A debt collection moratorium operates as float, which is needed to buy time until the relief checks start flowing. In other words, a debt collection moratorium is a form of stimulus. My New York Times op-ed explaining this is here.
Category: Covid-19
-
Student Loan Relief for Public Service Workers: Repeal the 15-day Rule
Posted by
More than one million public servants – nurses, soldiers, first responders, teachers—should be eligible now or soon for student loan cancellation under existing law – the Public Service Loan Forgiveness program. Congress and the Administration can accelerate this process now.
The Education Department and its servicer FedLoan have notoriously rejected 98% of PSLF loan cancellation requests. One of the reasons is a pointless and unhelpful regulation that was not part of the Congressional legislation, but was added by the Education Department – the 15-day rule. The PSLF law calls for public servants to have their loans cancelled after 10 years of repayment. The Department’s regulation defined 10 years of repayment as 120 payments, each made within 15 days of the due date. In real life borrowers make payments early and they make payment late. During the present crisis they cannot be expected to meet this rule.
Congress is already considering a bill that would give the Education Secretary broad authority to waive regulations. The 15-day rule should be the first to go. The Department and servicer FedLoan should work together to clear away ALL regulatory obstacles to full PSLF implementation.
-
Summary of the McConnell Bailout Bill
Posted by
The McConnell Bailout Bill (a/k/a HR 748 or the CARES Act), weighs in at just shy of 600 pages. I've taken the liberty of summarizing it in a powerpoint deck for teaching (syllabus be damned) and thought it might be helpful to make generally available. Here it is. (11:00 3/23 updated/corrected version).
I only warrant it as best efforts (meaning I might have misread or just missed something in this monster bill) and I have made no attempt to summarize the details of the social insurance program (UI, Medicare, Medicaid) interventions because they are outside my expertise. You'll have to read the bill itself (Part I and Part II) for that.
I'll note quickly two things for Slips aficionados: there's no bankruptcy piece anywhere within the bill. There might end up being some very minor bankruptcy changes, but bankruptcy really isn't where the action is right now.
You might consider how the airline bailout package in the bill compared with GM/Chrysler. That ought to be the benchmark for direct government rescue lending to real economy firms.
-
The Bailout Cronyism and Corruption Have Already Begun
Posted by
We need to bail out the economy, and it's not going to be cheap. The government is going to have to carry the economy for 18-24 months. There's no way of avoiding that. But we don't need to be stupid or corrupt about the way we do it. And stupidity and corruption is unfortunately so hardwired into the Trump administration's DNA that it is being reflected in virtually every proposal out of the administration.
Start with Treasury's ill-advised proposal to send checks out to every man, woman, and child in the United States. Beside being operationally difficult and misdirecting much of the aid, it is first and foremost a political move. These are serious times. They call for serious responses, not political maneuvers.
And now, we learn that Treasury Secretary Steven Mnuchin is proposing turning to Goldman Sachs executives to provide assistance in administering the bailout. It's hard to think of anything more politically tone-deaf other than perhaps delegating the bailout to Wells Fargo.
More importantly, Goldman is objectively not the right institution to help. Goldman does virtually no small business lending, and their consumer lending is a small portfolio of loans to affluent individuals. It’s not even at the top of the bracket in commercial lending generally. Goldman is primarily an investment bank that does M&A and securities underwriting; they're not known as commercial bankers. The challenges in the bailout response are restructuring and commercial banking issues, including a lot of operational problems. That's just not where Goldman's strengths lie. So why Goldman? Just more cronyism.
This should be a bright flag to ever member of Congress that Steven Mnuchin cannot be trusted to lead the bailout efforts. If he does, we're looking at something a lot worse than HAMP 2.0. A key part of any bailout is going to be its governance. There's inevitably going to be a fair amount of discretion involved in the bailout efforts. We need the bailout to be led by serious people. Sadly, there are not many serious people in any position of authority in the Trump administration. That suggests that Congress needs to come up with a governance structure for any bailout funds that is new and independent of the Trump administration.
I don't mean by this that it needs to be a bunch of people who share my political views. There are plenty of competent and serious people from both parties who aren't in the Trump administration. Hopefully this is a time that Senator McConnell recognizes that he can't turn the keys over the Trumpists; the effectiveness of a bailout is going to depend on whether Congress gets the governance structure right. We need to take a serious problem serious and not see it as an opportunity for self-enrichment and political gain.
