July 7, 2009
The agencies that enforce the rules and regulations of the Fair Debt Collection Practices Act (FDCPA) and the Fair Credit Reporting Act (FCRA)—including the Federal Trade Commission—have proposed a series of new rules to promote the accuracy and integrity of information provided to consumer credit reporting agencies (CRAs) and to allow customers to dispute inaccurate information directly with furnishers.
These changes come at a time when collections have been riding atop the wave of economic decline. Delinquencies, defaults and bankruptcies have surged over the last two years, triggering the need for more successful pennies-on-the-dollar recovery efforts. Since time is money in recovery efforts, NACM collection services, as well as the industry at large, have seen a trend in accounts being sent to collection sooner rather than later.
Collecting on a past-due account can be a winding path, and agents need to be firm and non-threatening, as guided by laws that outline how they may interact with debtors. Some of these provisions, however, have been attacked as being too unbalanced.
The other attributes in the process are credit reports and credit scores. Such information can have far-reaching impacts as the world judges individuals and businesses on the data contained in these resources. Everything from the costs of eligibility for lines of credit, employment, insurance, housing rentals and beyond is anchored to one's report and number.
Under the newly proposed rules, data furnishers to CRAs must establish reasonable policies and procedures to ensure that the information they are providing is accurate. The new rules outline instances when additional details may be necessary to keep the information that CRAs provide from creating misleading impressions about a consumer's creditworthiness. For example, the FTC wrote, "furnishers generally would need to include a consumer's credit limit among the information they furnish to a credit reporting agency."
The new rules also address the ability of consumers to dispute inaccurate information. The Association of Credit and Collection Professionals (ACA International) had submitted comments to the FTC to clarify conflicts regarding Section 805(c) of the FDCPA. Under that section, if a consumer notifies a debt collector in writing to stop communicating with the consumer, the collector must stop communicating with the consumer about the debt. This created conflicts when a consumer has sent a notice disputing information in their credit report.
With the new regulation in place, instead of filing a dispute only with CRAs, consumers can now take their case directly to furnishers, and furnishers are required to investigate them. The agencies also determined that "a debt collector does not violate the [FDCPA] by responding to a direct dispute via a communication whose sole purpose is to comply with the direct dispute rule by stating either the results of the investigation or the collector's belief that the communication is frivolous or irrelevant."
Matthew Carr, NACM staff writer
NACM Seeking Comments on "Red Flags" Ahead of Meeting With FTC Officials
NACM is meeting with officials from the FTC in just one week! Prior to this meeting, we're seeking comments from you, the member, regarding your experience with the agency's "Red Flags" Regulations. Your personal testimony will allow us to present the FTC with a clearer, more complete set of facts regarding how the regulatory burden will fall on B2B creditors while also laying the groundwork for any future guidance on the matter. If you have any specific comments or questions you'd like to share with FTC officials, be sure to send them via email to email@example.com by July 10, 2009!
While many economic indicators, including NACM's Credit Managers' Index (CMI), have suggested that the economy is on its way back to recovery, many participants in NACM's most recent monthly survey can't see the bottom of their business woes. In response to "NACM's most recent CMI indicates that the recession hit bottom in February and that the economy is starting to improve. Does your company's outlook correspond to the CMI's?," 48% of respondents answered "no" and 29% of respondents answered "yes." The remaining 23% said that they were "not sure."
"Based on current information, I feel the worst has passed, but we still have several months or quarters to go before consumer confidence starts to pick back up," said one respondent, who answered "no." "One key indicator is the housing industry, and in most regions there is still a very large surplus of homes to be sold. Until this surplus eases, we will continue to stay in a downturn." Others at odds with the CMI's slightly more optimistic look at the economy blamed the nature of their industry for their slow recovery. "Being in the construction industry, we tend to be late in the recovery," said one participant. "Being closely tied to home sales, we run a little later than most industries," said another. "We are hoping for a good June or July."
The current state of the American auto industry, with both Chrysler and General Motors in bankruptcy, also led some respondents to believe that the bottom of the downturn has yet to arrive. "The auto industry has not hit bottom yet," said one observer. "I believe with the bankruptcy of GM and others pending, we have yet to see the worst."
Those whose business seemed to be following the CMI's indications were obviously pleased with the progress, but still notably cautious. "We track our written sales on a weekly basis. Some weeks are better than others, but we are definitely seeing an increase," said one respondent. "Customers are beginning to tell us orders are picking up again, which is a good sign," said another participant. Other "yes" respondents noted that only certain aspects of their company's credit function were picking up. "We are in the health care business and, while we struggle in A/R, collections revenue seems to be doing well," said one respondent.
