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Colorado Joins CFPB in Suing CashCall Short-Term Lender

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CashCall Inc., an Anaheim, California-based lender, and its chief executive officer, J. Paul Reddam, were sued for alleged abusive practices by the U.S. Consumer Financial Protection Bureau and state of Colorado, Bloomberg News reported yesterday. CashCall, which on its website says it’s “one of the nation’s premier lenders,” collected money it had no right to take from consumers, CFPB Director Richard Cordray said. “The CFPB alleges that the defendants engaged in unfair, deceptive, and abusive practices, including illegally debiting consumer checking accounts for loans that were void,” Cordray said. Minutes before Cordray’s statement was released, Colorado Attorney General John W. Suthers said CashCall, founded in 2003, is illegally operating in that state by servicing and collecting on “predatory” loans.

Regional Bank Says It Will Take a Charge Because of Volcker Rule

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Regional lender, Zions Bancorporation, said today that it was taking a charge of $387 million to rid itself of a sizable portfolio of trust-preferred collateralized debt obligations and other CDOs to be in compliance with the new Volcker Rule that was approved last week, the New York Times DealBook Blog reported today. The bank, based in Salt Lake City, said that it was taking the fourth-quarter, noncash charge and putting the portfolio up for sale because it believed the securities would be considered “disallowed investments” under the Volcker Rule. The bank announced the move just days after federal regulators approved a tougher version of the rule, which is the centerpiece of the Dodd-Frank Act, passed in response to the financial crisis. The rule, inspired by Paul A. Volcker, the former Federal Reserve chairman, is intended to deter banks from making risky bets with their own money, in hopes of avoiding the need for future bailouts of the financial system.

Analysis Volcker Rule Shows Its Wide Reach

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ABI Bankruptcy Brief | December 12, 2013


 


  

December 17, 2013

 

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  NEWS AND ANALYSIS   

ANALYSIS: VOLCKER RULE SHOWS ITS WIDE REACH

Financial institutions and investors are scrambling to line up a new way to finance municipal-bond investments, with the week-old Volcker Rule set to curtail banks' dealings in tender-option bonds --a $75 billion niche of the market for debt issued by cities, states and local governments, the Wall Street Journal reported today. Meanwhile, more than a dozen small and midsize banks will likely need to sell collateralized debt obligations under a Volcker Rule provision limiting certain risky bank investments, according to analysts. Zions Bancorp of Salt Lake City said yesterday that it would have to sell some CDOs and that it would take a $387 million charge to write down the value of the securities. The Volcker Rule, part of the 2010 Dodd-Frank financial regulatory overhaul, will force giant banks to rethink virtually every aspect of their trading activities. Many banks have already sold, wound down or spun off such restricted activities as proprietary-trading desks that make wagers with the bank's own money. In a tender-option bond transaction, banks, hedge funds and others use short-term borrowings to fund the purchase of long-term muni bonds. The hope is that they will profit from the difference in the interest they pay lenders -- often money-market funds -- and what they earn on the muni bonds. The market is a fraction of the $3.7 trillion municipal-debt universe, but the debt has been popular with large investment firms such as OppenheimerFunds, Nuveen Asset Management and Eaton Vance, which often use the debt in leveraged strategies that aim to boost returns using borrowed money. Read more. (Subscription required.)

While the Volcker Rule was intended to prevent banks from "engaging as principal for the trading account of the banking entity in any purchase or sale of one or more financial instruments," it contains only a minimal enforcement mechanism, according to a commentary in yesterday's New York Times DealBook blog. The rule contains a list of exemptions, including trades made for liquidity purposes and market-making activity for customers. Even a hedging transaction is still permitted, as long as it is "designed to reduce or otherwise significantly mitigate and demonstrably reduce or otherwise significantly mitigate specific, identifiable risks." From an enforcement perspective, the heart of the Volcker Rule is the requirement that banks put in place extensive procedures to comply with the prohibition on proprietary trading. This will impose significant costs on banks that engage in the types of transactions that could run afoul of the Volcker Rule. If a bank engages in prohibited proprietary trading, it can be required to divest itself of the investment and be restricted from future trading of that type. But there is no separate punishment incorporated into the rule for violations, despite suggestions that the rule include its own schedule of civil penalties. Read more.

