November 3, 2009
Just when it seemed like enforcement was inevitable, the U.S. Federal Trade Commission (FTC) delayed the imposition of its "Red Flags" Rules yet again, this time until June 1, 2010. According to a release, the Rules were delayed at the behest of Congress. Recently, the Rules were dealt a series of blows, most notably with a bill passing the House of Representatives exempting health care, accounting and law firms, along with a broadly-defined sector of other businesses, and a federal judge ruling that the FTC could not force the regulations to apply to lawyers. The aforementioned bill is currently awaiting action in the Senate.
The regulations—covered extensively by NACM in the March and May issues of Business Credit magazine and several eNews articles, as well as multiple joint teleconferences with FTC officials—are essentially a fraud prevention program and require most creditors, both business and consumer, to create their own plan to detect and mitigate identity theft. Attendees looking for what was then a last-minute tutorial on how best to comply, and whether or not they needed to comply, tuned in on October 26 to hear Bruce Nathan, Esq. and Wanda Borges, Esq. in the most recent NACM-sponsored teleconference, "'Red Flags' Rules and Guidelines Simplified."
"The FTC is saying we're not just talking about consumers, we are dealing with small businesses," said Borges, who noted that her own business had recently been a victim of identity theft. "About two months ago, a bill hit my desk because my assistant didn't know what it was. It was a $120 bill for a corporation being set up in Tennessee. The whole transaction was done via the Internet and was ordered by the law firm of Borges & Donovan LLC, which used to be our name. Someone placed an order for books and records and the company never questioned it and then sent the bill to our proper address."
"We didn't pay it," she said, "but that's a form of small business identity theft."
The FTC regulations have frequently been confused with data security measures and other pieces of legislation that govern how businesses handle their customers' identifiable information. Borges noted, however, that the "Red Flags" Rules are separate from these pieces of legislation. "They pick up where data security left off," she said. "Some of you are large, publicly-traded organizations and you have so many aspects of data security pertaining to Sarbanes-Oxley (SOX), some of you adhere to the rules Gramm-Leach Bliley, and some under the Fair Credit Reporting Act. The FTC is going to pick up where those other laws left off."
In their presentation, Borges and Nathan noted that the definition of what constitutes a "creditor" under the "Red Flags" Rules is extremely broad, and the vagueness of the regulations continues even after a company has established that it is a creditor. "Once you've concluded that you are an eligible party, you then have to determine whether you have covered accounts," said Nathan. "You've got to look at both your existing accounts and any new ones." Nathan went on to discuss the two types of covered accounts. "The first is a consumer account which is an account that's used for primarily household purposes," he said. "You're more likely to be involved in the second, which is essentially a catch-all, for which there is a reasonably foreseeable risk from identity theft."
As the FTC and NACM have stressed in their publications, the Rules do not permit companies to make a plan and ignore it; rather, they require a more dynamic approach that changes with time and experience. "This is not a static process," said Nathan. "Things do change and the analysis as to whether you have a covered account is an analysis that has to be done periodically."
Nathan and Borges also discussed the concept of a "reasonably foreseeable risk" from identity theft and the importance of conducting risk assessments on old and new accounts to see whether a creditor is required to comply.
For more information on the "Red Flags" Rules, please refer to the aforementioned March and May issues of Business Credit magazine. Additionally, a template "Red Flags" policy, in MS Word format, can be found in NACM's online Resource Library.
Jacob Barron, NACM staff writer
The Balanced Scorecard Meets the Credit Department
One of the hardest things for some companies' upper management to understand is a credit department's real effect on their business. Especially in a belt-tightening environment, a company's top brass will only be interested in the numbers and the effect on the bottom line, which means metrics and measurements should be paramount for credit departments looking to maintain or increase management buy-in. To learn more about how to strategically plan and measure your department's direct impact on your company's finances, join Susan Delloiacono, CCE, a credit professional with nearly three decades of experience, for her latest NACM-sponsored teleconference, "The Balanced Scorecard Meets the Credit Department."
