The media coverage about President Trump's demand that Federal Reserve Board Governor Lisa Cook resign based on alleged occupancy fraud on a 2021 mortgage application has missed the real story: how terrifyingly inappropriate FHFA Director William Pulte has behaved. Pulte is using control of the GSEs to pursue a political enemies list. That is an incredibly dangerous abuse of office. We do not tolerate this with the IRS, and we should not tolerate it with FHFA. Pulte should resign.
Category: Mortgage Debt & Home Equity
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Fannie and Freddie Are Now Explicitly Guarantied
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When will Donald ever learn to run his tweets by counsel before posting them? He consistently shoots his legal position in the foot. The latest is about the implicit government guaranties of Fannie Mae and Freddie Mac: 
Pro tip: it’s not an “implicit” guaranty if you say it out loud. Once you do, it’s explicit. 🤦
That’s actually potentially a huge problem for federal accounting purposes. The whole reason that Fannie and Freddie’s enormous book of debt is not on the federal balance sheet, blowing through the debt limit, is that the guaranty has always been implicit: it’s about a wink and a nod. With this tweet, I am not sure that it is possible for Fannie/Freddie to come off the federal balance sheet even if privatized because of the now “explicit” guaranty. (Or as a fallback, there’s a promissory estoppel argument.) As far as I can tell, because of an over-eagerness to tweet, Fannie and Freddie’s obligations now bear the eagle. Maybe the CBO will view this differently, but all that comes to mind right now is the timeless words of Napoleon Dynamite:
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Juliet Moringiello – One of the Greats
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Juliet Moringiello was an amazing person. Her alchemy of brain and spirit and energy and heart and common sense made a positive difference for so many people, across disparate places and professions. She could teach you how to navigate a commercial law and to downhill ski.
Testaments from Widener University Commonwealth Law School and professional organizations illustrate how Juliet served academic and legal communities with distinction. Examples include the Uniform Law Commission (including an instrumental role in the development of the 2022 amendments to the Uniform Commercial Code), American Law Institute projects, and as a scholar-in-residence for the American Bankruptcy Institute. Juliet did these things while also serving in critical leadership roles at Widener and offering engaged and committed classroom teaching, including first-year property law and an array of upper level classes and seminars.
Chris Odinet's memorial captures beautifully Juliet's commitment to helping others and building communities. As reflected in the mentoring award she recently received from the Commercial and Consumer Law Section of the Association of American Law Schools, Juliet did so much behind the scenes to lift up others and to help them improve their research and analysis.
Juliet was ideally positioned for mentoring because her own scholarship was creative and wide-ranging and yet reflected care and attention to detail. She offered important insights on municipal bankruptcy and related state law procedures. Whereas scholars and jurists long have referred to the "Butner principle" in the abstract, Juliet closely studied the case for which the principle is named, which turned out not to match how it was remembered. She explored poorly drafted statutory language that since 2005 has affected the treatment of car loans in Chapter 13 repayment plans for individuals and proposed an analytical framework accordingly. These are just a few of the examples of her writings in which a reader can find careful and sustained attention to the relationship between state and federal law.
With respect to state secured transactions law, Juliet comfortably traversed the border between real property and personal property. The problems dwelling from the tangible-intangible divide of personal property particularly attracted her attention. She explored puzzles that arise, for example, when one tries to apply fundamental concepts such as possession to remotely controlled activities.
And those projects dovetailed with Juliet's longstanding interest in understanding emerging technologies, and her ability to demystify how foundational commercial law concepts can be squared with innovation – from software licensing agreements and electronic contracting, to cyberspace and domain names and Second Life, to non-fungible tokens. As popular subjects for scholarship, writings on hot tech topics risk ephemerality. Juliet's work is built to last. She made these issues accessible while demonstrating how they could and should be situated in broader legal frameworks.
Of course, these professional interests were part of a rich multi-faceted life of family and friends, of appreciating the sights and nature in Pennsylvania, in Quebec, and anywhere and everywhere she traveled. When there wasn't enough snow for skiis, you might find her on a hike. Or on a bike. Or a paddleboard.