COMMENTARY: THE HIDDEN DANGER IN PUBLIC PENSION FUNDS

The threat that public-employee pensions pose to state and local government finances is well known, but less known is that pensions are larger and their investments riskier than at any point since public employees began unionizing in earnest nearly half a century ago, according to a commentary in yesterday's Wall Street Journal. Public pensions have long been advertised as offering generous, guaranteed benefits for public employees while collecting low and stable contributions from taxpayers. But with Detroit's bankruptcy filing citing $3.5 billion in unfunded pension liabilities, and with four of the five largest municipal bankruptcies in U.S. history occurring over the past two years, reality tells us otherwise. According to the commentary, public pensions pose roughly 10 times more risk to taxpayers and government budgets than they did in 1975. In that year, state and local pension assets were equal to 49 percent of annual government expenditures, according to the commentary. Pension assets have nearly tripled to 143 percent of government outlays today. That's not because plans are better funded -- today's plans are no better funded than in 1980 -- but mostly because pension plans have grown as public workforces have aged. The ratio of active public employees to retirees has fallen drastically, according to the State Budget Crisis Task Force. Today it is 1.75 to 1; in 1950, it was 7 to 1. This means that a loss in pension investments has three times the impact on state and local budgets than it would have had 40 years ago. Read more. (Subscription required.)

ANALYSIS: INSIDERS OFFER VIEW OF HOW BOFA STYMIED NEEDY HOMEOWNERS

Bank of America, led by Chief Executive Officer Brian T. Moynihan, faced more than 15,000 complaints in 2010 from its role in the government's Home Affordable Modification Program (HAMP), Bloomberg News reported yesterday. Urban Lending, one of the vendors brought in to handle grievances from lawmakers and regulators on behalf of borrowers, also operated a mail-processing center for HAMP documents. Instead of helping homeowners as promised under agreements with the U.S. Treasury Department, Bank of America stalled them with repeated requests for paperwork and incorrect income calculations, according to nine former Urban Lending employees. Some borrowers were sent into foreclosure or pricier loan modifications padded with fees resulting from the delays, all but two of whom asked to remain anonymous because they signed confidentiality agreements. HAMP was the centerpiece of President Barack Obama's attempt to prevent foreclosures by lowering distressed borrowers' mortgage payments. Under the program, homeowners are given trial modifications to prove they can make reduced payments before the changes become permanent. Relying on the same industry that sold shoddy mortgages during the housing bubble and improperly sped foreclosures afterward, HAMP resulted in still-active modifications for 905,663 homeowners as of the end of August, or 13 percent of the 6.9 million people who applied. Bank of America stands out in a program that lawmakers and former Federal Deposit Insurance Corp. Chairman Sheila Bair have called a failure, leaving many homeowners worse off. The second-largest U.S. lender canceled more trial modifications than any mortgage firm and sent the highest percentage of rejected customers into foreclosure, Treasury data show. Read more.

WORKPLACE LOANS GAIN IN POPULARITY

Since 2010, at least half a dozen nonbank lenders have started marketing loans to companies and payroll vendors, the Wall Street Journal reported today. Employer-based loan programs are now available to more than 100,000 workers, according to estimates drawn from several lenders. That number could expand to more than 10 million workers in the next few years based on projections provided by company executives. The firms are part of a broader push by shadow lenders to take a growing share of the traditional banking business. Banks have toughened their lending standards since the financial crisis, leaving small companies and individual borrowers with battered or insufficient credit histories to search elsewhere for loans. Pitched as the financial equivalent of a health-wellness program, employer-loan programs often include online tools aimed at improving borrowers' budgeting abilities. Employers typically offer the loans without collecting a fee for themselves. They say that their goal is to help their employees lead more stable financial lives, alleviating the workplace disruptions that financial stress can cause for workers. While borrowers have various options to pay back their loans, the most common method is through automatic payments from an employee's paycheck. Some consumer advocates, however, say that could make it harder for borrowers to pay other bills if they run into financial difficulties. Read more. (Subscription required.)

