federal data released on Tuesday, the Washington Post reported. The finding that 27.5 million U.S. residents lacked coverage in 2018, based on a large U.S. Census Bureau survey, reverses the trend that began when the Affordable Care Act expanded opportunities for poor and some middle-income people to get insurance. Taken together, the census numbers paint a portrait of an economy pulled in different directions, with the falling poverty rate coinciding with high inequality and the growing cadre of people at financial risk because they do not have health coverage. As more Americans found jobs, the poverty rate fell last year to its lowest level since 2001, and middle-class income inched marginally higher. Median U.S. income — the point at which half of U.S. families earn more and half earn less — topped $63,000 for the first time, although it was roughly the same level as it was 20 years ago, after adjusting for inflation.







An article in the Summer 2019 edition of the ABI Law Review found that individuals who experienced a gap in medical care coverage over a two-year period were roughly twice as likely to file for bankruptcy as those who retained continuous coverage. Click here to read the article. A forthcoming podcast will feature the authors, Profs. Brook E. Gotberg of the University of Missouri School of Law (Columbia, Mo.) and Prof. Michael D. Sousa of the University of Denver Sturm College of Law (Denver, Colo.), discussing their research.

U.S. Consumer Prices Rose 0.1 Percent in August



U.S. consumer prices rose slowly in August, held down by weak energy prices that masked a broader firming in price pressures, the Wall Street Journal reported. The consumer-price index, which measures what Americans pay for items from fresh whole milk to lawn-care services, rose a seasonally adjusted 0.1 percent in August from a month earlier, matching economists’ expectations. The sluggish pace of overall price growth largely reflected a decline in energy prices. Core consumer prices, which exclude the volatile categories of food and energy, increased 0.3 percent from the previous month. This marked the third straight monthly increase of 0.3 percent and an uptick from earlier in 2019. Prices for a wide array of goods and services rose last month. Rent and medical prices were among the drivers behind stronger inflation in August.

Need Cash? Companies Are Considering Magazine Subscriptions and Phone Bills When Making Loans



For decades, banks and other financiers have relied primarily on consumers’ borrowing history to make lending decisions. Now revenue-hungry companies are considering metrics both mundane and peculiar, like whether applicants shop at discount stores, subscribe to magazines or pay their phone bills on time, the Wall Street Journal reported. Those experimenting with new metrics range from big-name banks like Goldman Sachs Group Inc., Ally Financial Inc. and Discover Financial Services to upstart financial-technology firms. The changes are an about-face for many banks, which have spent much of the decade since the financial crisis chasing mostly ultra-creditworthy customers. But that pool is only so big. The field of potential new borrowers is huge: About 53 million U.S. adults don’t have credit scores, according to Fair Isaac Corp., creator of the widely used FICO scores. Another roughly 56 million have subprime scores. Some have a checkered borrowing history or high debt loads. But others, banks point out, just don’t have traditional borrowing backgrounds, often because they are new to the U.S. or pay for most expenses with cash. Government officials at times have encouraged or even required changes to the information in credit reports and scores, reasoning they would bring loans to deserving borrowers who might not fit a traditional mold.

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GAO Finds Expanded Student Loan Forgiveness Program Still Rejecting Most Applicants



The Government Accountability Office (GAO) released a report today finding that the vast majority of applicants to a program designed to forgive student loans for public servants are still being denied, despite an effort from Congress to expand the program, The Hill reported. The GAO found that just 661 out of 54,184 requests, or 1 percent, for the new Temporary Expanded Public Service Loan Forgiveness (TEPSLF) program were accepted in its first year, from May 2018 to May 2019. Congress created the expansion program to the Public Service Loan Forgiveness (PSLF) last year after an outcry that the system's requirements were so rigid and poorly communicated that lawmakers needed to step in. The expansion program also came in response to a report from the GAO last year finding a PSLF rejection rate of 99 percent. PSLF was created in 2007 to forgive the remainder of federal student loan debt for graduates who pay loans for 10 years and work in a qualifying job for the government or a nonprofit. The program has been under intense scrutiny since last year's GAO report, and this summer the American Federation of Teachers filed a lawsuit over its failure. This year's GAO report recommends that the Education Department streamline the TEPSLF and PSLF application process and improve transparency with borrowers about the program's process and requirements.







The House Financial Services Committee will hold a hearing next Tuesday titled, "A $1.5 Trillion Crisis: Protecting Student Borrowers and Holding Student Loan Servicers Accountable." For more information, please click here.



The issue of student loan debt and bankruptcy is the first problem addressed in the Final Report of the ABI Commission on Consumer Bankruptcy. Click here to download your copy.