Juliet Moringiello offers inspiration to do impactful work, to help others, and to spend time on the the things you love. Deepest condolences to her family.
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SCOTUS National Bank Act Preemption Ruling
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The Supreme Court issued an important ruling about the National Bank Act's preemption standard today that precludes broad, categorical preemption of state consumer financial laws, but instead requires a fact-specific analysis.This decision opens the way to more expansive state consumer financial regulation that affects banks.
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The New Usury: The Ability-to-Repay Revolution in Consumer Finance
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I have a new article out in the George Washington Law Review, entitled The New Usury: The Ability-to-Repay Revolution in Consumer Finance. The abstract is below:
American consumer credit regulation is in the midst of a doctrinal revolution. Usury laws, for centuries the mainstay of consumer credit regulation, have been repealed, preempted, or otherwise undermined. At the same time, changes in the structure of the consumer credit marketplace have weakened the traditional alignment of lender and borrower interests. As a result, lenders cannot be relied upon to avoid making excessively risky loans out of their own self-interest.
Two new doctrinal approaches have emerged piecemeal to fill the regulatory gap created by the erosion of usury laws and lenders’ self-interested restraint: a revived unconscionability doctrine and ability-to-repay requirements. Some courts have held loan contracts unconscionable based on excessive price terms, even if the loan does not violate the applicable usury law. Separately, for many types of credit products, lenders are now required to evaluate the borrower’s repayment capacity and to lend only within such capacity. The nature of these ability-to-repay requirements varies considerably, however, by product and jurisdiction. This Article terms these doctrinal developments collectively as the “New Usury.”
The New Usury represents a shift from traditional usury law’s bright-line rules to fuzzier standards like unconscionability and ability-to-repay. Although there are benefits to this approach, it has developed in a fragmented and haphazard manner. Drawing on the lessons from the New Usury, this Article calls for a more comprehensive and coherent approach to consumer credit price regulation through a federal ability-to-repay requirement for all consumer credit products coupled with product-specific regulatory safe harbors, a combination that offers the best balance of functional consumer protection and business certainty.
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The New Usury
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I have a new paper up on SSRN. It's called The New Usury: The Ability-to-Repay Revolution in Consumer Finance. It's a paper that's been percolating a while–some folks might remember seeing me present it (virtually) at the 2020 Consumer Law Scholars Conference, right as the pandemic was breaking out. Here's the abstract:
Consumer credit regulation is in the midst of a doctrinal revolution. Usury laws, for centuries the mainstay of consumer credit regulation, have been repealed, preempted, or otherwise undermined. At the same time, changes in the structure of the consumer credit marketplace have weakened the traditional alignment of lender and borrower interests. As a result, lenders cannot be relied upon not to make excessively risky loans out of their own self-interest.
Two new doctrinal approaches have emerged piecemeal to fill the regulatory gap created by the erosion of usury laws and lenders’ self-interested restraint: a revived unconscionability doctrine and ability-to-repay requirements. Some courts have held loan contracts unconscionable based on excessive price terms, even if the loan does not violate the applicable usury law. Separately, for many types of credit products, lenders are now required to evaluate the borrower’s repayment capacity and to lend only within such capacity. The nature of these ability-to-repay requirements varies considerably, however, by product and jurisdiction. This Article collectively terms these doctrinal developments the “New Usury.”
The New Usury represents a shift from traditional usury law’s bright-line rules to fuzzier standards like unconscionability and ability-to-repay. While there are benefits to this approach, it has developed in a fragmented and haphazard manner. Drawing on the lessons from the New Usury, this Article calls for a more comprehensive and coherent approach to consumer credit price regulation through a federal ability-to-repay requirement for all consumer credit products coupled with product-specific regulatory safe harbors, a combination that offers the greatest functional consumer protection and business certainty.
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Postpetition Asset Sales in Chapter 13s–Modification, Not Estate Property
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Debtors selling houses during a chapter 13 continues to cause conceptual problems for the courts. A recent decision, In re Marsh, from Judge Fenimore in Kansas City is an example. (Hat tip to Bill Rochelle for flagging this decision in his DailyWire column from the American Bankruptcy Institute ($). If you are a bankruptcy lawyer and don't get this column in your inbox each morning, you are missing out.) Judge Fennimore's opinion is a good point of departure to discuss why I don't think these conceptual problems are as difficult as lawyers make it out to be.