-
Puerto Rican Debt and Force Majeure
Posted by
Among other things, the Coronavirus and the near global shutdown, has gotten contracting parties scrambling to read their force majeure clauses. But what about if the parties in question didn’t explicitly contract for an “act of god” clause that covered unexpected pandemics? The question, as we’ve discussed on this blog before, would become one of whether such a clause was implicit in the contract (here). That, in turn, will in part be a function of the contract’s governing law (here). Puerto Rico, already mired in a debt crisis, is going to need even more relief now. Question is: Does the fact that its debt contracts are almost all governed by local Puerto Rican civil law embed a source of temporary relief for it?
My casual impression is that the leading common law jurisdictions for contract law, such as New York and England, would be reluctant to find an implied force majeure term in contracts among sophisticated parties. By contrast, civil law jurisdictions such as France, the Netherlands and Spain, sometimes have such a clause baked into the civil law and also appear more willing to find such a provision implicit (for discussions of the common law v. civil law approaches, see these memos from White & Case and Cleary Gottlieb memos, here and here).
Particularly intriguing in the context of a sovereign or quasi sovereign debt, is the possibility that an implication of the civil law jurisdiction in question having force majeure as part of the civil code means that the relevant government can, through legislation, make it clear that a particular event (Coronavirus) satisfies the conditions for force majeure (here). China has apparently done just that, even issuing force majeure certificates in some cases (here and here).
A reason I’ve been thinking about implied force majeure clauses is that my seminar with Guy Charles has been discussing Puerto Rico’s debt crisis. (Two of our recent guests to the seminar were David Skeel and Sam Erman, both of whom had fascinating papers on the topic of Puerto Rico). Puerto Rico is, unlike most of the US, a civil law jurisdiction. Better still, almost all of its debt is under local Puerto Rican law (now, in the case of anything redone under PROMESA, with an overlay of that federal law).
One has to concede up front that the Puerto Rican debt crisis is not the product of some exogenous event such as a hurricane or the coronavirus. But surely everyone would agree that the virus has the potential to push Puerto Rico (back) over the financial brink, just as its seems to be getting back its sea legs (see here). And, so the question is, does Puerto Rico, as part of the implicit terms of any debt contract made locally, have the right to temporary relief from having to perform as a result of the enormous economic slowdown that the virus is already causing. I haven’t been able to track down anything specific in the Puerto Rican civil code, but the Puerto Rican code has its origins in the Spanish civil code. And the Spanish code has force majeure baked in (for discussions, see here and here).
Hmmm . . . Some years ago, a wonderful group of students did find some promising avenues for Puerto Rican debt relief buried deep in its civil code (here).
*Note (in response to the first few email comments – that I'm most grateful for): The question of what precise law the new agreements are governed by is thorny. Best I can tell, it seems to be PROMESA and, to the extent not inconsistent with PROMESA, Puerto Rican law. But what in the world does that mean with respect to what we care about: force majeure for pandemics such as coronavirus? I don't think there is any federal contract law on that matter; and, if so, that strikes me as pointing to Puerto Rican local law, which in turn might point us to the Spanish civil code. But maybe there is an argument there about how federal law has something to say about force majeure in the context of a pandemic that is escaping me. The actual language of the new governing law clauses is fascinating if you are as obsessed with governing law provisions as Mark W and I have been as of late. John Coyle of UNC is the leading scholar of governing law clauses in the whole wide world (see here). And he is a contracts guru as well. Maybe I can get him to opine. I will try to do so and report back.
-
COVID-19 Response: The Need for Speed
Posted by
While Congress struggles to figure out the best way to respond to the coronavirus pandemic, it is very apparent that immediate relief measures are necessary, if only to buy time for a more comprehensive approach. Layoffs are already happening and with they continue, it will result in more economic disruption from diminished consumption.
1. Sending out checks isn't fast enough (and can't happen in two weeks)
There is, fortunately, some recognition of that speed is imperative, but there's a right way and a wrong way to do it. The wrong way is what the Trump administration is proposing, namely sending everyone a check. Besides being poorly tailored—$1,000 isn't enough for those who really need help and is wasted on many other folks—the problem is it just cannot happen fast enough. No one is being honest about the operational problems. Treasury Secretary Steven Mnuchin is going around saying that he wants to get checks for $1,000 to every American within two weeks. That's just not possible, and Mnuchin should stop overpromising.
Here's why it won't work fast enough: for Treasury to send everyone a check, it would need to know where to send the checks. It doesn't. Treasury knows where to send checks to individuals who are receiving Social Security and Disability Insurance (actually, it would be electronic transfers in almost all such cases). But what about everyone else? Treasury doesn't know (a) who is still alive, and (b) where they live. The first problem might mean sending out some checks that shouldn't happen, but the second problem is more serious, as it means that checks won't get where they need to go. Treasury is able to send me a tax refund because I give an address with my tax return. At best Treasury has year-old information, which will be wrong for many people. Those people who most need the money are the people who are most likely to have moved in the last year—economically insecure renters (see Matthew Desmond's Evicted on this). Sending everyone a check really isn't a very good solution.