PG&E Seeks More than $14 Billion in Equity in Restructuring Plan



PG&E Corp. is floating a restructuring plan that calls for more than $14 billion in equity commitments — while giving no clear picture of what its liabilities may be, Bloomberg News reported. In a draft term sheet, PG&E laid out a reorganization proposal that would have it exiting the largest utility bankruptcy in U.S. history next year by using a mix of debt and equity to cover the costly claims it faces from wildfires that its equipment ignited. The company fell short, however, of giving an actual estimate for those claims, and the plan is due to be filed on Monday. PG&E, California’s largest electric utility, was forced to seek chapter 11 protection in January to deal with claims tied to deadly blazes that devastated Northern California in 2017 and 2018. It warned at the time that its liabilities may exceed $30 billion. The company is now rushing to come up with a plan to cover the costs as bondholders including Pacific Investment Management Co. and Elliott Management Corp. try to pitch their own proposal that would all but wipe out the stake of current shareholders.

Fed Officials Warn the Consumer Is Alone in Carrying U.S. Economy



Federal Reserve officials are weighing two competing forces in the U.S. economy: the resilience of the consumer versus the fallout from uncertainty around trade disputes and weaker global growth, Bloomberg News reported. “The consumer is now carrying all of the weight, or much of the weight, for growth going forward,” Federal Reserve Bank of New York President John Williams said during a speech yesterday. “One thing, though, about consumer spending that you have to be careful about is it’s not really a leading indicator.” As threats from U.S./China trade tensions have chilled business confidence and investment, consumers have been the main drivers of growth. There’s weakness surfacing in manufacturing and concerns brewing in financial markets that the world economy may be heading toward recession. The theme was echoed later on Wednesday by Dallas Fed chief Robert Kaplan, who told an audience in Toronto that he was watching to see whether weak macroeconomic data will filter into consumer attitudes. Kaplan, who isn’t a voter on the Federal Open Market Committee this year, said that if policymakers wait for consumer spending to weaken, it might be too late.

Small Business Hiring Increased in August



A great U.S. job market for workers at small firms got a little better in August, according to the latest monthly employment survey from the National Federation of Independent Business, the Wall Street Journal reported. “Job creation picked up in August, with an average addition of 0.19 workers per firm compared to 0.12 in July," reports NFIB Chief Economist William Dunkelberg. Given that small businesses are still trying to hire more workers, Dunkelberg said that it is “hard to call it a ‘recession’ when job openings still exceed job searchers.” Amid the ongoing American worker shortage, the NFIB report also finds that business owners are not giving up the search for new talent. Friday’s government jobs report will provide a snapshot of the broader economy. (Subscription required.)

Freddie Mac: Mortgage Rates Drop to Another 3-Year Low



Once again, the average U.S. rate for a 30-year fixed mortgage fell to another three-year low this week, according to the latest Freddie Mac Primary Mortgage Market Survey, HousingWire.com reported. According to the company’s data, the 30-year fixed-rate mortgage averaged 3.49 percent for the week ending today, down from last week’s rate of 3.58 percent. Unsurprisingly, this average is nearly an entire percentage point lower than the 2018 average rate of 4.54 percent. The five-year Treasury-indexed hybrid adjustable-rate mortgage averaged 3.3 percent, slipping from last week’s rate of 3.31 percent. This rate sits significantly lower than the same week in 2018, when it averaged 3.93 percent.

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Bankruptcy Bills Await President's Signature



A trio of bankruptcy bills are sitting on President Trump’s desk awaiting his signature. The three bankruptcy bills are the “Small Business Reorganization Act of 2019” (H.R. 3311), the “Honoring American Veterans in Extreme Need Act of 2019” or the “HAVEN Act” (H.R. 2938), and the “Family Farmer Relief Act of 2019” (H.R. 2336).

JPMorgan: Tariffs Could Cost U.S. Families Up to $1,000 a Year



More than a year into the U.S./China trade war, American consumers are about to find themselves squarely in the crosshairs for the first time, with households estimated to face up to $1,000 in additional costs each year from tariffs, according to research from JPMorgan Chase, the Washington Post reported. Consumers, whose spending fuels about 70 percent of the U.S. economy, have been largely shielded from previous rounds of tariffs, which have left businesses reeling and upended global supply chains. But that’s about to change with the 10 percent levies on roughly $300 billion in Chinese imports, about a third of which will take effect Sept. 1. Those tariffs will primarily target consumer goods. Amid growing concern that the tariffs could damage the economy, Trump abruptly announced he would delay tariffs on certain popular products such as laptops, footwear and video games — about two-thirds of the impacted items — until mid-December. But that’s not enough to eliminate the added burden for consumers. JPMorgan researchers calculated that after the 10 percent levies go into effect, American families will be facing about $1,000 in additional costs from all tariffs on Chinese goods annually. If the upcoming tariffs are raised to 25 percent, as Trump has warned, consumers’ costs could go as high as $1,500 a year, researchers estimated. “The impact from reduced spending could be immediate for discretionary goods and services, since tariffs are regressive,” JPMorgan researchers noted. “Unlike the agriculture sector, which is receiving subsidies/aid to offset the impact of China’s retaliatory actions, there is no simple way to compensate consumers.”

