July 14, 2009
President Barak Obama has taken up the mantle as champion for the average American. The economic collapse has been stackedârightly soâupon the shoulders of the cadre of corporations and institutions that lent massive sums of money to individuals that had little hope of ever repaying those funds. The corpses of subprime mortgages, tucked into nearly indecipherable bundles with lower risk instruments, floated down the financial stream, dissolving confidence in security and bond markets, crumbling the foundation of construction and sending lending to a screeching halt.
Now it is a new era of consumer protections, where credit card companies are brought to trial over inflated interest rates and investors demand goggles to peer into the murky waters of security instruments. As part of Obama's larger, ambitious overhaul of the regulatory system, the establishment of the Consumer Financial Protection Agency (CFPA), covered in NACM's eNews on July 7, has been tweaked and re-introduced into committee as bill H.R. 3126. The goal of the CFPA would be to oversee the structure and issuance of various loans, as well as the sale of financial products and services to consumers such as bank accounts and some credit-related services, like debt collection and loan modification.
Currently, the Federal Trade Commission (FTC) handles these responsibilities in its Bureau of Consumer Protection, of which creditors should be familiar because of the agency's "Red Flags" Rules. But there is a view among some advocates that consumers aren't receiving effective enough considerations and a new model must be employed. The FTC, with the CFPA edging in on its turf, is reviewing legislation already offered by the Obama Administration and being debated in a House Energy and Commerce subcommittee hearing.
"Recent reports about the lack of mortgage mortifications and increases in various fees only reinforce the need for this bill, which is already very clear," said House Financial Services Committee Chairman Barney Frank (D-MA), who introduced the bill that finely tunes the Obama outline for the CFPA. "I intend to mark this up by the end of July, and we have already begun to hold hearings on this subject and have had a great deal of consultation among members."
Congress breaks in August, but Frank is confident that the bill will ultimately provide greater protections for consumers while not further burdening legitimate bank activities.
Frank's version of the CFPA differs from the one originally outlined by the White House by preserving the role of federal banking regulators in the enforcement of the Community Reinvestment Act (CRA). For now, Frank only refers to the Office of the Comptroller of Currency (OCC) and the Office of Thrift Supervision (OTS) as regulating bodies, instead of the National Bank Supervisory (NBS), which the Obama Administration envisions as a new prudential regulator.
"Many of the rulemaking, enforcement, education and research functions of the CFPA are functions that the FTC currently performs with respect to entities under its jurisdiction," testified FTC Chairman Jon Leibowitz before the Subcommittee on Commerce, Trade and Consumer Protection. "The proposal is designed to consolidate these responsibilities, which currently are divided amongst a number of different agencies depending on the nature of the financial institution, within a single regulatory body."
The debate looms about creating a separate agency instead of bolstering the resources of those that are already charged with consumer protection. Congressman Bobby Rush (D-IL), chairman of the Subcommittee on Commerce, Trade and Consumer Protection, doesn't see the need to construct the CFPA.
"The [FTC] operates as a lone hawk. From high above, the agency can survey the marketplace and swoop down on predators that deceive unsuspecting and misinformed consumers," said Rush. "The higher and further away that the FTC is from other agencies and entities it regulates, the better it is at spotting unfair commercial and trading practices, and at isolating those practices that cast the longest shadows."
Matthew Carr, NACM staff writer
Out-of-Court Liquidations and Workouts: What Creditors Need to Know
An increase in bankruptcies, coupled with a decrease in confidence in the bankruptcy process, has led many debtors, whether they're reorganizing or liquidating, to believe that they can get a better deal outside the courtroom. "A lot of debtors are trying to liquidate out of court," said Deborah Thorne, Esq. of Barnes & Thornburg LLP. "And from a creditor's perspective this is not so bad." Thorne will deliver the NACM-sponsored teleconference "Out-of-Court Liquidations and Workouts: What Creditors Need to Know" on July 20 at 3:00pm EST where she'll tell credit professionals just how to get the best for their companies in the instance that a debtor wants to liquidate or reorganize on its own. While the setting may be different, Thorne noted that the goal of the creditor is the same in these cases. "You need to protect your rights just as you would in bankruptcy," she said.