In the case at hand, the debtors scheduled the value of their home at $140,000. Between the $125,000 mortgage and a $15,000 homestead exemption, there was no value for unsecured creditors. The debtor confirmed a plan that provided for payment of the mortgage through the trustee, known as a "conduit plan." Although the debtor was below-median income and qualified for a three-year plan, the debtor opted to do a five-year plan, presumably to make it easier to cure the mortgage arrearage. The plan specified that unsecured creditors were to receive no distribution.
Forty-three months into the case the debtors filed a motion to sell the home for $210,000, which the court approved and which generated about $78,000 in cash after payment of the mortgage and fees. The debtor filed a "motion to retain" the cash. The chapter 13 trustee resisted, noting the cash would pay unsecured creditors in full.
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Getting Ahead of Consumer Loan Defaults Post-Pandemic
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On this Tuesday, the Supreme Court refused to lift a ban on evictions for tenants that the Centers for Disease Control and Prevention recently extended through the end of July. The eviction moratoria is one of a handful of debt pauses put in place by the federal government during the COVID-19 pandemic that are set to expire soon. The student loan moratorium ends on September 30. The mortgage foreclosure moratorium ends on July 31. In anticipation of the end of the foreclosure moratorium, this week, the CFPB finalized new rules that put into place protections for borrowers that servicers must use before they foreclose.
Student loans and mortgages are most people's two largest debts. But they are not the only large loans that people are in danger of getting behind on post-pandemic. Indeed, when student loan and mortgage debts become due, people may prioritize paying them ahead of car loans, credit cards, and similar. In a new op-ed in The Hill, Christopher Odinet, Slipster Dalié Jiménez, and I set forth how the CFPB can use its legal authority to steer a range of loan servicers to offering people affordable modifications. As a preview, we suggest that the CFPB should issue a compliance and enforcement bulletin directing loan servicers to make a reasonable determination that a borrower has the ability to make all required, scheduled payments in connection with any modification.
The piece is a short version of our new draft paper, Steering Loan Modifications Post-Pandemic, which we wrote as part of the upcoming "Crisis in Contracts" symposium hosted by Duke Law's Law & Contemporary Problems journal. The paper contains more about what federal agencies already are doing to get ahead of mortgage modification requests, about why similar is needed for the range of consumer loans, and about the reasoning behind our suggestion that the CFPB use its prevent what we term modification failures.
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Collins v. Yellen: the Most Important (and Overlooked) Implication
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The Supreme Court's decision in Collins v. Yellen has garnered a fair amount of attention because it resulted in a change in the leadership at the Federal Housing Finance Agency and largely dashed the hopes of Fannie and Freddie preferred shareholders in terms of seeing a recovery of diverted dividends. But the commentary has missed the really critical implication of the decision: the Biden administration can undertake a wholesale reform of Fannie and Freddie by itself without Congress.
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Collins v. Yellen
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The Supreme Court ruled today in Collins v. Yellen, a case brought by Fannie Mae and Freddie Mac preferred shareholders that challenged both the constitutionality of the FHFA Director's appointment and the 2012 amendment to Treasury's stock purchase agreement with Fannie and Freddie that provided for all of Fannie and Freddie's profits to be swept into Treasury. The preferred shareholders are miffed because they believe that those dividends should be paid to them first, never minding the fact that but for the Treasury stock purchase, Fannie and Freddie would have been liquidated in receivership, resulting in the preferreds being wiped out.SCOTUS, following its ruling in Seila Law v. CFPB, held that the FHFA Director must be removable at will by the President. In light of this finding of unconstitutionality in the appointment of the FHFA Director, the Court remanded for consideration of damages from past profit sweeps. Future profit sweeps are permitted, however, as the Director is now clearly removable at will by the President.While some media is pitching the outcome as a mixed ruling, it really isn't for the preferred shareholders. The preferreds took it on the nose here, and the market gets it: Fannie Mae preferred shares tumbled in value by 62% after the decision.