Maryland Legal Alert for Financial Services
Maryland Legal Alert - August 2021
IN THIS ISSUE:
CFPB BACKTRACKS ON EFFECTIVE DATE OF NEW DEBT COLLECTION RULES
TENTH CIRCUIT OPINION REINFORCES UTILITY OF LOAN MODIFICATIONS AND FORBEARANCE AGREEMENTS
COURT ADDRESSES DEVELOPMENTS IN STUDENT LOAN DISCHARGE
CFPB Backtracks on Effective Date of New Debt Collection Rules
We previously reported on the proposal of the Consumer Financial Protection Bureau (CFPB) to extend the effective date of the CFPB’s new debt collection rules by 60 days to January 29, 2022.
Recently, the CFPB announced it would be withdrawing its proposal, and the final debt collection rules would go into effect November 30, 2021, as originally planned. The CFPB noted that while the extension was intended to allow additional time for interested parties to prepare due to the ongoing COVID-19 crisis, most industry commenters indicated that they would be able to comply with the final rules by the original effective date.
Practice Pointer:Debt collectors must ensure they are prepared to comply with the new rules by the November 30 effective date. You can check out Part I and Part II of our summary of the CFPB’s final debt collection rules for more information.
For additional information on the impact of the coronavirus, visit our information hub for a list of up-to-date content.
Please contact Bryan M. Mull for questions concerning this topic.
Contact Bryan M. Mull | 410-576-4227
Tenth Circuit Opinion Reinforces Utility of Loan Modifications and Forbearance Agreements
For lenders dealing with troubled loans, a forbearance agreement or loan modification is often a great solution. An agreement may give borrowers breathing room to get back on the path to compliance or set the stage for a palatable exit strategy. A recent decision from the U.S. Court of Appeals for the Tenth Circuit underscores another benefit that is sometimes overlooked — the obligors’ release of their claims against the lender.
In this case, the debtor operated a cattle ranching business. The debtor refinanced its cattle loans with a new lender, who expressed interest in also refinancing the debtor’s real estate loans. The debtor was reluctant to do so — as this would cross-collateralize the loans — but ultimately agreed to refinance its real estate loans with the lender the following year. Thereafter, the lender stopped advancing funds to the debtor on the cattle loans and the loans went into default. The lender and the debtor entered into several loan modification agreements and forbearance agreements to revise payment terms, extend maturity dates and provide for additional credit advances. Crucially, all of the modification and forbearance agreements contained waiver provisions in which the debtor and the guarantors waived any claims or defenses relating to the loans.
The lender later filed a Chapter 11 bankruptcy petition, and the guarantors filed suit against the lender, alleging breach of contract, breach of the implied covenant of good faith and fair dealing, negligence, fraud, and negligent misrepresentation. The guarantors claimed that the lender misrepresented its confidence in the debtor’s business and manufactured a default.
The trial court granted summary judgment in favor of the lender based on the applicable statute of frauds as well as the guarantors’ waivers under the modification and forbearance agreements. On appeal, the Tenth Circuit agreed. The Court noted that under applicable state law, the guarantors could not challenge the waivers under an economic duress theory since the guarantors benefited from the modifications (including the lender extending additional credit).
Practice Point: Loan modifications and forbearance agreements are great opportunities for lenders to look ahead and develop retention or non-retention strategies for troubled loans, while also mitigating potential exposure to lender liability claims. Lenders should review their loan modification and forbearance agreements to ensure they contain robust waiver provisions.
Please contact Bryan M. Mull for questions concerning this topic.
Contact Bryan M. Mull | 410-576-4227
Court Addresses Developments in Student Loan Discharge
An oft-repeated refrain during any discussion of the student loan crisis is that unlike most debt, student loans are generally excepted from a bankruptcy discharge. That is, unless a borrower can establish that payment of their student loans constitutes an “undue hardship,” the student loan debt will not be discharged. Generally, this standard is nearly impossible to meet, according to our previous report on this issue.
Recently, the U.S. Court of Appeals for the Second Circuit held that certain student loans fall outside of the “undue hardship” analysis and are not excepted from discharge. Joining the Fifth and Tenth circuits, the Second Circuit held that private student loans are not excepted from discharge under Section 523(a)(8) of the Bankruptcy Code.
In that case, a student loan borrower was indebted under two private student loans and obtained a Chapter 7 discharge. The discharge order did not specifically address whether the discharge covered the borrower’s private student loans. Thereafter, the servicer pursued collection and the borrower repaid the loans. The borrower later reopened his bankruptcy case and filed a putative class action against the servicer. The servicer moved to dismiss and the Bankruptcy Court denied the motion. On appeal, the Second Circuit held that the denial of the motion to dismiss was proper. Section 523(a)(8) excepts from discharge the following:
- Loans and benefit overpayments backed by the government or a nonprofit;
- Obligations to repay funds received as an educational benefit, scholarship or stipend; and
- Qualified private educational loans.
The servicer claimed that the private student loans were excepted from discharge under the second category since the loans were an obligation to repay funds received as an education benefit. After analyzing the statutory text and legislative history, the Second Circuit determined that if Congress intended to except all private student loans from discharge, it could have done so in clear language. The Second Circuit rejected the servicer’s interpretation of the second category, reasoning that this reading would render the third condition superfluous (which covers a subset of private student loans), especially considering that the third one was added well after the first two requirements.
Seeking a legislative fix to the student loan discharge issue, a bipartisan group of U.S. senators recently introduced the FRESH Start Through Bankruptcy Act of 2021. Among other things, this bill proposes to make federal student loans dischargeable 10 years from the date they first came due.
Practice Point: Though it appears that much of the momentum to forgive some or all federal student debt has waned, the U.S. Department of Education recently announced that the blanket forbearance for federal student loans would be extended through the end of January 2022. We will continue to monitor developments in the student lending debate.
Please contact Bryan M. Mull for questions concerning this topic.