SEC ORDERS $3.4 BILLION IN PENALTIES IN FISCAL 2013

The Securities and Exchange Commission said that its enforcement division opened 13 percent more investigations in the latest fiscal year and ordered violators of SEC rules to pay a total of $3.4 billion, the Wall Street Journal reported today. The SEC said these monetary sanctions were 10 percent higher than the prior year's penalties and 22 percent more than in 2011, when the SEC filed the most actions in its history. For the year ended in September, the agency filed 686 enforcement actions and opened 908 investigations. Read more. (Subscription required.)

LATEST ABI PODCAST TAKES A CLOSER LOOK AT HOW UNSECURED CREDITOR RECOVERIES DECREASED POST-BAPCPA

The latest ABI Podcast features ABI Resident Scholar Kara Bruce speaking with Prof. Lois Lupica of the University of Maine School of Law, who was the reporter and principal investigator for "The Consumer Bankruptcy Creditor Distribution Study" funded by the ABI Endowment. Lupica, who also authored the ABI Endowment-funded Consumer Bankruptcy Fee Study in 2011, talks about the results of the new study, which found that creditor returns in consumer bankruptcy proceedings have been less effective since the implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Click here to listen to the podcast.

To access a copy of "The Consumer Bankruptcy Creditor Distribution Study," please click here.

NOW AVAILABLE FOR PRE-ORDER: BEST OF ABI 2013: THE YEAR IN CONSUMER BANKRUPTCY

Now available for pre-order in the ABI Bookstore is Best of ABI 2013: The Year in Consumer Bankruptcy. This must-have reference contains the best ABI Journal articles and papers from ABI's top-rated educational seminars selected by ABI Board Member Alane Becket of Becket & Lee LLP (Malvern, Pa.) to cover the most important developments in consumer bankruptcy for 2013. The book delves into such timely topics as the foreclosure crisis, tax issues, the latest on chapter 13, student loans and much more, and it also features relevant case summaries drawn from ABI's Volo site (volo.abi.org). Make sure to log into www.abi.org to get your discounted ABI member pricing. The book will ship in late December. Click here to order.


RENEW YOUR ABI MEMBERSHIP BY DEC. 31 AND SAVE!

Beginning in January 2014, ABI will institute its first dues increase to the regular dues rate in six years. The $20 increase will ensure that ABI can continue to provide you with the latest and most effective tools available in insolvency information and education. You can lock in 2013 rates, and additional discounts, for up to three years by using a multi-year renewal option (save $75!). You can also save 10 percent on future dues by opting into the automated dues program. To renew your membership and save, please go to renew.abi.org.

ABI LAUNCHES SIXTH ANNUAL WRITING COMPETITION FOR LAW STUDENTS

Law school students are invited to submit a paper between now and March 4, 2014 for ABI's Sixth Annual Bankruptcy Law Student Writing Competition. ABI will extend a complimentary one-year membership to all students who participate in this year's competition. Eligible submissions should focus on current issues regarding bankruptcy jurisdiction, bankruptcy litigation, or evidence issues in bankruptcy cases or proceedings. The first-place winner, sponsored by Invotex Group, Inc., will receive a cash prize of $2,000 and publication of his or her paper in the ABI Journal. The second-place winner, sponsored by Jenner & Block LLP, will receive a cash prize of $1,250 and publication of his or her paper in an ABI committee newsletter. The third-place winner, sponsored by Thompson & Knight LLP, will receive a cash prize of $750 plus publication of his or her paper in an ABI committee newsletter. For competition participation and submission guidelines, please visit http://papers.abi.org.

ABI IN-DEPTH

NEW CASE SUMMARY ON VOLO: ATAYDE V. FECO (IN RE ATAYDE; 9TH CIR.)

Summarized by Samuel Schwartz of The Schwartz Law Firm Inc.