To learn more about this teleconference, or to register, click here.
In a recent venture to Capitol Hill, NACM, along with lobbyist Jim Wise, met with Senate staff to discuss the association's suggested changes to the Bankruptcy Code, offering its assistance to the Senate Judiciary Committee as it shapes and considers any future legislation on the subject.
NACM previously met with staff members from the House Judiciary Committee, which, at the committee's request, eventually led to the formation and submission of NACM's Issue Brief and Suggested Enhancements to the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). In many ways, this document served as a rebuttal to legislation proposed by Congressman Jerrold Nadler (D-NY) several months ago, which would've rolled back several benefits to unsecured trade creditors provided by BAPCPA in the interest of keeping Chapter 11 debtors from trying to reorganize, failing and eventually folding into a full-on liquidation. The bill has since stalled in the House.
In the meeting, NACM discussed the difficulties facing unsecured trade creditors in the instance that one of their customers files for bankruptcy. The primary focus was on preference statutes, which have long been a thorn in the side of credit professionals who work diligently to collect on their invoices, only to see their hard work punished as the buyer files for bankruptcy and the money collected by the creditor has to be returned to the estate to be distributed to other lenders with a higher priority than the creditor itself. Reclamation statutes were also discussed along with the Section 503(b)(9) 20-day administrative priority claim, which Nadler's bill would repeal. A copy of NACM's aforementioned suggested changes was left with committee staff along with the association's pledge to offer its assistance should a bill or hearing arise.
It was noted, however, by Senate Committee staff that action on statutory changes to the Bankruptcy Code, at least on the Senate side, will be primarily consumer-focused in the short term. Specifically, the committee is considering S. 257, the Consumer Credit Fairness Act, a bill introduced by Senator Sheldon Whitehouse (D-RI) in January, which will primarily deal with consumer debtors and possibly some sole proprietorships or small businesses. Action on the bill has been delayed due to the Senate Judiciary's focus on vetting President Barack Obama's judicial nominees, but during markup of S. 257, Judiciary Committee Ranking Member Jeff Sessions (R-AL) is expected to introduce some amendments that would affect commercial creditors. Whether or not these amendments will make it into the final version of the bill, however, remains to be seen.
Additionally, Senate staff noted that the Judiciary Committee may consider new, commercial-centric legislation in the fall as well as the possibility of establishing a new chapter of bankruptcy to more readily accommodate small businesses.
NACM's Government Affairs Committee will consider these issues and any further updates on the association's efforts will appear in NACM's eNews and on the Advocacy page. If you have any thoughts or comments on bankruptcy reform, or any other related topic, please email your comments to email@example.com.
Jacob Barron, NACM staff writer
Outposts and Allies: Politics, Money and Moral Dilemmas in International Trade
Nations change. "Ally" and "enemy" are rotating labels anointed with each shift in leadership. There is a future awaiting the world where Kim Jung Il will be no moreâregardless how supreme of a title he grants himselfâjust as Chairman Mao Zedong's hard line dissolved in China. North Korea will one day have their own Deng Xiaoping who will be followed by a further line of reformers. But that is "some day." Now, the United States is face to face with one of the most contentious modern trade debates: Cuba.
A Castro is still in power, but the United States and the rest of the world see ample opportunities in a market that has long been closed. Read more in the July/August issue of Business Credit magazine. Don't have a subscription? Get one here.
