STUDENT DEBT PROGRAM: Where’s the Relief?

STUDENT DEBT PROGRAM: Where’s the Relief?

​On August 24, 2022, President Joe Biden announced a proposed plan, through the Department of Education, to forgive a portion of student loan debt owed by millions of Americans. The plan proposed to allow cancellation of up to $10,000 for certain loan recipients, and up to $20,000 for Pell Grant recipients. This forgiveness would be given only to holders of federal loans, and would not guarantee full cancellation of all debt owed by every borrower, such as those who owe more than $20,000 in Pell grants. The program also does not apply to those whose loans come from private lenders, such as Sallie Mae.  
As of this writing, over 26 million borrowers have applied for relief, and the Biden Administration has approved certain applicants for relief. But no loan relief has been granted.
No relief has been granted because several Republican Attorneys General, from Nebraska, Missouri, Kansas, Iowa, Arkansas, and South Carolina, sued to stop the program (Eastern District of Missouri, Case No. 4:22CV1040, filed 9/29/2022). Briefly, the States claimed that the loan relief would harm them financially, based on lost loan repayments (the States apparently did not discuss how they might benefit from increased tax payments if the borrowers were not tied to low-wage jobs to make their current payments; nor did the States discuss how much more money they would receive through the federal infrastructure bill).
Eastern District of Missouri Judge Autrey threw the case out, based on lack of “standing” (i.e., lack of an actual harm that the States had suffered), but the 8th Circuit Court of Appeals, which oversees several Midwestern states, placed this loan relief program on hold, pursuant to an injunction. State of Missouri, et al. v. Joseph R. Biden, etc., et al., Case No. 22-3179, published 11/14/22
Unfortunately, the 8th Circuit’s logic, particularly on the issue of immediate, actual harm (“standing”) appears disingenuous, and suggests a political motive behind the decision. For example, the 8th Circuit ruled that the state of Missouri has standing, because a loan fund created by the state of Missouri would potentially lose money if some of the loans granted through that fund were reduced or forgiven. That no relief has yet been granted means that no funds have yet been lost. And thus the state of Missouri has no standing. Lujan v. Defenders of Wildlife (1992) 504 US 555, 575-578 [opinion of Scalia, J].
Even more worrisome is the court’s assertion that because a federal decision causes a state to lose money, the state can sue to stop that program. Taken to its logical extreme, if the federal government decides from year to year to spend less money on highway repair for roads in Ohio than in Kansas, Ohio can sue and stop the program. Or if, year to year, the federal government decides to grant more funds for cancer research to universities in Minnesota than in California, California can sue to stop the program. This is the sort of chaos that Scalia warned against; the courts would assume day to day authority over the acts of a co-equal branch of government. Lujan v. Defenders of Wildlife (1992) 504 US at 577.
In other words, the 8th Circuit Court’s reasoning leads to chaos, and no federal spending program could ever be approved, because by definition, some agency, state, or individual will receive less money than another.
Additionally, how these States might benefit eventually from the improved financial health of borrowers apparently played no role in the 8th Circuit’s decision.
The Biden Administration has asked the US Supreme Court to intervene and overturn the 8th Circuit. (SCOTUS Blog, 11/18/2022) However, given the Court’s extreme conservative nature, as well as its willingness to disregard long-established precedent, a favorable ruling is not assured.

Jurisdiction And Precedential Effect

Jurisdiction And Precedential Effect

JURISDICTION AND PRECEDENTIAL EFFECT: The bankruptcy courts, and Bankruptcy Appellate Panel, are Article I Courts under the US Constitution. The district courts and courts of appeal are Article III courts. As such, the Courts of Appeal are not bound by the decisions of the bankruptcy appellate panel, but considers such decisions as advisory only. In fact, district courts and courts of appeal routinely perform a de novo analysis (considering the facts and law anew) of the Bankruptcy Appellate Panel’s findings. In re Silverman 616 F.3rd 1001 (9th Circuit 2010).

BANKRUPTCY LAW  Preferential Transfer: Can the Transfer Be Unwound?

BANKRUPTCY LAW Preferential Transfer: Can the Transfer Be Unwound?

