Fewer subprime borrowers are paying off their auto loans early, a possible sign that consumers with weaker credit scores are struggling more, according to a report by Wells Fargo & Co. researchers, Bloomberg News reported yesterday. Borrowers are making fewer extra payments on loans that were bundled into bonds in 2015 and 2016, compared with loans in 2013 and 2014 bonds, according to Wells Fargo analysts led by John McElravey. The data on prepayments may offer another sign that subprime consumers are having more trouble paying their bills, the analysts wrote in a note on Tuesday. Borrowers are already defaulting on a growing amount of auto debt. Last decade, slower monthly payment rates on credit cards were an early sign of the consumer credit cycle changing for the worse, the analysts wrote. For auto loans, slower prepayment may be more of a coincident indicator than a leading one, they wrote.
Illinois had its bond rating downgraded to one step above junk by Moody’s Investors Service and S&P Global Ratings, the lowest ranking on record for a U.S. state, as the long-running political stalemate over the budget shows no signs of ending. S&P warned that Illinois will likely lose its investment-grade status, an unprecedented step for a state, around July 1 if leaders haven’t agreed on a budget that chips away at the government’s chronic deficits. Moody’s followed S&P’s downgrade Thursday, citing Illinois’s underfunded pensions and the record backlog of bills that are equivalent to about 40 percent of its operating budget. “Legislative gridlock has sidetracked efforts not only to address pension needs but also to achieve fiscal balance,” Ted Hampton, Moody’s analyst, said in a statement. “During the past year of fruitless negotiations and partisan wrangling, fundamental credit challenges have intensified enough to warrant a downgrade, regardless of whether a fiscal compromise is reached.”
The director of the Consumer Financial Protection Bureau, Richard Cordray, defended the need for the agency, which has been under near-constant attack from Republicans this year, saying yesterday that it provides important protections for consumers, Reuters reported. Cordray rarely addresses political moves or the lawsuit that could defang his agency, which was created after the financial crisis to protect individuals from fraud in lending. In a speech at a community development conference, Cordray did not mention names or specifics. But he argued at length for maintaining the CFPB's rulemaking work, its enforcement powers, and its public database of consumer complaints — all at the heart of current assaults on the agency. "Consumers want and need to have someone stand on their side to see that they are treated fairly. We seek to protect them against unfair surprises, frustrating runarounds and bad deals that ruin their credit, cost them their homes and saddle them with further problems," Cordray said.
Jay Clayton, who left Sullivan & Cromwell, the prominent New York law firm, to become the chairman of the Securities and Exchange Commission, is expected to tap his former colleague Steven R. Peikin to serve as the commission’s co-director of enforcement, the New York Times reported. Peikin, a Sullivan & Cromwell partner and former federal prosecutor, is said to be friends with Clayton, and many New York lawyers speculated for weeks that he would get the job. Clayton is expected to also name Stephanie Avakian, the agency’s acting enforcement director and a former white-collar defense lawyer, as co-director with Peikin.
Senate Judiciary Committee Chairman Chuck Grassley (R-Iowa) and Sen. Al Franken (D-Minn.) have reintroduced legislation that corrects a Supreme Court ruling (Hall v. United States) that they said made it harder for family farmers to reorganize their finances when falling on hard times, according to a press release on Friday. Grassley and Franken’s “Family Farmer Bankruptcy Clarification Act of 2017” remedies the May 2012 Supreme Court ruling that said amendments made to the Bankruptcy Code in 2005, which restricted the Internal Revenues Service’s veto power over a family farmer’s ability to reorganize in bankruptcy in certain situations, unfortunately failed to achieve Congress’s express goal of helping family farmers. The Family Farmer Bankruptcy Clarification Act clarifies that bankrupt family farmers reorganizing their debts are able to treat capital gains taxes owed to a governmental unit, arising from the sale of farm assets during a bankruptcy, as general unsecured claims. It also removes the Internal Revenue Service’s veto power over a bankruptcy reorganization plan’s confirmation, giving the family farmer a chance to reorganize successfully.
