Analysis: How a Major U.S. Farm Lender Left a Trail of Defaults, Lawsuits

Analysis: How a Major U.S. Farm Lender Left a Trail of Defaults, Lawsuits

ABI Bankruptcy Brief

October 24, 2019

ABI Bankruptcy Brief

Analysis: How a Major U.S. Farm Lender Left a Trail of Defaults, Lawsuits

As the U.S. agricultural economy sours and farmers’ financial woes pile up, BMO Harris Bank is leaving behind a trail of farmers who have lost nearly everything, Reuters reported. The bank, a subsidiary of Canada’s Bank of Montreal, has struggled to recoup some of its investments through a slew of bitter legal fights. The plight of BMO Harris and its customers reflects broader distress in the U.S. farm sector. Farmers are struggling to pay back their loans or obtain new ones. Shrinking cash flow is pushing some to retire early and a growing number of producers to declare bankruptcy, according to farm economists and legal experts. BMO Harris may yet face more defaults, judging by its high level of delinquent loans. At the end of June, nearly 13.1 percent of its farm loan portfolio was at least 90 days late or had stopped accruing interest because the lender doubts the money will be paid back - compared to 1.53 percent for all U.S. farm loans at banks insured by the Federal Deposit Insurance Corporation (FDIC). BMO Harris had the highest rate among the 30 largest FDIC banks, according to a Reuters analysis of loan data the banks reported to the regulator. BMO Harris spokesman Patrick O’Herlihy attributed the high delinquency rates to the bank’s lending in the upper Midwest, where dairy and grain operators have faced serious financial challenges. Sam Miller, BMO Harris’s managing director of agriculture banking, said the bank is keeping a closer eye on its customers with cash-flow shortages and lending to fewer mid-sized operators. ”We have to be more vigilant in underwriting the risk,” Miller said. Some experts and bankruptcy attorneys representing former BMO Harris customers say the bank issued too many loans for too long that farmers simply could not pay back. The problems, they said, stem from the aggressive practices of some loan officers and a lack of oversight by bank auditors.

Public Law 116-51, the Family Farmer Relief Act, raised the eligibility limit for Chapter 12 up to $10 million from about $4 million, and is now in effect.


Commentary: Rethinking College — and How to Pay for It

The price of a college education has outpaced both incomes and federal grants, as administrative bloat and cuts in state funding have led private and public institutions to increase their tuition fees, according to a Bloomberg News commentary. For the lowest-income quarter of students, the average annual cost of attendance (including living expenses, net of grants) reached about $11,600 in 2016, roughly 30 percent higher in real terms than in 1996. The federal government has sought to fill the breach with a crazy quilt of loan options, both subsidized and not: Stafford, Perkins, Plus loans for parents, and a system intended to consolidate them all. No matter the choice, those who enroll emerge with increasing debts, which weigh on the economy by impairing graduates’ ability to start families, buy houses and save for retirement. As of June, total student debt stood at an estimated $1.48 trillion, or about 36 percent of disposable income. That’s up from $250 billion, or 12 percent, in 2003. Unfortunately, the benefits of a college education appear to have little to do with what people actually learn, according to the commentary. A 2009 survey across 25 institutions found that four years of college had only a limited effect on critical thinking, complex reasoning and writing. The combination of big debts and low-quality education has caused a lot of financial distress. Those who drop out or attend for-profit schools, or who were simply unlucky enough to graduate into a weak economy, often find themselves with obligations they can’t hope to pay — and can’t discharge in bankruptcy. Proposals to make higher education free for all or forgive student debt would primarily benefit the wealthy, who already account for the majority of college-goers and loans outstanding. Also, debt can be a legitimate way to finance an education that provides a high return. Its growth can even be seen as a positive sign, reflecting Americans’ desire to invest in themselves. Removing public support and letting the market sort things out is not a great option, either. That said, policymakers can take steps to improve the system through access, cost control and quality, according to the commentary.

Don't miss the ABI Talk at ABI's 2019 Winter Leadership Conference on "The Rhetoric and Reality of Student Debt," to be delivered by Inez Feltscher Stepman of the Independent Women’s Forum (Washington, D.C.). Ms. Stepman will examine whether there is too much emphasis on reducing student loan debt, including through bankruptcy, and not enough about the real causes of skyrocketing college costs. For more information on WLC and to register, please click here

Massachusetts AG Sues DeVos over Debt Relief for Corinthian Colleges Students

Massachusetts attorney general Maura Healey filed a lawsuit Tuesday against Education Secretary Betsy DeVos and the Education Department, seeking debt cancellation for 7,200 former Corinthian Colleges students, Inside Higher Ed reported. Healey's office submitted an application for loan relief in 2015 on behalf of those students who attended Everest Institute campuses in Massachusetts. The application was based on a state lawsuit against Corinthian, which found that the for-profit chain had violated the state's Consumer Protection Act. Although a federal court last year found that the group application was a valid submission, the department has yet to agree to rule on the claims. The former Corinthian students have continued to face repayment and in some cases have had tax refunds seized or wages garnished. Healey has argued that Corinthian misled former students by routinely inflating job-placement rates in communications with former students. The Project on Predatory Student Lending at Harvard Law School filed a similar lawsuit on Tuesday on behalf of the same borrowers.