NACM's July Survey is now live on the website and deals with adjustments on invoices. To participate, visit www.nacm.org.
Jacob Barron, NACM staff writer
Invoice Adjustments: How Many Does Your Company Have?
NACM's July survey asks credit professionals how many of their invoices face adjustments due to disputes, deductions or other problems. Participants earn .1 roadmap points toward an NACM designation and have the chance to win a FREE teleconference registration! Answer now by clicking here!
The construction industry is in dire straits. Construction of new single-family homes is at a 16-year low while unemployment in the building sector has ballooned to 30% in some parts of the country. When the economy enters a tailspin, it is the construction sector on the frontlines, often taking the brunt of the trauma.
Construction credit is a unique realm, mired in a maze of deadlines, delays and documents. There are supply chains and tiers, priorities and legal avenues unique to the building and supply sector. Being a construction credit professional is a one-of-a-kind experience, particularly when problems arise. Unfortunately, credit managers—those individuals who deal with defaults and discrepancies—are generally left out of that all important, initial contracting stage, where headaches can be plotted around.
"Everything that we knew has been flipped around and turned upside down," said Greg Powelson, director, NACM's Mechanic's Lien and Bond Services (MLBS) division during the NACM-sponsored teleconference "Construction Credit: Credit's Role in Negotiating Fair Contracts." Powelson noted that it's bad enough that credit managers are talking about being 7-10% behind the previous year, but, when the industry starts to hear tales of declines as much as 25-40%, it's a sign things need to change. "It's really an important time to stop and look at your role in negotiating fair terms and conditions. You need to get involved, to get your fingers into anything that can move the business along," he said.
Powelson added, "It's time to negotiate for everything that you need to do your job. It's time to think about what you need to do your job better; what do you need to help collect money and then negotiate for those things."
Credit managers have to ask themselves if the collection of consistent job information, assistance in obtaining copies of bonds, securing fair and consistent quotes and purchase orders and similar elements will help them, and does credit need to be directly involved in negotiating terms and conditions of purchase orders. There must be an equilibrium between setting an optimistic but justifiable target to get the provisions that credit managers need to be able to function optimally. For example, typically with purchase orders, credit is not even involved. Purchase orders are signed and then returned to sales, where the sales department checks for material accuracy—is it the right quantity, is it priced correctly—and then they are filed into a drawer.
"I don't think there's ever going to be a time that you're going to have more leverage to get what you need than you do right now," stressed Powelson. He said that the construction industry is hamstrung by a lack of fair terms and conditions, but credit professionals can establish some proactive measures. "There are going to be two key documents that you are really going to have to look at and be involved with: credit applications and ultimately purchase orders and sub-contracts."
Credit applications are a great venue for managers to seek leverage. "You can be the driving force behind credit applications," said Powelson. "And they are really an amazing document because typically they are the first document to get signed. Establishing construction-oriented terms and conditions in a credit application is absolutely critical."
For the most part, sales isn't going to be plugged into what credit needs, but credit can provide sales with a useful tool by negotiating retainage upfront. It becomes a win-win situation by creating an environment that drives sales while clearing an item that will typically be on a company's books for months.
Most importantly, credit has to put their foot down and say that they will simply not accept inequitable terms and conditions.
Matthew Carr, NACM staff writer
MLBS Lien Navigator
Lien laws are continuing to evolve and change. Texas just adopted considerable changes that affect the minor lien notice errors or omissions and their relationship to the Fraudulent Lien Act. Colorado has passed legislation that affects two sections of the Colorado Revised Statutes and ultimately all lien waivers entered in the state as of July 1, 2009.
For construction credit professionals, tools like NACM's MLBS Lien Navigator—a credit professional's guide to notice, lien, payment bond and suit time requirements—gains prominences in this changing environment. MLBS Lien Navigator is already the leading source of information on when action needs to be taken to protect lien rights across the 50 states and D.C. and is updated as new regulations are passed and effect lien rights.
Members interested in learning more about the benefits of NACM's MLBS Lien Navigator and to try a free demo should click here.
Since the drop seen following the passage and implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), bankruptcy filing numbers have been on a steady recovery to pre-2005 levels. The most recent economic downturn has only compounded matters for both consumers and businesses, making bankruptcy petitions more common and still challenging for creditors of either.
