Paul Kupiec and Alex Pollock have an op-ed in the Wall Street Journal arguing for a pair of federal government interventions in the mortgage market to boost the volume of residential real estate transactions that has been depressed because of borrowers being locked into very low rate mortgages and large, taxable appreciation. Alas, these interventions won’t work, as explained below the break.
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Debunking Debanking: The OCC’s Debanking Report Is a Nothing Burger
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The OCC released the preliminary findings from its “Review of Large Banks’ Debanking Activities” undertaken pursuant to an Executive Order on debanking.
The findings are a nothing burger. The OCC did not adduce any examples of any individual or business being denied financial services because of viewpoint or line of business. Instead, all it found were that large banks required more complicated internal approval processes for lines of business that present reputation risk. That’s 100% legal. Let me repeat that again: the OCC did not find any evidence of denial of services, just of heightened review for certain lines of business that pose reputational risk. Moreover, the OCC did not adduce any evidence of banks discriminating against individuals on the basis of their politics or religion. Instead, all it found was evidence of prudent banking practices. Yawn.
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How Not To Do A Bankruptcy Literature Review
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I was excited to see a new article purporting to offer a “bibliometric analysis of research on personal insolvency.” My excitement soon turned to disappointment as I realized how fundamentally flawed the “analysis” was. To make lemonade out of lemons, I offer this cautionary tale for future analysts to avoid a research method gone horribly wrong. (more…)
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Sorry to Break It to You Geniuses: Under the GENIUS Act the Holders of Stablecoins Actually Have FIFTH Priority in an Issuer Bankruptcy
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In order for stablecoins to operate like money, there cannot be any issuer credit risk. Otherwise coins will be discounted based on the financial strength of the issuer. That will cause transactional friction because buyers and sellers might not agree on the appropriate discount. It also means that different coins cannot possibly be good delivery for each other.
The GENIUS Act tries to reduce issuer credit risk as much as possible. First, it requires payment stablecoins to be backed by reserves and creates a regulatory oversight system to create some confidence that the claimed reserves are in fact there. That’s basically replicating what the National Bank Act of 1864 did when it created national bank notes and a federal bank regulator to inspect the national banks that issued those notes.
Second, the GENIUS Act has a provision regarding the insolvency of a payment stablecoin issuer. It aims to reduce credit risk by saying that the holders of payment stablecoins have first priority, coming ahead of all other claimants, for the issuer’s reserves. And second, it directs the bankruptcy court to pay out on the stablecoins as soon as possible, namely within 14 days of “the required hearing.” The idea here is to ensure that there is minimal liquidity disruption.
Here’s the thing. The GENIUS Act fails miserably at both of these bankruptcy goals. Holders of payment stablecoins actually will rank fifth in a bankruptcy distribution, coming after (1) repo and margin lender claims, (2) the DIP lender, (3) the bankruptcy professionals via the DIP lender’s carve-out, and (4) set-off claims from depositaries and brokers. Those claims will gobble up a huge chunk of any reserves, so recoveries for payment stablecoin holders will be severely diminished.
Moreover, because of the nature of the DIP lender and professionals’ claims, no distribution to the payment stablecoin holders will be possible until well into the case, if not the very end of it. That might mean waiting months or years for a distribution.
Let me put it bluntly: a stablecoin issuer bankruptcy won’t be like an insured deposit claim against an FDIC insured bank, where you get 100¢ on the dollar back incredibly fast (perhaps next day). In a payment stablecoin issuer bankruptcy there will be a large haircut on the stablecoins and the payment won’t be any time soon.
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Bonfire at the Repo Lot
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You hear a bump in the night. Is it Edgar Allan Poe’s Telltale Heart? Or someone hauling away your car? If you have missed some car payments, it probably is the latter. And while most of your creditors aren’t allowed to lurk in the dark to snatch your car, your car lender can.
Recorded with steaks sizzling on a fire pit at a car repossession lot, a recent podcast from the Wall Street Journal discusses the physical risks and tight margins associated with the repo industry. Without mentioning the law that shapes this industry, the podcast shows how Article 9 of the Uniform Commercial Code, a law passed by all state legislatures and yet virtually unknown, is far from a niche subject. That’s also an implication, to say the least, from the downfall of FirstBrands, now in bankruptcy.
Now is a good time for lawyers to ask their law schools if they regularly offer courses that include a hefty dose of UCC Article 9.
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Unconscionable Ambulance Fees
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The Washington Post had a pretty shocking story about ambulance bills. $9,000 for a 40 minute ambulance ride at normal speeds, no siren, no unusual life support measures. What I found striking about the story was less the outrageous pricing than that no one was talking about how the ambulance company’s fees are almost assuredly unenforceable and probably an unfair trade practice. (more…)
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CFPB Ultra Vires Acts?