BANKRUPTCY LAW (Preferential Transfer): A preferential transfer is a payment made within 90 days before the filing of bankruptcy, which is not made in the ordinary course of business. WHEN the trustee or Court finds that the debtor has made such a transfer, the transfer may be unwound, and the money ordered returned to the bankruptcy estate. The creditor who received the money will have to dig into its pockets and return the funds to the court.

In determining whether a payment is a preference, the court can conduct a hypothetical payment analysis to determine whether that payment would have been made had bankruptcy had not been filed. If the creditor received more via the questioned transaction than it would have received in the bankruptcy, then the payment is a preference (“preferential transfer”). In re Tenderloin Health 849 F 3rd 1231, 9th Circuit 2017

Trust in Comments: Court Holds Loan to Trust to be “Consumer Loan,”​ Protected by Fair Lending Laws

Trust in Comments: Court Holds Loan to Trust to be “Consumer Loan,”​ Protected by Fair Lending Laws

When representing clients, attorneys rely on the words of the law (a “statute”) and ask the court to implement the plain, obvious meaning of its words. When it comes to federal statutes, however, it is easy to overlook the “comments” by the lawyers for the Congressional committees that draft the statutes, or the agencies which implement them.

In a recent unanimous 9th Circuit decision by the Honorable Mary M. Schroeder, the comments to a consumer lending statute were critical to holding a bank accountable.

In Gilliam v. Levine, Case No. 18-56373 (9th Circuit, 2020), the court recounts that the borrower obtained a loan as trustee for a family trust. The purpose of the loan was to make home repairs. the home itself was the sole asset of the trust. Another family member, who occupied the home, with the trust beneficiary.

The home, i.e., the asset of the family trust, secured the loan. 

The borrower later discovered that the due date for the final loan payment was 1 year earlier than she had been led to believe. The borrower was alarmed, and sued to cancel (rescind) the loan under federal law, Truth in Lending Act (TILA), 15 U.S.C. § 1601, et seq., and the Real Estate Settlement Practices Act (RESPA), 12 U.S.C. § 2601. The borrower also asserted a claim under California’s Fair Lending Law [Rosenthal Act], 1788.1(b) of California’s Rosenthal Act, California Civil Code §§ 1788.1(b). 

This relief is only available where the borrower is a consumer. 15 U.S.C. § 1635(i)(4); 12 U.S.C. § 2606(a); Cal. Civ. Code § 1788.2(e). The trial court, Hon. Philip Gutierrez, concluded that because the loan went to the trust, it was not a consumer loan. The trial court dismissed the case.

The 9th Circuit reversed the trial judge. The appellate court noted federal Consumer Financial Protection Bureau’s Official Staff Commentary to Regulation Z (mortgage loans), which suggested the opposite result in this case. The Commentary, for example, stated that “[c]redit extended for consumer purposes to certain trusts is considered to be credit extended to a natural person rather than credit extended to an organization.” 12 C.F.R. pt.1026, Supp. 1, § 1026.3 Comment 3(a)-10.

The “certain trusts” that fall under the rubric of “natural persons,” entitled to protection for loans made to benefit a natural person, and not an organization, include the trust in this case, which was formed for tax or estate planning purposes [which benefit people]. As a result, where individuals invest assets in the trust, the regulation thus effectuates TILA’s definition of consumer credit transactions. 12 C.F.R. pt.1026, Supp. 1, § 1026.3 Comment 3(a)-10.

The trust in question was “primarily for personal, family, or household purposes.” 15 U.S.C. § 1602(i). The borrower was the aunt (as Trustee); the niece was the beneficiary; and the trust property was a private home. As a result, the loan was a “consumer credit transaction,” which was subject to the Fair Lending Laws. And the Comment makes the point: Look to the substance of the transaction. Here it was to benefit a consumer, not a company. 12 C.F.R. pt. 1026, Supp. 1, and § 1026.3 Comment 3(a)-10.i.

For as much as it has been vilified by certain political interests, the CFPB remains in force, and fortunately, it remains a source of protection for consumers. It will be interesting to see if the case if appealed to the Supreme Court (quite likely), and whether it will be upheld.

WARNING: THIS POST DOES NOT CONSTITUTE LEGAL ADVICE; PLEASE CONSULT AN ATTORNEY

#law  #fairlending  #mortgages  #truthinlending  #codeoffederalregulations  #courts

 

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