The Ninth Circuit Bankruptcy Appellate Panel affirmed the holding of the U.S. District Court for the Central District of California, finding that the lower court did not abuse its discretion when it: a) awarded the debtor $300 for actual damages, $3,000 in attorneys' fees and $390 in costs; and b) found that although the debtor's real estate agent was a petition preparer, the real estate agent's broker was not, and thus, was not a proper defendant.

There are more than 1,000 appellate opinions summarized on Volo, and summaries typically appear within 24 hours of the ruling. Click here regularly to view the latest case summaries on ABI’s Volo website.

NEW ON ABI’S BANKRUPTCY BLOG EXCHANGE: HOUSE-PASSED INNOVATION ACT WOULD MAKE MAJOR CHANGES TO §365(n)'S IP LICENSEE PROTECTIONS

The Bankruptcy Blog Exchange is a free ABI service that tracks more than 80 bankruptcy-related blogs. The U.S. House of Representatives on Dec. 5 passed a significant patent reform bill known as the "Innovation Act." Although the focus of the legislation is on patent infringement litigation and other patent law revisions, the Innovation Act, H.R. 3309, would also make major changes to §365(n) of the Bankruptcy Code. It would also address the interplay between §365(n) and chapter 15 cross-border bankruptcy cases.

Be sure to check the site several times each day; any time a contributing blog posts a new story, a link to the story will appear on the top. If you have a blog that deals with bankruptcy, or know of a good blog that should be part of the Bankruptcy Exchange, please contact the ABI Web team.

ABI Quick Poll

Electricity qualifies as a "good" entitled to administrative expense status under § 503(b)(9).

Click here to vote on this week's Quick Poll. Click here to view the results of previous Quick Polls.

INSOL INTERNATIONAL



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  CALENDAR OF EVENTS
 

2014

January

- Western Consumer Bankruptcy Conference

    Jan. 20, 2014 | Las Vegas, Nev.

- Rocky Mountain Bankruptcy Conference

    Jan. 23-24, 2014 | Denver, Colo.

February

- Caribbean Insolvency Symposium

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- VALCON14

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March

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Visa MasterCard 5.7 Billion Swipe Fee Accord Approved

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Visa Inc. and MasterCard Inc. won approval for a $5.7 billion settlement that ended years of litigation with U.S. merchants over allegations that credit-card swipe fees are improperly fixed, Bloomberg News reported today. U.S. District Judge John Gleeson said that he was satisfied with the settlement, which was estimated to be the largest-ever U.S. antitrust accord. Visa and MasterCard have defended themselves for decades against legal claims that they operated price-fixing schemes. Swipe, or interchange, fees are set by Visa and MasterCard and paid by merchants when consumers use credit or debit cards. MasterCard and Visa separated from the banks through initial public offerings in 2006 and 2008, respectively. Merchants filed a class-action lawsuit against the companies and the biggest card-issuing banks in 2005. They later alleged that the payment networks continued to fix prices with the banks even after the IPOs.

Merrill Settles with SEC over Crisis-Era Bond Deals

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Bank of America Corp. yesterday agreed to pay $131.8 million to settle civil charges that its Merrill Lynch unit misled investors in two mortgage-bond deals, the Wall Street Journal reported today. The settlement took the total sanctions paid to the Securities and Exchange Commission for alleged misconduct related to the 2008 meltdown to more than $3 billion. The SEC has ruled out enforcement action against prominent hedge-fund firms that helped banks create the complicated mortgage-bond deals that the hedge-fund firms then bet against, reaping profits on the wagers when the housing market collapsed. One of those hedge-fund firms, Magnetar Capital LLC, was involved in helping to create a number of deals that have been the focus of SEC cases, including Thursday's action against Merrill Lynch. The SEC said investors in the Merrill deals weren't warned that Magnetar had a "significant influence" in selecting the assets.