Simultaneously, many observers have noted that the Chapter 11 process, in some major instances, has failed to give filers the tools they need to effectively reorganize and become profitable once again. This sentiment was expressed over and over again in a March hearing in the House Judiciary Committee's Subcommittee on Commercial and Administrative Law titled "Circuit City Unplugged: Why Did Chapter 11 Fail to Save 34,000 Jobs?" Many experts and legislators wondered what about the Chapter 11 filing procedure prevented a large company like Circuit City from falling into complete liquidation and sought proposals to combat any future instances of this kind of scenario. Some even suggested removing some portions of the BAPCPA that were the most favorable to commercial creditors.
While the merits of the Chapter 11 process are still debatable, an increase in bankruptcies and decrease in confidence in the bankruptcy process have 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.
Jacob Barron, NACM staff writer
Get the Best Business Reports Available
The collection of information about a potential customer enhances the quality of the credit granting decision. That same information also has strategic implications: it can strengthen a company's understanding of its customer base and lead to expanding that base. The credit department is, in effect, an information warehouse within any company.
Gathering the most predictive information about a customer beforehand in order to ensure that a company will get paid will reduce the risk of playing the guessing game. NACM Affiliates can provide you with the most up-to-the-minute information about your customers that's available in the business today—saving time and money and ensuring a completely sound and informed credit decision. NACM Affiliates are industry leaders in providing predictive data and credit reporting tools to companies that use credit information to compete in their marketplace.
NACM understands that business credit reports are the keystones that help credit professionals make sound credit decisions. NACM Affiliates can provide credit professionals with the most complete, objective and accurate reports available.
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"We bring to the membership what is happening in the economy today," said Jim McIntyre, CCE, McIntyre Enterprises, Ltd. McIntyre has been an instructor with NACM for 15 years and taught Business Credit Principles at this year's Credit Congress. "In my particular case, I bring them the basics of financial credit. We have to be absolutely prepared for whatever is going to happen in the economic environment. Our classes—be it from the CAP to the ACAP to the CCE—prepare the students."
He added, "In this environment, if we don't maintain our knowledge base, we're going to fall behind."
NACM's certificate sessions ran throughout the week, putting the students on the path to a designation. Business Credit Principles is a basic class, though an intense and comprehensive one, that looks at the credit function in detail and prepares students for the Credit Business Associate (CBA) exam. Topics range from the function of credit in the business world and in a company, to organizing the credit department, credit policy and procedures, as well as the legal environment of credit, legal forms and terms and conditions.
"I want the students to walk away with the knowledge of what they are doing," said McIntyre. "Why do they do something? Why do they look at a credit application?" He explained that he wants the individuals in his class to leave with a clear understanding of why they look at a credit file and practice due diligence; why they review financial statements, how to understand the statements and how to put the three pieces of financial statements together. The ultimate goal is to get credit managers to understand how to conduct investigations and how to determine the credit availability for each customer.
For those planning to earn their Credit Business Fellow (CBF) designation, the certificate session Financial Statement Analysis: Interpretation and Credit Risk Assessment is NACM's intermediate course. It focuses on understanding what is behind the numbers in financial reports by standardizing and organizing ratios. The session begins with a point of view based on return on equity (ROE), then breaks that into a return on asset segment and weighs the three most important aspects: margins, turnover and leverage.
"Students leave with the understanding that each one of those components is tied to a statement: margins are tied to the operating statement; turnover concentration is on the left side of the balance sheet; and on the right side, tied to leverage, is financing," explained instructor George Schnupp, CCE, Anixter, Inc. "They're able to take that away, standardize their job and get to a decision about a company's total operating performance quickly."
Going beyond the groundwork laid in Business Credit Principles, Financial Statement Analysis covers the process of financial reporting, analysis and interpretation of financial statements and the steps required to establish a quality credit line recommendation.
"The wonderful part about teaching around a tool like return on equity is that when the students leave here, they can immediately put it to play in their job," said Schnupp. "They will reorganize their ratios in that way so that the ratio sheet becomes the way that they write and talk or carry on a conversation with management. That has been a huge take away, and quite frankly, for every class we have taught, the bosses have come back and said, 'That's a wonderful tool; my people employed that.' We refer to that as ROE: return on education dollars."
Schnupp explained that from an instructor's perspective, interaction with students is very rewarding as everyone participating in the week-long course is exposed to diverse industries and viewpoints. "I get to see how they look at things," said Schnupp. "I then get the opportunity to ask them to change the way they look at things and use these tools in a way that is going to make them a better credit manager and make their company a better place to earn profits, because now they can at least look at risk reserves and sell, and realize that if they don't get paid, they're setting an inappropriate reserve that impacts their bottom line."