Law Firm Bills in Big Bankruptcy Cases Growing Rapidly



There was no summer slowdown for law firms advising on large corporate bankruptcies: The season has brought a bonanza of law firm fee applications and approvals, Law.com reported. Several large firms stand to gain up to tens of millions of dollars from some of the most active chapter 11 bankruptcies this summer, including Sears Holding Corp. and PG&E Corp. In the Sears case, Bankruptcy Judge Robert Drain on June 28 approved fee requests for 16 advisors — including six law firms — that totaled about $130 million in all for work mostly from mid-October through February. Across the country, PG&E has already paid more than $84 million to four firms in the months leading to its January 2019 bankruptcy.

Wells Fargo Pays $6.5 Million to Navajo Nation over 'Predatory' Practices



Wells Fargo & Co. will pay the Navajo Nation $6.5 million to settle a lawsuit over “predatory and unlawful practices” by the bank, the Native American tribe said today, Reuters reported. The Navajo Nation sued Wells Fargo in federal and tribal courts in 2017, alleging that the San Francisco-based bank had opened unauthorized accounts for vulnerable tribe members as part of the potentially millions of fake accounts opened by bank employees nationwide. The settlement “puts other companies on notice that harmful business practices against the Navajo people will not be tolerated,” Navajo Nation President Jonathan Nez said in the statement, which referred to Wells Fargo’s “long campaign of predatory and unlawful practices.” The settlement with the Navajo Nation followed a $575 million deal in 2018 with U.S. states over claims that Wells Fargo opened phony customer accounts and improperly referred and charged customers for financial products.

Hedge Funds Have Already Bled $55.9 Billion This Year



Hedge funds have already bled 50 percent more money this year than in all of 2018, as the industry struggles to win back investors fed up with high fees and poor performance, Bloomberg News reported. Investors yanked $8.4 billion in July, bringing net outflows this year to $55.9 billion, according to an eVestment report on Thursday. That’s up from $37.2 billion for all of last year. Investors’ frustration with hedge funds continues to mount, driving down management and performance fees to well below the “two and 20” fee model once considered standard, according to Eurekahedge. More hedge funds have shut than started in each of the last three years, and those that do launch are far smaller than they were before the financial crisis. The pain for hedge funds isn’t spread evenly, with 37 percent of funds posting net inflows this year. So-called event-driven funds have fared the best, with inflows of $10.3 billion through July, eVestment data show. These funds try to cash in when events such as mergers, takeovers and bankruptcies lead to a temporary mispricing of a company’s shares.

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Analysis: Bankruptcy Filings by U.S. Energy Producers Pick Up Speed



Bankruptcy filings by U.S. energy producers so far this year have already nearly matched the total for the whole of 2018, according to a report yesterday by Haynes and Boone LLP, as volatile oil and gas prices are driving companies to seek protection from creditors, Reuters reported. A total of 26 firms with debts totaling $10.96 billion have filed for court restructuring through mid-August, according to the law firm’s report. Last year, 28 companies filed for bankruptcy listing $13.2 billion in debt, while 24 firms sought protection in 2017 with $8.5 billion in debt. Throughout most of 2019, U.S. light, sweet crude oil has been stuck in the $50 range on the New York Mercantile Exchange, finishing on Wednesday at $55.23. West Texas Intermediate averaged $65.06 a barrel last year. Natural gas prices also have fallen so low in some places that some companies have shut in wells and others have paid pipeline operators to take their gas. Buddy Clark, a partner at Haynes and Boone, said, however, that he did not predict a new wave of producer bankruptcies similar to that which followed the oil price collapse mid-decade. In 2015, there were 44 oil and gas producers filing for protection with combined debts of $17.4 billion. “We’re not going to see anywhere near the wave of bankruptcies in 2015,” Clark said. Many of 2019’s filings are pre-planned chapter 11 restructurings, where creditors agree in advance on a financial restructuring plan, Clark said.







Get a better understanding of what happens when an oil, gas or other natural resources company goes bankrupt. Order your copy of ABI's revised and expanded When Gushers Go Dry: The Essentials of Oil & Gas Bankruptcy, Second Edition.