S&P Says Trial Sought by U.S. on 163 Securities Is Unfair

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McGraw Hill Financial Inc.’s Standard & Poor’s said that it would be unfair to let the U.S. Justice Department put more than 150 selected securities before a jury to argue at the firm’s ratings were the result of fraud, Bloomberg News reported today. S&P’s lawyer, John Keker, said at a hearing yesterday in federal court that if the case goes to trial, the company would want to show on a security-by-security basis that its credit rating was fair and equal to its competitor, Moody’s Corp. The Justice Department is seeking as much as $5 billion in civil penalties for losses to federally insured financial institutions that relied on S&P’s investment-grade ratings for mortgage-backed securities and collateralized debt obligations. U.S. District Judge David Carter said that he has tentatively decided that the government complied with his earlier request to narrow the case. The U.S. identified 56 residential mortgage-backed securities and 107 CDOs that it will use at trial to try to prove S&P lied about its ratings being free of conflicts of interest.

Banks Add 1.8 Billion of Mortgage Debt as Volcker Rule Is Approved

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Wall Street dealers added $1.8 billion of speculative-grade U.S. home-loan securities to their inventories yesterday as the Netherlands sold bonds to five banks led by Bank of America Corp. and Goldman Sachs Group Inc., Bloomberg News reported yesterday. Trading data that includes a $5.1 billion auction by the Dutch government shows that customers sold $5.5 billion of the debt to dealers, which in turn placed $3.7 billion with customers, according to Trace, the transaction reporting system of the Financial Industry Regulatory Authority. Bank of America won $1.9 billion in the Dutch sale, with Goldman Sachs getting $1.3 billion, according to a government statement. The auction of mortgage securities acquired in the Dutch rescue of ING Groep NV during the financial crisis came a day after banks avoided their worst fears of the Volcker rule, with regulators approving a final version of the speculative-trading ban crafted to leave intact market-making operations that can also create losses for dealers. Some firms may seek to use the business or hedging permitted under the regulation to disguise trading not meant to help clients or reduce risks, according to Commodity Futures Trading Commissioner Bart Chilton.

MasterCard to Impose Consumer-Protection Requirements

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MasterCard Inc. will impose consumer-protection requirements on debit cards that many companies use to pay workers amid concerns that employees are being forced to use fee-carrying cards, the Wall Street Journal reported today. Under MasterCard's rules, to be announced today, employers will be required to offer workers a choice of whether to receive their pay on debit cards, via direct deposit or check. The move comes amid warnings by state and federal officials about the use of so-called payroll cards. MasterCard, the second-largest U.S. payments network, is able to set requirements for banks and other companies that issue debit cards using its network. The rules will go into effect in July for new issuers of MasterCard-branded payroll cards, while existing issuers will have to comply by October.

Criminal Action Is Expected for JPMorgan in Madoff Case

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JPMorgan Chase and federal authorities are nearing settlements over the bank’s ties to Bernard L. Madoff, striking tentative deals that would involve roughly $2 billion in penalties and a rare criminal action, the New York Times DealBook blog reported yesterday. The government will use a sizable portion of the money to compensate Madoff’s victims. The settlements, which are coming together on the anniversary of Madoff’s arrest at his Manhattan penthouse five years ago yesterday, would fault the bank for turning a blind eye to his huge Ponzi scheme, according to people briefed on the case who were not authorized to speak publicly. A settlement with federal prosecutors in Manhattan would include a so-called deferred-prosecution agreement and more than $1 billion in penalties to resolve the criminal case. The rest of the fines would be imposed by Washington, D.C., regulators investigating broader gaps in the bank’s money-laundering safeguards.

Strategy for Dismantling Failed Financial Firms Released by FDIC

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The Federal Deposit Insurance Corp. released its strategy for dismantling big failing financial institutions even as board members said the plan continues to face major obstacles, Bloomberg News reported yesterday. The FDIC’s guidance, opened for a 60-day public comment period yesterday, illuminates a key power bestowed on the agency by the 2010 Dodd-Frank Act: the authority to seize and restructure a large, failing financial company. The FDIC will seize a U.S. firm at the parent-company level, impose losses on shareholders and give creditors equity in a new holding company, according to the strategy.

To read the FDIC's proposed strategy, please click here: http://www.fdic.gov/news/board/2013/2013-12-10_notice_dis-b_fr.pdf