Matthew Carr, NACM staff writer
NACM Certificate Programs
For a comprehensive, quick way to earn your CBA or CBF designation, or prepare for the CCE exam, attend an NACM Certificate Session. Each session provides an intensive six-day program designed to fulfill education requirements for your professional designation. Sessions are held at NACM-National Headquarters in Columbia, MD.
For more details and a schedule of upcoming programs, click here.
A recent proposal by President Barack Obama would create a new regulatory reform agency, with jurisdiction over a broad array of consumer issues that could potentially back into the concerns of creditors who work with small businesses or sole proprietorships that rely on personal guarantees, personal bank accounts or personal credit reports.
The proposed Consumer Financial Protection Agency would govern the structure and sale of certain consumer products such as different types of bank accounts and would share credit-related services like debt collection and loan modification with the Federal Trade Commission (FTC). It would also oversee a number of other consumer loans including home, auto, credit card and nontraditional loans like payday loans and overdraft protection issues. "Too often, captive federal banking regulators have treated consumer protection as less important or even in conflict with their supposed primary mission to ensure the safety and soundness of financial institutions," said Ed Mierzwinski, consumer program director of U.S. Public Interest Research Groups (PIRG), a consumer advocacy organization. "The President's proposal would streamline and dramatically improve the current splintered, ineffective federal financial regulatory system because the new agency would be required to make consumer credit protection its top priority."
Specifically, the suggested new agency is part of Obama's sweeping plan for financial regulatory reforms, some of which have been applauded and others that some business organizations, such as the U.S. Chamber of Commerce, have opposed. "Our evaluation of the administration's plan is based upon its ability to solve three fundamental problems with our financial regulatory system: ineffective regulation, regulators that are not well coordinated and regulatory gaps that missed significant problems that occurred in our markets," said David Hirschmann, president and CEO of the Chamber's Center for Capital Markets. "While the Administration has made several positive recommendations, we're concerned that overall, the proposal simply adds to the layering of the system without addressing the underlying and fundamental problems. We can't simply insert new regulatory agencies and hope that we've covered our bases." The U.S. Chamber noted that it believed a stand-alone consumer protection agency would "cannibalize regulatory expertise and add yet another regulatory layer" to something that it believes is already too complex.
Stay tuned to NACM's eNews and NACM's Advocacy webpage for details.
Jacob Barron, NACM staff writer
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The recovery from the recession of 2008-2009 continues to be a controversial topic as there are arguments asserting that the economy really has touched bottom and is on the road to rebound, just as there are arguments that assert that the economy has been severely damaged by the downturn and is not yet ready for recovery. The latest Credit Managers' Index (CMI) tends to favor the first interpretation although the data is not without some warning signs. "The latest CMI is holding steady and showing stability in the credit sector. The data has not yet been enough to push past the point of contraction to expansion, but it is getting ever closer to that point, suggesting that expansion is only a month or two away," said Dr. Chris Kuehl, NACM's economic analyst.
The latest CMI combined index rose from 45.4 to 46.6, over a one point gain. This is still short of the 50 line that separates contraction from expansion, but it is drifting ever closer. The data reinforces the sense that has been dominating most economic analysis for the past few months. "The discussion started to shift from how much worse the economy would become to how fast it would recover," said Kuehl. "The balance now is delicate, as growth that is too sharp will result in a serious inflation jump, while growth that is too slow will keep the economy in the doldrums too long. The fact that the CMI has been stable for the last three months is a good sign as far as inflation threats are concerned. If there were an imminent danger of too much liquidity, it would be reflected in a sharp rise in the index. This has not manifested itself thus far."
The growth areas are showing some truly positive signs. The biggest gains came from the favorable factors. Sales and new credit applications are both up dramatically, there has been a significant increase in credit granted and dollar collections are up. In unfavorable factors, there were fewer bankruptcies and fewer disputes. These are all signs of business returning to some semblance of normal activity. The businesses that have survived the recession are looking to return to this normalcy and are paying their bills, buying product and gaining access to capital again.
Now, the primary questions are whether this trend accelerates and what will be the source of the threats. The most serious concern now is with state governments. Sharp drops in revenue have thrust most states into budget crises and they have reacted with program cuts. These programs and projects provide a great deal of private business expansion and there will be a reaction to their decline. Some of this is showing up among survey respondents who have noted that governments are becoming less reliable in paying their bills. This is perhaps the most significant shoe to fall in recent months and solving the problem will take longer than dealing with private sector issues.
To view the full CMI report for June and to sign up to receive monthly email reminders to take part in the survey, please click here.
Read more about what Kuehl has to say in the Credit Congress coverage coming up in the July/August issue of Business Credit! To subscribe, click here.
To view past eNews issues or visit the NACM Archives, click here.