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The CFPB is apparently rushing to address the problems posed by it supposedly running out of funding in early 2026: it is looking at taking steps to expedite a revision of the 1033 open banking rule and also trying to find a way to outsource the calculation of the Average Prime Offer Rate (APOR) to private parties. Good luck with that during the holiday season.
All of this suggests that Russ Vought’s hit squad didn’t properly coordinate with the folks who actually know what the Bureau has to do (to the extent anyone’s even left in the building).
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APOR Consequences If the CFPB’s Funding Is Illegal
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In a prior post I noted that if the CFPB’s funding is illegal, it creates a time bomb for the entire US housing market because the Bureau will not be able to update the Average Prime Offer Rate (APOR) that is used to determine the presumptive legality of mortgages.
The situation is actually worse. If the Bureau’s funding is illegal, it isn’t just a problem going forward. It also implicates the legality of everything the Bureau has done since the Fed stopped running a profit, that is from the 4th quarter of 2022 onward. That is every rulemaking and every enforcement action and every termination of a consent decree becomes suspect if the Bureau’s been acting without legal funding. And that includes the APOR.
If the Bureau’s funding is illegal, then the APOR is arguably frozen at either the end of Q3 or Q4 2022. I think Q4 2022 because until the end of that quarter it wasn’t know if the Fed was running a profit.1 Here’s why it matters. The APOR for a 30 year mortgage was 6.79% at the end of Q3 2022 and 6.28% at the end of Q4 2022. Right now it’s 6.26%, but it’s been substantially higher at points between 2022 and today. That means that some mortgages that would be QM under the APOR that was listed when the mortgages were made would not be QM if the APOR were frozen at a Q3 or Q4 2022 level. That’s a potential mess for lenders, who face putbacks (they would be in breach of their reps and warrants), a borrower defense to foreclosure, and state AG enforcement.
Now it would seem easy enough to say “justified reliance” and grandfather everything old in. But I’m not sure that’s how it will work, and that uncertainty is enough of a problem in and of itself.
- The difficulty in knowing how/when to measure the Fed’s profitability is yet another factor that points toward the absurdity of the OLC’s opinion. Any corporate lawyer will tell you that if you have an incurrence test in your bond, you need a relevant incurrence date. And if you have a maintenance test, you should still know the date of a breach because there’s a notice requirement. There’s nothing at all like this for the CFPB, however. The timing of the Fed’s financial reporting is not synced with the timing of the CFPB draws, which suggests that the draws are not meant to relate to anything in the content of the reporting, including profitability. ↩︎
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Russell Vought’s Too Clever By Half: CFPB Edition
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Oh Russell Vought must think he’s so clever bankrupting the CFPB by asking OLC for an opinion letter saying that the Bureau can’t draw funds on the Federal Reserve System when the Fed isn’t running a profit. After all, killing off the CFPB has been his goal all along.
But Vought seems to have forgotten a lesson he learned during his first attempt to shutter the CFPB: doing so could crash the housing market.
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Encouraging People To File Bankruptcy — A Book To Recommend To Potential Clients
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A few months ago, Slipster Bob Lawless, former Slipster Deborah Thorne, and I published Debts Grip: Risk and Consumer Bankruptcy. The book draws on eleven years of data from the Consumer Bankruptcy Project to document the financial consequences of decades of risk privatization for individuals and families across the United States. Some people ultimately will file bankruptcy. Over the past few months, during panel discussions, podcasts, and interviews, we have been asked about the value of people filing bankruptcy earlier. We (well, at least I) think that for many people, filing sooner would be advantageous. People deplete their assets in the years they struggle before filing and suffer psychologically and physically from the stress of unmanageable debts. Based on our data, the stigma of bankruptcy and the inability to make good on their contracts remains a barrier to filing. So, how to encourage people to file? And, relatedly, how to make people feel “good” about their bankruptcies such that they have a better chance at succeeding when they are released post-bankruptcy into the same economic and social structure that may be stacked against them?
I recently spoke about Debt’s Grip as part of the National Association of Bankruptcy Attorneys‘ meeting. There I saw Adrienne Hines, a bankruptcy attorney from Ohio who I knew from her social media presence as The Lady Like Lawyer (Instagram, TikTok). I picked up her new book, Bankruptcy Magic: The Life-Changing Power of Debt Relief With Dignity. The book puts into a written guide format for people the core message of her social media: that filing bankruptcy can be an effective solution to unmanageable debt challenges for which people do not need to feel ashamed. Adrienne’s social media accounts are an excellent resource for struggling debtors. Her book may be even more excellent. It is part of the answer to the question of how to encourage people to file sooner.
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