When the price of oil and natural gas skyrocketed as the margins between production and consumption narrowed, Congress stepped up its pace in carrying the torch of environmentalism. Between 2007 and 2009, a number of climate change bills worked their way through Congress, covering cap-and-trade systems, carbon taxes, emission pricing systems and incentives to lower greenhouse gas emissions. The House has already passed climate change legislation this year, while the Senate is getting ready to do its part. The idea has been to create a system that produces results, while allowing for a profit to be made. The counter-argument has been that demanding too much change too quickly could topple some industries that are energy-intensive, driving them out of the U.S. because they can no longer remain competitive. The United States exports about 20% of its manufactured goods and around 30% of its agricultural production; establishing an emissions pricing system could have detriments.
At the same time, the United States is searching for some agreement with the world's developed countries that would meet the demands and be beneficial to all nations. "Climate change is a defining issue of our time," said Senate Finance Committee Chairman Max Baucus (D-MT). "We must identify industries that need help and give them the tools to succeed in a greener economy, but we also must comply with international trade rules. Actions that provoke retaliation from our trading partners will only hurt the same industries we're trying to help."
The problem currently facing the United States is developing a greenhouse gas emission reduction and limit program ahead of a comprehensive international agreement. By doing so, some industries in the U.S. might shift overseas where mandatory climate constraints don't yet exist. At the same time, if the United States doesn't make the first move, what large industrial country will?
"Addressing climate change presents policy challenges at both the domestic and international levels, and the issue of competitiveness underscores the very close nexus between the two," testified Eileen Claussen, president, Pew Center on Global Climate Change at a Senate Finance Hearing on climate change's impacts on trade. "In the long term, a strong multilateral framework ensuring that all major economies contribute their fair share to the global climate effort is, I believe, the most effective means of addressing competitiveness concerns."
The Government Accountability Office (GAO) found that if the U.S. were to regulate greenhouse gas emissions, production costs could go up, which in turn could cause output, profits and employment to fall. The effects would be further felt further through rising imports and lower exports. The bump in the road is that the industries that produce the most greenhouse gases are the industries that represent a considerable portion of trade, like metals, non-metallic minerals, paper and chemicals.
On an international scale, there is the question of border measures, emission sanctions and the downright complexity of the system. Lawyer Gary Horlick posed in his testimony before the Finance Committee, "An Apple iPod with a retail price of $299 arrives in the U.S. in a box labeled 'Made in China,' but only $4 stays in China while $130 stays in the U.S. and the remainder is scattered among 18 other countries," said Horlick. "How are the 20 countries that collectively make an Apple iPod going to calculate all the carbon impacts and untangle all those permits, taxes and rebates?"
"I think it would be difficult to design such an approach that would be consistent with rules of the World Trade Organization," added Ranking Member of the Senate Finance Committee Chuck Grassley (R-IA), stating that violating WTO rules could result in devastating sanctions for the U.S. "And then we'll have hurt our manufacturers twice. We'll have raised their costs by imposing cap and trade in the first place. And then we'll compound the problem by giving foreign countries a license to hit us with sanctions."
At the G8 meeting, China, India and a number of other developing nations announced that they would not accept mandatory emissions controls on their economies. As President Barack Obama has pointed out, India and China have lower per capita emissions than the United States. The Environmental Protection Agency (EPA) has stated that if the U.S. flies solo on reductions, the effect on the world's environmental health would be close to nil.
"Unless supporters of cap-and-trade legislation can develop a plan to convince China and India to make meaningful emissions reductions on par with the United States, no such bill will pass the U.S. Senate," warned Senator James Inhofe (R-OK), Ranking Member of the Senate Environment and Public Works Committee. "Without participation from China and India, anything we do here at home would impose burdensome costs on consumers in the form of higher electricity, gas and food prices, all for no climate gain."
Inhofe, who is not a fan of the concept of global warming or climate change legislation, is on the offensive as Democrats have been forced to postpone the deadline to September 28 for the six Senate committees working on the bill.