2. Foreclosure/eviction moratoria are equivalent to an immediate cash injection to the economy.
Fortunately, there's a better solution: an immediate national moratorium on foreclosures, evictions, repossessions, utility disconnects, garnishments, default judgments, and negative credit reporting for all consumers and small businesses. The point of a national collection action moratorium is not to be nice to debtors. A national collection moratorium is a stimulus measure: it has the effect of immediately injecting cash into the economy in that it allows people and businesses to shift funds from debt service obligations to other consumption. It's basically a giant forced loan from creditors to debtors. And it happens immediately, without any administrative apparatus. There's nothing else that will have such a big effect so immediately. Congress should move on moratorium legislation asap as a stand-alone bill to buy itself some more time for a longer-term fix.
Now let's be clear—what I am talking about is not debt forgiveness. It is forced forbearance. The debts will still be owed and may accrue interest and late fees (there may be ways to limit those, but that's another matter). That's important because it substantially reduces the argument that the delay constitutes a Taking—government is always free to change how remedies operate, such as changing foreclosure timelines, etc. without the changes being a Taking.
This is exactly what a moratorium would be doing. A number of states and localities have already undertaken such moratoria, and FHFA and HUD have done so for federally or GSE insured or guarantied loans. But we've got a national crisis, so this should be done uniformly on the federal level using the Interstate Commerce power for the entire consumer and small business debt market. Given that all collection actions involve the mails or wires and that debt markets are national, this seems squarely within the scope of federal power.
Now a collection moratorium is not a permanent fix and will cause some dislocations itself. Consumers/small businesses will eventually need to come current on their obligations, and they may need assistance to do so, but that's something that we can work on later when we're not in free fall. But right now what we need more than anything is time, and a collection moratorium can buy us some time more broadly and more immediately than any other possible step.
-
The Small Business Reorganization Act of 2019 and COVID-19
Posted by
Professor Ted Janger of Brooklyn Law School sent me a proposal for a small change to the Bankruptcy Code that might significantly help small businesses affected by the COVID-19 pandemic. His idea merits consideration. In Ted’s words:
Obviously, it is too early to tell how all of this will play out, but the U.S. bankruptcy system will inevitably play an important role in whether small businesses hurt by COVID-19 ultimately survive. Chapter 11 was built to help sound businesses that experience a sudden shock, but it is often too cumbersome for even medium-sized businesses. In a law that took effect in February, Congress made it easier for small businesses to benefit from chapter 11. That law is only available, however, to businesses with less than $2.7 million in debt. It will, therefore, apply to only 42% of the businesses that file. In the wake of COVID-19, Congress should raise the debt ceiling to $10 million to help more small businesses and soften the inevitable fallout that will come from COVID-19 related business disruptions.
-
COVID-19’s Impact on Higher Education’s Finances
Posted by
There's a lot to say about the economic dislocation from the coronavirus and the economic policy response. But I want to focus for a moment about its impact on higher education. Lots of schools have gone to virtual classrooms either temporarily or for the rest of the semester. It's not ideal pedagogically (and it really unsuitable for certain types of classes), but it works as a stop gap measure, especially for courses which have already been going for several weeks, in which some rapport has developed between faculty and students.
But there's no reason to think that this disruption will be over by the end of the semester. What happens with summer courses? And most importantly, what happens in the fall? Will schools be able to enroll new cohorts of students? I suppose it's possible to teach 2Ls and 3Ls virtually all the time. But can that be done for 1Ls? Or for college freshmen? And even if it is possible to do generally, what about enrolling foreign students? To be sure, University of Phoenix and other on-line schools do this all the time, but they offer a very different kind of educational experience. Will students seek to defer for a year or simply not enroll?
This matters hugely for universities as businesses.
-
Federal Reserve Emergency Lending as a Coronavirus Response
Posted by
Senator Elizabeth Warren has put out a plan for mitigating the economic fallout from the coronavirus. Of particular note is that she is proposing having the Federal Reserve use its emergency lending power to support businesses affected by the coronavirus in order to ensure that they are able to provide paid health care leave to affected employees and avoid mass layoffs.
This post addresses whether the Fed has the legal authority for such lending, what precedent exists, how it differs materially from the 2008 bailouts, and why it's a good idea. (Full disclosure: I consulted with the Warren campaign on this plan.)