U.S. student loan borrowers owe approximately $1.7 trillion on their student loans. About 92% of that amount consists of federal student loans (debt owed to the U.S. government), with the remainder owed to a growing market of private lenders. Despite the fact that default rates have increased consistently since 2003, a substantial marketplace developed for student loan asset-backed securities (SLABS). That marketplace, and the world of student loans more generally, are now being buffeted by a confluence of factors creating great uncertainty about what the future holds. These factors include the prospect of forthcoming student loan legislation, continuing concerns about the effects of COVID-19 on the larger economy, and structural changes affecting securitizations and the underwriting of student loans.
One would think that, as we approach 2021, litigation related to residential mortgage loans originated and sold well over a decade ago would be ancient history. Nevertheless, some suits filed years ago remain active, and, even more surprisingly (and disturbingly), new lawsuits related to loans sold prior to 2008 may be on the way. Here is a look at the current RMBS (residential mortgage-backed securities)-related litigation landscape.
When mortgage-related litigation, including residential mortgage-backed securities (RMBS) lawsuits, erupted after the last financial crisis (the Great Recession of 2008), the litigants recognized that some of their disputes presented issues of “first impression.” That is, the parties’ arguments required judicial analysis and interpretation of contractual provisions and other issues that had not been litigated in a mortgage industry context. Even now, more than a decade later, some key issues remain subject to contradictory legal rulings or still lack definitive rulings from appellate courts.
Other key issues, though, were vigorously litigated by the parties and resolved (to one degree or another) by some courts. This post will examine some of those subjects, which might prove critical to future litigation involving other securitized assets, such as commercial mortgage-backed securities (CMBS).
On September 4, the Centers for Disease Control (CDC) imposed a moratorium on residential foreclosures and evictions through the end of this year. The move quickly followed comments by the Trump administration that it would take steps to keep renters from being evicted during the current pandemic. The administration described the steps as necessary to prevent an eviction crisis that would likely further strain an already fragile economy. The CDC also cited the health risks that would flow from displacing large numbers of people from their homes at a time at which the potential for additional stay-at-home orders remains significant.
Major League Baseball (MLB) is scheduled to begin its COVID-delayed season on July 23, but the MLB teams’ Minor League counterparts will have no 2020 campaign. Their season has been canceled. Many Minor League teams are now seeking victories in court, suing their insurers for denying them coverage under their insurance policies for business interruption and income loss.
As state and local governments throughout the country attempt to find a balance between re-opening the economy and sheltering in place, fears persist that the COVID-19 pandemic has already set in motion the next financial crisis. Early in the pandemic, we wrote about various types of debt that might melt down because of increased borrower defaults, including securities backed by student loans, auto loans, and commercial mortgages.
While declining to rule that the Consumer Financial Production Bureau (CFPB) itself is unconstitutional — a position taken by many of the agency’s opponents since it began operating in July 2011 — the U.S. Supreme Court ruled today, June 29, 2020,that the CFPB’s structure violates the Constitution. In a 5-4 decision, the Court held that the structure put in place when the Dodd-Frank Act created the CFPB unconstitutionally insulates the agency from presidential oversight and must be modified. In so holding, the Court rejected a restriction that the Dodd-Frank Act placed on the president’s ability to fire the agency’s director.
In March, the Florida Legislature passed CS/HB 873, approving the Uniform Commercial Real Estate Receivership Act (“UCRERA”). First drafted in 2015 by the Uniform Law Commission, UCRERA has already been adopted by seven states: Arizona, Maryland, Michigan, Nevada, Oregon, Tennessee, and Utah. If Governor DeSantis signs the bill, UCRERA will become effective July 1, 2020, and will be codified under Chapter 714 of the Florida Statutes. With the anticipated large volume of commercial foreclosures due to COVID-19 and expectations of resulting delays in the foreclosure process, this Act could have significant immediate effects. It would likely provide relief that commercial lenders and other parties have sought to protect their interests in real property, as well as incidental personal property related to or used in operating the real property.
Businesses that receive forgivable loans through the Paycheck Protection Program (PPP) would get additional time and greater flexibility to make use of those funds under proposed legislation approved last week by the U.S. House of Representatives. By a 417-1 vote, the House passed on for the Senate’s consideration the PPP Flexibility Act. That Act, if it becomes law, would give employers 24 weeks to spend the money and have the loans forgiven. The current permitted period is just eight weeks.
Talk of a broader “re-opening” of the economy has led to a fierce debate in Congress about whether it would be advisable to include, as part of a new COVID-19 legislative relief package, provisions creating certain immunities from potential liability for businesses that re-open. Specifically, some U.S. senators want to insulate companies from liability for claims by employees or customers that their health was compromised by unsafe workplace conditions that the company permitted to exist. Others say leaving employees or customers with little to no legal recourse for coronavirus exposure would be unjust, and may even make employees less willing to return to work in the first place. This debate is, in turn, sparking a re-examination of other related legal issues, like what the “standard of care” should be for protecting health at workplaces, whether that standard should be federal or local, whether standards should be established on an industry-by-industry basis, and what insurance coverage companies might have for claims by employees or customers that they were exposed to COVID-19 on the company’s premises.