Trouble Is Brewing for American Companies that Gorged on Cheap Credit

Unlike the collateralized debt obligation (CDO), the collateralized loan obligation (CLO) made it through the financial crisis largely unscathed and has boomed in the decade since, Bloomberg Businessweek reported. Fueled by an unprecedented $3.5 trillion wave of private-equity buyout deals that occurred during the past decade, as well as rock-bottom U.S. interest rates that only stoked investors’ willingness to gamble on riskier assets, the CLO market has more than doubled since 2010, to $660 billion. But as odds of a recession in 2020 grow, ratings downgrades could cause a stampede of selling by CLOs, potentially cutting off scores of companies from additional credit, preventing them from refinancing their debt, and threatening their survival. Almost 40 percent of issuers of junk debt (which includes leveraged loans), according to Moody’s, are now rated B3 and lower — a record high. “If there’s no price support for lower-rated loans, that will be reflected over time in new-issue and refinancing markets, which may mean the lowest-quality borrowers lose access to capital markets,” says Andrew Curtis, the head of Z Capital Group‘s credit arm, which manages CLOs and other funds. Volatility in the market could spill over into the high-yield bond market and even send ripples into the broader economy that could deepen or prolong any recession.

Judicial Conference’s Public Comment Period for Proposed Rules on SBRA Open Until Nov. 13

On February 19, 2020, the Small Business Reorganization Act of 2019, P.L. 116-54 (SBRA), will go into effect – long before the normal three-year rules amendment process runs its course. As a temporary measure, the Advisory Committee on Bankruptcy Rules has drafted Interim Bankruptcy Rules that can be adopted by courts as local rules or by general order when the SBRA goes into effect. The Advisory Committee has also drafted amendments to the Official Forms to address the SBRA. The Standing Committee now seeks comment on the proposed SBRA rules and forms for a short four-week period prior to making final recommendations.

- Interim Bankruptcy Rules 1007(b), 1007(h), 1020, 2009, 2012(a), 2015, 3010(b), 3011 and 3016.
- Official Forms 101, 201, 309E, 309F, 314, 315, 425A, and new Official Forms 309E2 and 309F2

The comment period is open until November 13, 2019. Because of the short publication period for the Interim Rules and related Official Forms, there will be no public hearings.

Read the text of the proposed amendments and supporting materials.

Written comments are welcome on each proposed amendment. The Advisory Committee on Bankruptcy Rules will review all timely comments, which are made part of the official record and are available to the public. The comment period closes on November 13, 2019. Click here to submit a comment.

Don't miss the "New Reorganization Hope for Main Street Debtors" ABI Talk by Judge Harner at ABI’s Winter Leadership Conference

To register for the conference, please click here.

Report: Consumer Class Actions Nearly Tripled in the Past Decade

Lex Machina has issued a report saying that the number of consumer-protection class actions has nearly tripled in the past decade, with cases over data privacy and unwanted text messages behind the increase, the National Law Journal reported. The “Consumer Protection Litigation Report,” released yesterday, is the first of its kind by Lex Machina, a unit of LexisNexis that tracks consumer-protection lawsuits filed in federal courts. Overall, the number of consumer-protection lawsuits rose by less than 20 percent from 2009 through 2018, with a collective 132,000 awarding $34 billion in damages over the past decade. Class actions, however, rose much higher, from 1,223 to 3,382 filings, in the same time frame. Laura Hopkins, a legal data expert at Lex Machina, attributed much of that increase to a rise in data breach cases. “You could classify that as [being that] more catastrophic events are happening to a large group of people,” she said. “There’s more liability in data breach cases, and higher expectations for data security. Also, plaintiffs are seeing that if they come together, they have a little more traction or leverage and media exposure from class actions.”

Commentary: White House Wants to Privatize Fannie and Freddie, but It Needs Wall Street’s Help

The Trump administration wants to put Fannie Mae and Freddie Mac back into private hands after more than a decade in government control, but the path to doing so will likely lead through Wall Street, according to a Wall Street Journal commentary. Before the two mortgage giants can be privatized, they will potentially have to raise billions of dollars from investors, a move that will require big banks to move further into a sticky political issue. Financial firms are already laying the early groundwork. Executives at Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley in recent months have talked with the Treasury Department and Fannie and Freddie’s regulator about how a capital raise could work. There are no indications that the government has begun a formal process for hiring banks on a capital raise, and it could be a hard sell to investors. Still, several, including Bank of America, Citigroup and Goldman, have begun preparing internally to win a role in what could be a landmark event. (Subscription required.)

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New on ABI’s Bankruptcy Blog Exchange: House Passes Bill to Crack Down on Shell Companies

The Corporate Transparency Act would require companies to report their true owners to the Financial Crimes Enforcement Network, removing the burden on banks of collecting beneficial ownership information about their clients, according to a recent blog post.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

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