Matthew Carr, NACM staff writer
Coming to Terms With the Financial Crisis and Finding the Proper Resources
The entire world is trying to come to terms with the financial crisis. Layoffs are piling up from coast to coast, and credit departments are continuing to face a future of reduced headcounts and increased workloads as corporate structures become flatter. "Credit in the High Tech World," presented at Credit Congress by Jim Montague, CCE, director of credit and treasury operations, Lippert Components, Inc., focused on using technology to be the beast of burden for the credit department and to streamline tasks.
"What every one of you is doing in this room, is working harder with less people. Your company is not going to come to you and say, 'I'm going to give you some more help,'" said Montague. "The reality is that it's going to be the other way around and they're going to say, âWe need to cut one person.'"
Read more about the tips Montague provided in this session, as well as other Credit Congress sessions and additional events here. Also be on the lookout for extensive coverage in July/August issue of Business Credit. Don't get the magazine? Subscribe here.
A recent report by the Small Business Administration's (SBA's) Office of Advocacy shows that the nation's smaller firms faced tough times through the end of 2008, including job losses and a one-two knockout punch of declining sales combined with deteriorating credit conditions. The office's most recent report, "The Small Business Economy: A Report to the President," showed that while many recent numbers have shown improvement throughout the U.S. economy, the final months of 2008 were some of the worst in memory for small businesses.
Luckily for smaller firms, legislators are aware of their troubles and, in response, have exuberantly taken up their cause, offering a broad array of initiatives to ease the burden on the sector most commonly credited with a large majority of America's job creation.
The Internal Revenue Service (IRS) recently announced that it would suspend certain penalties related to its investigation of U.S. businesses that have invested in tax shelters. Some small businesses may have invested in these shelters inadvertently and would have been assessed penalties far greater than the amount of tax benefits received from these transactions, but a letter sent to IRS Chairman Douglas Shulman by Senate Finance Committee Chairman Max Baucus (DâMT) and Ranking Member Chuck Grassley (RâIA), along with House Ways and Means Oversight Subcommittee Chairman John Lewis (DâGA) and Ranking Member Charles Boustany (RâLA), asked the IRS to alleviate the burden on these businesses while Congress sorts out the issue and the IRS agreed. "We are workingâboth sides of the aisle and the Capitolâto ensure assessed tax penalties fall in line with received tax benefits. Until we reach that goal, we require cooperation from the IRS so that millions of American small businesses don't get another chip stacked against them in the lagging economy," said Baucus. "It's good to have the reprieve from the IRS, though the suspension will probably need to be longer in order to get necessary changes through Congress," Grassley said. "The IRS should also do the right thing by studying why only small businesses have been hit with the penalties since they're less likely to have the expensive lawyers that big corporations do. It's a matter of tax fairness for both the IRS and Congress."
Additionally, the House of Representatives recently passed legislation to update and reauthorize the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs, both of which are aimed at developing new products to generate job growth. "Innovation has been the key to all of our previous economic recoveries and, with this legislation, we will invest in promising small businesses that produce technological breakthroughs and new jobs," said Rep. Nydia VelĂĄzquez (D-NY), the Chairwoman of the House Committee on Small Business. "At its core, this bill is about creating new jobs by supporting the innovation of America's entrepreneurs."
Specifically, the new bill would expand the pool of small businesses that participate in the programs, making it easier for these businesses to access capital and effect change in the way capital is raised, and eventually work toward the creation of a more successful, workable financing product. "While the early stage research funded by SBIR and STTR is important, the real payoff comes when these programs result in a new product that can be sold in the commercial marketplace or used by a government agency," VelĂĄzquez said. "When that happens, we have the opportunity to open new markets and create more good paying jobs for Americans."
More action on other small business initiatives is expected in the future, in both houses of Congress. Stay tuned to NACM's eNews for updates.
Jacob Barron, NACM staff writer
Industry Credit Groups
Credit groups are an effective management tool. They permit credit professionals of different companies servicing the same customer, regardless of industry or trade, to compare information on collection history and provide a forum for the exchange of data as to the most recent payment practices. The purpose of exchanging information is to help group members segregate fiction from fact, so competent and realistic credit decisions about a customer can be made.
