A long-delayed federal rule intended to protect student loan borrowers who were defrauded by their schools went into effect yesterday, after a judge rejected an industry challenge and the Education Department ended efforts to stall it any longer, the New York Times reported. The new rule, finalized in the last few months of President Barack Obama’s administration, is intended to strengthen a system called borrower defense that allows forgiveness of federal student loans for borrowers who were cheated by schools that lied about their job placement rates or otherwise broke state consumer protection laws. The new rule could expedite the claims of more than 100,000 borrowers, many of whom attended for-profit schools, including ITT and Corinthian, that went out of business in recent years. The new rule requires the Education Department to create a “clear, fair, and transparent” process for handling borrowers’ loan discharge requests, many of which have sat for years in the department’s backlog. It also orders the department to automatically forgive the loans of some students at schools that closed, without requiring borrowers to apply for that relief.
A federal regulator plans to explain what it considers to be “abusive” practices by companies selling financial services, a move aimed at giving a clearer idea of what behavior would get companies into trouble under relatively new government enforcement powers, the Wall Street Journal reported. Mick Mulvaney, the Consumer Financial Protection Bureau’s acting director, said on Monday that the bureau is working on a regulation defining how it views unfair, deceptive or abusive acts or practices, known as "UDAAP." Most of the CFPB’s enforcement actions involve such claims and the 2010 Dodd-Frank financial law, which created the CFPB and gave it broad enforcement powers. Companies have long complained that the CFPB’s UDAAP approach was overly broad and nuanced, making what would trigger an enforcement action less predictable.
The U.S. Department of Education recently released new data on student loan default rates and is touting a success story: The national default rate is 10.8 percent, down from 11.3 percent last year. But this decline doesn’t mean that students are no longer struggling to repay their loans or suffering the consequences of default. Though data on federal loans is notably poor, over the past three years, researchers have identified certain groups of students who face particularly high risks of default on their federal student loans. The Center for American Progress and others have found that African American borrowers, students who are parents, and low-income students have higher-than-average default rates, in some cases topping 50 percent. Research has also repeatedly demonstrated that students who do not complete college are more likely to default than those who have. These groups are relatively large and can therefore be studied in depth using the Education Department’s sample survey data, which follow students from when they entered college in 2003 through 2015. However, there are other groups of students with similarly high default rates who often go unstudied because they comprise a relatively small portion of the overall population. These students are an important part of the American postsecondary education system, yet they are too often underserved by it.
Mortgage rates hit their highest level in more than seven years this week at nearly 5 percent, a level that could deter many home buyers and represents another setback for the slumping housing market, the Wall Street Journal reported. The average rate for a 30-year fixed-rate mortgage rose to 4.9 percent — the largest weekly jump in about two years — according to data released Thursday by mortgage-finance giant Freddie Mac. Lenders and real-estate agents say that, even now, all but the most qualified buyers making large down payments face borrowing rates of 5 percent. A 5 percent mortgage rate isn’t that high by historic standards. During much of the decade before the financial crisis, these rates hovered between 5 and 7 percent.
Corporate loans have outperformed almost every asset class this month as climbing interest rates hit stock and bond prices, defying analysts’ warnings about rising risk in funds that buy below-investment-grade loans, the Wall Street Journal reported. While stocks bore the brunt of the recent selling, even investments that typically profit when rates rise have declined, leaving investors with few havens. The resilience of so-called leveraged loans in this environment helps explain the rising popularity of the once-niche market, which grew to a record $1.2 trillion this year, overtaking the amount of outstanding junk bonds for the first time. Leveraged loans to companies with junk credit ratings have grown increasingly popular among individual and institutional investors because they pay relatively high interest that moves in lockstep with benchmark interest rates. That feature insulates the loans from rate increases by the Federal Reserve, which have weighed on corporate and government bonds throughout the year and sent stock prices tumbling in recent days, analysts said. “It’s a Wall Street truism that you can’t fight the Fed — except, maybe, with loans,” said Steve Miller, a loan-market analyst and chief executive of Fulcrum Financial Data. Leveraged-loan returns have beaten investment-grade and high-yield bonds in only five of the past 26 years and in four of those years the Fed raised rates, Miller said.
