A company that insured billions of dollars of private student loans faces insolvency, raising concerns about smaller financial institutions’ ability to lend money to students heading to school this fall, WSJ Pro Bankruptcy reported. South Dakota’s insurance regulator has moved to shut down ReliaMax Surety Co., a Sioux Falls, S.D.-based company that offered insurance against losses to financial institutions that originated private student loans. The company, a subsidiary of ReliaMax Holding Co., provides insurance on about $2.7 billion in loans made by more than 400 lenders. Private student loan insurance has been a relatively safe investment because loss rates in the sector have been low compared with other types of consumer debt. But losses on some ReliaMax-insured loans began to creep up in recent years. The company also found it had priced premiums too low for the policies of those older loans that weren’t being repaid.
Students seeking relief on their college and graduate-school debt could be sitting on a hidden tax bomb: Billions of dollars in one-time bills from the Internal Revenue Service for any debt they get forgiven, the Wall Street Journal reported. The tax bills are a feature of the “income-driven repayment plans” that have been offered by the Education Department since 2007. One version of these plans allows borrowers to set their monthly student-loan payments at 10 percent of their discretionary income. The balances often grow over time because the payments aren’t big enough to cover accruing interest. Private-sector workers pay for 20 or 25 years. At the end of that period, any remaining balance would be forgiven. Under federal tax rules, that disappearing debt is considered part of a borrower’s income for that given year, and taxed as such. Those delayed tax bills are piling up. There are now 7 million borrowers owing $389 billion in income-driven repayment, according to the Education Department. The first borrowers likely won’t have debt expunged until 2027. As enrollment surges, education analysts and student advocates are warning of a potential crisis facing borrowers and the government down the road: huge one-time tax bills that individuals aren’t prepared to pay off.
A federal district judge ruled yesterday that the structure of the Consumer Financial Protection Bureau (CFPB) violates the Constitution, countering a January ruling from a federal appeals court, The Hill reported. Judge Loretta Preska of the Southern District of New York ruled that the CFPB’s creation as an independent agency with a director that could only be dismissed for wrongdoing was unconstitutional. In January, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the CFPB’s structure was constitutional, reversing a 2016 verdict issued by a panel of the court’s judges. The appeals court’s initial opinion, written by Judge Brett Kavanaugh, sought to fix the issue by ruling that the CFPB director could be fired at will. Preska, an appointee of former President George H.W. Bush, concurred with part of the D.C. appellate court’s initial ruling against the CFPB, which held that the agency “is unconstitutionally structured because it is an independent agency that exercises substantial executive power and is headed by a single Director.” She ruled that the entire section of the 2010 Dodd-Frank Act that established the CFPB should be stricken, and she dismissed the CFPB from the case, which was filed in May 2017 by then-New York Attorney General Eric Schneiderman (D). Preska did not issue an order to shut down the bureau.
The White House intends to nominate a budget official to head the Consumer Financial Protection Bureau, setting up what is expected to be a contentious fight in Congress about the direction the agency is taking in the Trump administration, the Wall Street Journal reported. The nomination of Kathy Kraninger, an associate director at the Office of Management and Budget, to head the consumer-finance bureau formed by Democrats in 2011 after the financial crisis, drew support from some in the industry and swift condemnation from policy advocates both on the left and right. She is a “mid-level budget staffer lacking expertise, chosen to lead one of the most powerful agencies in the government,” said J.W. Verret, a law professor at George Mason University who was chief economist for Rep. Jeb Hensarling, (R-Texas). Liberal groups accused the administration of making a placeholder nomination to keep Mick Mulvaney, the Trump-appointed acting CFPB head who also serves as her boss at OMB, in power longer. While Kraninger’s confirmation is pending in the Senate — a process that usually takes months — Mulvaney, who serves as both budget chief and interim head of the CFPB, can continue to lead the bureau.
For decades, bankruptcy judges refused to consider reducing student loans, but that is changing as some judges are now throwing lifelines to people struggling to repay their debt, the Wall Street Journal reported. In interviews with the Wall Street Journal, more than 50 current and former bankruptcy judges, frustrated at seeing borrowers leave federal courtrooms with six-figure debts, say they or their colleagues are more open to chipping away at the decades-old guidelines that determine how such debt is treated. “If the law’s not going to be improved by Congress, we have to help these young people who are drowning in student loan debt,” said U.S. Bankruptcy Court Judge John Waites in South Carolina. Outright cancellations remain rare, but judges said they have other tools at their disposal, including encouraging lawyers to represent borrowers for nothing. The lawsuits can cost $3,000 to $10,000 and take years. Other judges are embracing debt-relief techniques that don’t fully erase student loans but make repayment more affordable by, for instance, canceling future related tax bills. The popularity of these relief strategies could get a boost from a panel of professors, judges and advocates who are studying failures in consumer bankruptcy law and plan to release a report next year. Read more. (Subscription required.)
In related news, Sens. Marco Rubio (R-Fla.) and Elizabeth Warren (D-Mass.) plan to introduce a bill today that would prevent states from suspending residents’ driver’s and professional licenses over unpaid federal student loans. Critics have called the practice a self-defeating approach that denies borrowers the means to pay their debts, the New York Times reported. The bipartisan proposal comes after a November report by the Times revealed that 20 states had laws allowing government agencies to seize licenses from residents who had defaulted on their education debts. Records requests turned up 8,700 cases in which borrowers had lost their credentials in recent years, although that figure most likely understated the true tally. Read more.
Borrowing costs for consumers have risen as the Federal Reserve continues to tighten monetary policy, with interest rates on home, auto and credit-card loans reaching multiyear highs in recent months, the Wall Street Journal reported. Rates on mortgages, which account for the biggest chunk of U.S. household borrowing, are at their highest levels since 2013. According to Freddie Mac, the average fixed rate on a 30-year mortgage was 4.54 percent last week, up from 3.95 percent in early January. Though rates are still moderate by historical standards, that increase is enough to add about $100 to the monthly mortgage on an average-priced home in the U.S. with a 20 percent down payment. So far, there is little sign that higher interest rates are damping consumer spending, which handily beat economists’ expectations in April even after the Fed raised its benchmark federal-funds rate in March to a range between 1.50 percent and 1.75 percent. The central bank is likely to announce another quarter-percentage-point increase today and pencil in at least one more move this year.