Managed and operated by NACM Affiliates nationwide, NACM-Canada and FCIB internationally, credit groups:
- Provide unparalleled networking opportunities
- Assist in the exchange of credit information on common customers
- Facilitate the receipt and analysis of information to make unilateral credit decisions
- Provide the forum to discuss the latest developments on credit department procedures,
equipment and other credit management functions
- Support the discussion of account information and delinquent account reports
- Adhere to federal antitrust guidelines
Click here to learn more about NACM credit groups and find the group for your industry.
The troubles of the construction sector have begun to attack the foundation of community banks, which lent heavily to the industry. Defaults and delinquencies are on the rise, while unemployment for construction workers is nearly twice that of the national average, currently over 17%.
"The fact remains that the construction industry has many long, slow and difficult months ahead as the $1 trillion construction market continues to suffer from declining state and local revenue, little demand for commercial or retail facilities and shrinking orders for new factories and facilities," said Stephen Sandherr, chief executive officer, Associated General Contractors of America (AGC).
With the outlook grim and little relief in sight, construction-oriented credit managers need to be able to effectively utilize the tools available to them. Currently, two statesâTexas and Coloradoâhave made changes to their lien laws to ensure project participants are getting paid in the face of default.
It was a victory for contractors and suppliers on June 19 when Texas Governor Rick Perry signed SB 669 into law. Under the legislation, which will go into effect September 1, 2009, minor errors and omissions may be corrected in a lien filing instead of allowing for the claim to be immediately subject to the Fraudulent Lien Law. The Fraudulent Lien Law has been torturous for lien claimants ever since it was enacted in 1997. The law cleared the way for considerable civil penaltiesâ$10,000 plus exemplary damagesâfor inadvertent mistakes in a lien affidavit and allowed contractors and suppliers to be bullied and threatened from filing a legitimate claim. Oftentimes, a computer template is used to file a lien claim and unfortunately, those filling out the forms don't have legal expertise.
"A critical function of a trade association is to represent the whole of its members in the government arena," said Kathleen Quill, CAE, CBA, president, NACM Houston. "When the Fraudulent Lien Law was twisted by some to punish suppliers and subcontractors for honest mistakes in lien filing, it was considered our duty and purpose to spring into action on their behalf." NACM Houston worked with Tom Shiels, partner, Matthews, Stein, Shiels, Pearce, Knott, Eden & Davis, LLP, in playing an active role in getting the measure passed.
The new law deems that the misspelling of a name or transposing the lot and block numbers of a legal description of a property is no longer the basis for a fraudulent lien claim, as attorneys were able to argue under the Fraudulent Lien Act. It also shifts the burden of proof of intent to defraud away from the filer.
"A congressman once told me that the legislature is in the business of unintended consequences," said Quill. "Once our state legislators understood the unintended consequence of the Fraudulent Lien Law, our bill to fix it carried in both the House and the Senate unopposed, and was subsequently signed into law by Governor Perry. Score one for the good guys."
In Colorado, two sections of the Colorado Revised Statutes were modified, which affects all lien waivers that were entered in the state as of July 1.
The first statuteâUnlawful Activity Concerning the Selling of Land, CR Â§18-5-302âdeals with fraudulent conduct and misrepresentations made in the context of selling land or the ownership of land. A new subsection has been added that imposes criminal sanctions for the failure to timely pay funds received from a construction loan where a lien waiver is signed.
The second statute targets people who sign a lien waiver or a construction loan and knowingly fail to timely pay any debts resulting from a construction agreement covered by a waiver. This is now considered a Class 1 misdemeanor, punishable by 6-18 months in prison, fines between $500-$5,000 or both.