The U.S. Department of Agriculture’s $12 billion package to offset farmers’ losses from the imposition of tariffs American exports could end up shrinking after an agreement to update NAFTA was struck, Agriculture Secretary Sonny Perdue said yesterday, according to Reuters. “We will be recalculating along as we go,” Perdue said in regard to the second tranche of the planned compensation, estimated at about $6 billion, which was first announced in July after U.S. and China imposed trade tariffs on each other’s imports. China has traditionally been the biggest buyer of U.S. agriculture exports but it has been largely out of the market for several products, such as soybeans, since implementing levies on U.S. imports in retaliation for the Trump administration’s tariffs on Chinese goods. The aid package includes cash payments for farmers of soybeans, sorghum, corn, wheat, cotton, dairy and hogs. The USDA had already outlined the allocations for the first $6 billion at the end of August. Perdue said the picture has changed after the United States-Mexico-Canada Agreement (USMCA) was reached, a revamp of the NAFTA trade agreement between the three nations.
Sen. Bernie Sanders (I-Vt.) yesterday unveiled legislation that would place a hard cap on the size of financial institutions, the Washington Post reported. Sanders’ bill would bar financial institutions from holding assets, derivatives and other forms of borrowing worth more than 3 percent of the entire U.S. economy, or $584 billion in today’s dollars. The legislation would force federal regulators to break up six different Wall Street firms — JPMorgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley — as well as insurance giants such as Prudential Financial and MetLife. Collectively, the targeted firms hold more than $13 trillion in assets, according to Sanders aides. Prospects for the bill are unfavorable, however, with a Republican Congress and President Trump in office.
There might be a second act for Toys “R” Us, which shut down hundreds of stores over the summer: A group of investors said in a bankruptcy court filing that it's scrapping an auction for Toys “R” Us assets, The Associated Press reported. The investors believe they'll do better by potentially reviving the toy chain, rather than selling it off for parts. The investors said they'll work with potential partners to develop new ideas for stores in the U.S. and other countries "that could bring back these iconic brands in a new and re-imagined way." Toys “R” Us suffocated under a staggering $5 billion debt load before liquidating its U.S. assets this year. A leveraged buyout hobbled the company, and hundreds of stores were shuttered in June to the dismay of children and numerous generations of one-time children. The seeming end of Toys “R” Us rippled through the toy industry and beyond. When the company closed the doors at some 800 stores, more than 30,000 people lost their jobs. Less than a month later, Mattel said it would cut more than 2,200 jobs partly because of lost sales to Toys “R” Us. Economists were caught off guard that month by the slow growth in jobs. In addition to the debt it was saddled with by its private-equity owners, Toys “R” Us found itself in a battle to its seeming death with Amazon.com and other big toy sellers.
Jerome H. Powell, the Federal Reserve chairman, said yesterday that the American economy is enjoying an unusual but sustainable period of low unemployment and low inflation. He described the current moment, and the Fed’s expectation that it will continue, as “not too good to be true,” the New York Times reported. Inflation is hovering around the 2 percent annual pace that the central bank regards as optimal while the unemployment rate has remained close to 4 percent for the last year. Economists have long regarded low unemployment as a harbinger of higher inflation, and there is no precedent in modern American history for both economic indicators to remain at such low levels. But Powell said that there was reason to believe this time could be different. He said that the Fed’s success in holding down inflation in recent decades has reinforced public expectations that inflation would stay low, and that, in turn, is helping to keep inflation low. “These developments amount to a better world for households and businesses, which no longer experience or even fear the scourge of high and volatile inflation,” Powell said yesterday.
Elizabeth Warren describes medical bills as "the leading cause of personal bankruptcy" in the United States. She bases that opinion in part on her own research, in which she and her collaborators surveyed people who had experienced personal bankruptcy, asked them whether they'd experienced health-related financial distress, and concluded that 60% of all bankruptcies in the U.S. result from illness or injury. An article in the New England Journal of Medicine this spring convincingly argued that Warren's estimates were seriously exaggerated due to faulty research methods. I'll briefly summarize that critique. But more importantly, I'll explain why even revised bankruptcy estimates still overstate the contribution of healthcare costs to American bankruptcy rates.