The average American's credit score has never been higher, but rising levels of consumer debt have some analysts worried a bubble is forming. The Wall Street Journal reported Monday that the average credit score hit 700 in April to reach its highest level since such information was first tracked by Fair Isaac Corp. [-] back in 2005. On top of that, the share of consumers with scores below 600 dropped to about 40 million, representing 20 percent of U.S. adults with FICO scores. That percentage peaked at 25.5 percent in 2010. Americans' personal savings rate – which tracks the percentage of disposable income a consumer stashes away in a given month – soared during and after the crisis. And at 5.3 percent in April, it still sits above any level reached in 2005, 2006 or 2007. Now, consumer default rates are significantly lower than they were even just a few years ago. A composite S&P/Experian consumer credit default index in April was slightly elevated from where it sat through much of 2016. Consumers' debt portfolios simply look different than they did 10 years ago, as mortgage obligations have taken a backseat for many while student, auto and credit card loans have soared. A household debt tracker published earlier this year by the Fed's New York regional bank estimated total household indebtedness sat at $12.7 trillion at the end of the first quarter. That's up $50 billion from the previous peak reached in the third quarter of 2008.
The Trump administration is considering moving responsibility for overseeing more than $1 trillion in student debt from the Education Department to the Treasury Department, a switch that would radically change the system that helps 43 million students finance higher education, the New York Times reported today. The potential change surfaced in a scathing resignation memo sent late Tuesday night by James Runcie, the head of the Education Department’s federal student aid program. Runcie, an Obama-era holdover, was appointed in 2011 and reappointed in 2015. He cut short his term, which was slated to run until 2020, after clashing with the Trump administration and Betsy DeVos, the education secretary, over this proposal and other issues. A shift in handling federal student aid is being weighed as the Trump administration and DeVos consider overhauling the Department of Education. Trump’s proposed budget for 2018 slashes funding for the department by nearly 50 percent.
The U.S. Supreme Court’s decision that debt collectors can file “stale” claims in bankruptcy without violating federal law may have raised more questions than it answers on issues like exposure to sanctions and malpractice claims. The May 15 decision “creates a lot of confusion and burden on the bankruptcy system” that didn’t exist before the opinion, Thad O. Bartholow, a partner with Kellett & Bartholow PLLC, Dallas, said. Bartholow primarily represents consumer debtors. There was “no allegation at the pleading level” in court documents that Midland Funding knew it’s claim was time-barred when it filed its proof of claim, Bartholow said. Debt collectors fall under the ambit of the FDCPA and are subject to “higher scrutiny,” he said. “Debtors are worse off as a result of the decision, Bartholow said, agreeing with Sotomayor’s assessment. There is a “risk of revival of debt,” he said. The payment of a time-barred debt by a trustee could be viewed as allowing the debt to “spring back to life,” Bartholow said. The decision may open up debtor’s attorneys or trustees who fail to object to time-barred claims to malpractice claims.
Federal Reserve Board officials said at a meeting early this month that they wanted to see evidence of stronger economic growth before continuing to increase the Fed’s benchmark interest rate, according to minutes of the meeting published yesterday, the New York Times reported. But the account presented in the minutes did not shake a widespread conviction that the Fed will raise rates at its next meeting, which is scheduled for mid-June. Analysts said recent economic data was strong enough to reassure the Fed, and investors increased their bets on a June rate hike. Investors also learned for the first time yesterday on how the central bank is likely to reduce its holdings of more than $4 trillion in Treasury and mortgage-backed securities. A reduction of those holdings would be the last step in the Fed’s retreat from its economic stimulus campaign. The account of the May meeting reiterated that the Fed would probably begin taking that step later this year.
The White House released its 2018 budget proposal to Congress this week. Buried (the second to last item) in a 171-page Major Savings and Reforms supplement is one half-page that addresses the CFPB. The section is called, Restructure the Consumer Financial Protection Bureau. Here's what it says: “The Budget proposes to restructure the Consumer Financial Protection Bureau (CFPB), limit the Agency's mandatory funding in 2018, and provide discretionary appropriations to fund the Agency beginning in 2019.” The justification is: “Restructuring the CFPB to refocus its efforts on enforcing enacted consumer protection laws is a necessary first step to scale back harmful regulatory impositions and prevent future regulatory hurdles that stunt economic growth and ultimately hurt the consumers that CFPB was originally created to protect. Furthermore, subjecting the reformed Agency to the appropriations process would provide the oversight necessary to impose financial discipline and prevent future overreach of the Agency into consumer advocacy and activism.”