Study: Student Loans and Auto Debts Comprise Increasing Share of Delinquency Rates



Total household debt balances increased by $192 billion in the second quarter of 2019, boosted primarily by a $162 billion gain in mortgage installment balances, according to the latest Quarterly Report on Household Debt and Credit from the New York Fed’s Center for Microeconomic Data (the mortgage installment balances exclude home equity lines of credit, which are reported separately and have been declining in balance for some time). The new mortgage total of $9.4 trillion is slightly higher than the previous high in mortgage balances from the third quarter of 2008 in nominal terms. In the data, there are several categories of delinquency — for example, 30, 60, 90 and 120+ days past due — plus “severely derogatory,” which includes any stage of delinquency paired with a repossession, foreclosure or “charge-off." During and after the Great Recession, the 90+ day delinquency rate, especially for mortgages, soared and an unprecedented number of properties entered foreclosure. This created a surge in severely derogatory balances that took years to work down, even as delinquencies other than severe derogatories were declining relatively rapidly. Although the housing crisis produced a huge increase in severely derogatory mortgages, that effect has dissipated as the foreclosure pipeline has cleared out in even the slowest states. Today, auto and especially student loan balances are the interesting components: In the second quarter of this year, the outstanding severely derogatory balance is comprised of 35 percent defaulted student loans, which have grown stunningly since 2012. Auto loans are now 21 percent of the outstanding severely derogatory balance, a larger share than what we’ve seen historically as the auto loan market has expanded and auto loan delinquencies have been increasing for subprime borrowers over the past five years.

New Puerto Rico Governor Finally Receives Support



Puerto Rico's new governor finally appeared to be overcoming some of the challenges to her authority yesterday following weeks of political turmoil in the U.S. territory, with key members of the majority New Progressive Party expressing support, the Associated Press reported. That may allow Gov. Wanda Vázquez, who has never held elected office, to turn her attention to the territory’s lagging efforts to recover from 2017’s devastating Hurricane Maria, as well as the grinding economic slump and debt crisis that has led to demands for austerity from a federal board overseeing its finances. Senate President Thomas Rivera Schatz, who had been seen as her chief challenger, issued a statement yesterday backing her and saying that he’d only been looking for a replacement because he thought Wanda Vázquez didn’t want the governor’s job — although his efforts had continued well after she said she did. Rivera Schatz had suggested the post go to the island’s congressional representative, Resident Commissioner Jenniffer González, but González too issued a statement of support for Vázquez on Tuesday. Under the territory's constitution, the governorship fell to Justice Secretary Vázquez on Aug. 7 when Gov. Ricardo Rosselló resigned after intensive public protests and his attempt to name a last-minute successor were knocked down by the territory’s Supreme Court.

U.S. Will Back More Condominium Loans Aimed at First-Time Buyers



The Trump administration is vastly expanding the scope of condominium purchases eligible for lower-down-payment loans, the Wall Street Journal reported. The move, announced yesterday by the Federal Housing Administration, could help revive the entry-level condo market for first-time buyers because FHA-backed loans require only a 3.5 percent down payment and lower credit score than conventional loans. It also loosens financial-crisis-era rules and could expose the government to a higher likelihood of loan default if the housing market continues to slow and prices fall. The FHA insured a million home loans last year made by banks and other private lenders, the vast majority of which were for single-family homes. With the new rules, the agency estimates it could insure as many as 60,000 additional condo loans each year, on top of the 16,000 condo loans it backed in 2018. The median price of an existing condo or co-op unit was just over $260,000 in June, compared with nearly $290,000 for the median existing single-family home, the National Association of Realtors said. (Subscription required.)

Commentary: Subzero Interest Lending Presents Alarming Signal for Global Financial Markets



For Americans accustomed to paying 4 or 5 percent mortgage rates, let alone the double-digit figures consumers endured in the early 1980s, the new loan from Denmark’s Jyske Bank might seem inconceivable, according to a Washington Post commentary. The Danish lender last week started offering home buyers 10-year mortgages at an interest rate of -0.5 percent. That means borrowers over a decade will pay back a little less than the amount borrowed, not including one-time fees. This highly unusual condition may be good for Danish home buyers, but economists say that it’s an alarming sign for the global economy. Several major governments and more than 1,000 big companies in Europe are now able to effectively borrow from global financial markets at a negative interest rate. For Jyske Bank, that means it can turn around and lend money at a subzero interest rate, too. The amount of this type of debt, issued as government or corporate bonds, has doubled since December and now totals $15 trillion. The sudden increase suggests that a fast-rising share of investors are so nervous about the future they’re willing to actually lose a little money by lending it to a borrower that is almost certain to pay it back, rather than risk betting on something that could go bust.

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