Bankruptcy

The Los Angeles Times has a piece out today about the phenomenon of "no press release" clauses that are a regular part of FDIC settlements with banks. Essentially, "the government cut[s] a deal with the bank's lawyers to keep [the settlement] quiet: a 'no press release' clause that required the FDIC never to mention the deal 'except in response to a specific inquiry.'"

The Times explains that "Since 2007, 471 U.S. banks have failed, nearly depleting the FDIC deposit-insurance fund with $92.5 billion in losses. Rather than sue, the agency has typically preferred to settle for a fraction of the losses while helping the banks avoid bad press." The settlements the Times explored cover a whole range of alleged banking violations, including "reckless loans to homeowners and builders; falsified documents; inflated appraisals; lender refusals to buy back bad loans." Furthermore, "At least 10 [of the] undisclosed settlements involved officers and directors accused of contributing to the collapse of their own banks."

These "no press release" clauses allow banks to avoid major hullabaloo following even multi-million dollar settlements with the FDIC. Theoretically, settling has benefits for both the FDIC and the banks in question: "Defendants benefit by settling because they can avoid admitting guilt and limit the damages they might face in court. The FDIC benefits by collecting money without the hassle and expense of litigation." But, as the Times points out, the phenomenon of "no press release" clauses is both an aberration from past policy and raises some serious concerns about the transparency of settlements and the effectiveness of government regulation of bank actions.

Tucked away in the pages of the tax bill that averted the Fiscal Cliff (which Aleta Sprague reviewed here) is a crucial lifeline to struggling homeowners. Known as the Mortgage Debt Relief Act,  thousands of homeowners who go through a mortgage modification, short sale, or foreclosure correction will not owe federal taxes on that debt forgiveness. This is a big deal.

Earlier this summer, I wrote about the significant cuts to the budget of the Legal Services Corporation, which provides funding to around 137 legal aid programs with over nine hundred offices nationwide. These organizations provide crucial services to low-income communities, ranging from foreclosure prevention to domestic violence services to increasing access to public benefits.  LSC-funded programs employ approximately 58% of the attorneys working in the legal aid field. Legal aid programs support asset building by helping clients access basic necessities and maintain their existing assets—including most families’ greatest asset, the home. Unfortunately, insufficient funding has left legal aid organizations struggling, and most families facing foreclosure unrepresented. However, banks have an opportunity to make small changes that could have a big impact with respect to one of legal aid's major funding streams - the Interest on Lawyers' Trust Accounts program.

The Legal Services Corporation (LSC), which provides funding to legal services organizations throughout the country, is an essential feature of the safety net—though rarely described as such. LSC funding is used to provide civil legal services to households at or below 125% of the federal poverty line. Unlike in criminal cases, where the right to counsel is constitutionally guaranteed for indigent defendants, parties to civil cases have no such right under federal law. In other words, depending on where you live, it’s perfectly legal for you to lose your house, all your possessions, and perhaps even custody of your child without ever talking to a lawyer, no matter how little money you make.

LSC-funded services are crucial in helping keep many families afloat. Yet perhaps unsurprisingly, like other social services programs, LSC has faced major budget cuts, and continues to see its funding attacked. Over the past three decades, LSC’s budget has been effectively cut by just around seventy percent. One member of Congress even proposed an amendment to the FY 2013 House Appropriations Bill that would have ended all funding for LSC, citing the organization as “nonessential” and alleging fraud (it failed, but received 122 votes in the House). Like the proposed cuts to SNAP, cutting LSC’s funding—or even failing to increase it—could have truly dire consequences for low-income communities nationwide.

A mark-up, actually. Next Tuesday, July 27th, the House Financial Services Committee will hold a mark-up on a number of bills, one of them is the "Medical Debt Relief Act," H.R. 3421.

Yesterday we hosted the launch of the Economic Security Index. The ESI is a new tool developed by a team led by Yale Professor (and former NAF Fellow) Jacob Hacker and supported by the Rockefeller Foundation. According to the project's website:

By Melissa B. Jacoby

Momentum appears to be growing in Congress for changing federal law to allow individuals to borrow money for education without undue risk to their financial futures. Specifically, Sen. Dick Durbin (D-IL) and Rep. Steve Cohen (D-TN) have offered standalone legislation, S. 3219, and H.R. 5043, respectively, that would restore the common-sense treatment of private student loans in personal bankruptcy. Sen. Al Franken (D-MN) has submitted an amendment to the Senate financial regulatory overhaul bill that would do the same, although it is unclear whether it will be considered.

To see the issue, imagine that Chris owes $10,000 to Bank One and $10,000 to Bank Two. Both banks conducted the same credit checks and charged the same interest rate. Now imagine that Chris suffers severe financial hardship and files for bankruptcy. If Chris is an honest debtor with few assets, he will emerge from bankruptcy with no legal liability to Bank One, but, under current bankruptcy law, likely will continue to owe $10,000 to Bank Two. Why the different treatment? Chris used the Bank One loan for medical care, food, and other basic necessities, but used the Bank Two loan for trade school tuition.

In the 1970s, for-profit consumer lenders publicly criticized the establishment of such a distinction. Their representatives noted, “If the social utility of what is exchanged for the debt is to be determinative of dischargeability then the question can be raised of whether it is proper to discharge medical bills, food bills, etc. This proposed [legislation] simply suggests that if sufficient political pressure can be generated, a special interest group can obtain special treatment under the bankruptcy law.”

Singing a different tune today, however, the Consumer Bankers Association now endorses treating student loans differently from debts incurred for food or medical bills. Why the shift? In 2005, Congress expanded the nondischargeability of private student loans, allowing for-profit lenders to become beneficiaries of the law they opposed decades earlier.

Levity aside, today's papers are full of stories about the state of financial reform. In particular, the focus is on yesterday's meeting at the White House between President Obama and Congressional Leaders. Unfortunately, not everyone emerged singing Kumbaya:

"As Republican leaders left the White House, they called on Democrats to restart bipartisan talks about the overall shape of the legislation. Senate Minority Leader Mitch McConnell (Ky.), echoing comments he made Tuesday, said the bill amounts to an 'endless taxpayer bailout for Wall Street banks.'"

The Democratic leadership and President Obama obviously disagreed, according to Press Secretary Robert Gibbs:

I’m very honored to be here today to talk about the situation we find ourselves in more than 2 years into a very deep and seemingly never-ending recession, through two lenses—policy in Washington, and community banking and community development finance. And I’ll try, without being presumptuous, to bring it home to Maine.

Last week, a bipartisan coalition came together at the state capitol to launch Step Up California, a statewide campaign to reduce poverty in the state. After the press conference, over 70 legislative staffers participated in an interactive poverty simulation, that had them assume the role of a member of a struggling family.