The bill also amends the language in Agreement to Waive-Effect, CRS Â§ 38-22-119, as it relates to the waiving of mechanic's liens rights. The new section does not dictate the exact wording needed in a lien waiver, but does state that language to that effect must be contained in lien waiver documents. The statute now reads: "An agreement to waive lien rights shall contain a statement, by the person waiving lien rights, providing in substance that all debts owed to any third party by the person waiving the lien rights and relating to the goods or services covered by the waiver of lien rights have been paid or will be timely paid."
Matthew Carr, NACM staff writer
Look for the "A" Players
You need the "A" players. They're the most qualifiedâthe most productive peopleâin your organization. And, for any open positions you have, you need them fast because any interruptions in staffing can mean missed deadlines, a breakdown in operations and loss of productivityâconsequences you can't afford.
You'll find the "A" players at Careers in Commercial Credit, Collections & Finance (C4F), the online resource for the people who are educated and experienced in your related field, and who are looking for the opportunities you can provide.
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C4F: Employment Connections for the Business Credit Community
Following the requests and recommendations from several constituents, the Financial Accounting Standards Board (FASB) recently announced that it would undertake a new project aimed at establishing an overarching framework intended to make disclosures on financial statements more effective, coordinated and less redundant. Included in the groups that urged the FASB to initiate this new program were the Investors Technical Advisory Committee (ITAC) and the Securities and Exchange Commission's (SEC's) Committee on Improvements to Financial Reporting (CIFR).
"Many constituents have expressed concerns about so-called 'disclosure overload,'" said FASB Chairman Robert Herz. "While clear and robust disclosures are essential to informative and transparent financial reportingâa critical component in maintaining investor confidence in the marketsâimproving the way such disclosures are integrated can help decrease complexity. The Board will embark on this project to create a principles-based disclosure framework that will enable companies to communicate more effectively with investors and also help eliminate redundancy or otherwise outdated U.S. generally accepted accounting principles (GAAP) disclosure requirements."
Herz insisted that the project would not simply amount to another layer of guidance, but instead would aim to create a basic framework for GAAP disclosures that enables all entities to focus on making more coherent and comparable disclosures in their annual reporting packages. It would also work to move companies toward electronically tagging information using the eXtensible Business Resource Language (XBRL), a new electronic analysis tool that will eventually become standard issue for financial statement filings.
Deliberations on the subject will begin this quarter, and a preliminary views document will be issued by FASB in the first half of 2010.
Jacob Barron, NACM staff writer
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Although the downturn has proven tough for workers, those who are still employed say they're gaining more from the experience than just managing to keep their jobs. Seventy-seven percent of professionals interviewed cited at least one positive effect the recession has had on their jobs, including the ability to tackle new projects (53%), assume additional responsibility (52%) and take on more challenging work (52%). But according to most respondents, the extra work has yet to be formally rewarded: Only 12% said they have received promotions.
The national survey included responses from 457 workers 18 years of age or older and employed full- or part-time in an office environment.
Workers were asked, "What positive effects, if any, has the recession had on you and your job?" Their responses*:
- Taken on new projects: 53%
- Gained more responsibility: 52%
- Taken on more challenging work: 52%
- Had more interactions with management: 44%
- Had more interactions with clients or customers: 38%
- Been promoted: 12%
- None of these: 23%
* Multiple responses were allowed
"Because of the realities of today's business environment, firms are working with leaner teams, which has, out of necessity, given many professionals the opportunity to take on greater challenges and expand their skill sets," said Max Messmer, chairman and CEO of Robert Half International and author of Human Resources Kit For DummiesÂź, 2nd Edition (John Wiley & Sons, Inc.). "But some employees may be struggling to keep up, and employers need to ensure they provide the resources staff need to be successful and avoid becoming overburdened."
Messmer added, "While many employees are willing to stick it out during difficult times, companies must be prepared to reward those who have taken on added responsibilities as soon as business conditions improve or risk losing valued staff. Organizations that can't provide promotions or financial incentives now should look for other ways to recognize top performers and let them know there is a long-term vision for them within the organization."
To view past eNews issues or to visit the NACM Archives, click here.