Delloiacono will present the four parts of a balanced scorecard (financial, innovation, customer and internal) and help attendees develop strategies and measures that will drive common goals and performance metrics.
To learn more about this teleconference, or to register, click here.
California is often considered at the forefront of many aspects in American life. Cultural icons call the state home and trends born in Hollywood are quickly reproduced in pricey boutiques along Rodeo Drive. Even laws in the state often set the pace for changes that eventually sweep throughout the rest of the nation. However, California's mechanic's lien laws, first enacted in 1850, have been slow to modernize; even today they contain language that dates back to 1872.
As the state grows and evolves, these outdated statutes become roadblocks and increasingly more difficult to use in a rapidly developing landscape. The obstacles have ignited litigation over conflicting and confusing provisions and, many times, have left unprepared and uneducated parties vulnerable, unsure and unaware of either their rights or responsibilities.
As California's real estate market crumbled and collapsed this past year, legislators rushed to fix and amend throwback laws and the mechanic's lien statutes were targeted for tweaks and much-needed modernization. Two years ago, California State Senator Alan Lowenthal began campaigning to update the state's lien laws. Now, two of his sought-after changes to amend the lien law process—recently signed into law as Assembly Bill 457 by Governor Arnold Schwarzenegger—go into effect on January 1, 2011.
Currently in California, after filing a lien, the claimant has the option to record a notice of lis pendens—basically a public note of the lien. As of January 1, 2011, the state will make this action mandatory within 20 days of filing. "The owner is going to understand more quickly that an encumbrance has been filed and hopefully will be able to react to it before foreclosure," said Greg Powelson, director, NACM Mechanic's Lien and Bond Services (MLBS). "Most states require, once a lien is filed, that within 'x' amount of days, a copy of that lien must be sent to the owner. It kind of functions as a courtesy. The idea is that the sooner the owner is notified a lien has been filed, the quicker he'll be able to resolve the situation. So the public notification requirement in California, in my opinion, brings the statute up to par with what many of the other states already require."
The second new requirement expands the definition of "mechanic's lien" to include a Notice of Mechanic's Lien. This notice will contain specific information regarding the legal effect of the lien. Under the recently passed law, the mechanic's lien and the Notice of Mechanic's Lien are required to be served upon the owner or the reputed owner of a property and the lien claimant is also required to complete and sign a proof of service affidavit to be included as part of the mechanic's lien. This is an important factor to be made aware of because, after January 1, 2011, failure to serve the mechanic's lien, including the Notice of Mechanic's Lien, will cause the mechanic's lien to be unenforceable.
It's imperative that these two changes to the mechanic's lien process in California are recognized by contractors, subcontractors and construction-oriented credit professionals working in the state. The new regulations are also indicative of the constant stream of changes taking place in lien laws from coast to coast. "Setting California aside, there are a lot of states that are going through changes, and having current information is always critical," said Powelson. "This is just one example of the nuance in changes that really happen all the time. So, make sure that you're using current information. That's why we created our Lien Navigator, so folks would have the current information in front of them."
"As soon as any new requirements are signed into law, we make sure our clients are up to speed, regardless if they are using us to file their liens and bonds," said Powelson. "As it relates to California specifically, the additional steps of notification will now be required. You need to comply if you want your lien to be effective."
Matthew Carr, NACM staff writer
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At the SBA, everything seems to be getting bigger and bigger.
Just a week after hearing and endorsing proposals from President Barack Obama to increase loan sizes, the U.S. Small Business Administration (SBA) proposed increases to the size definitions in three broad commercial sectors. These three sectors can be broken down into 71 different types of businesses, two-thirds of which are in retail trade sectors, with the remainder in accommodations, food and other services.
"The SBA has undertaken a comprehensive review of our size standards to ensure they are current and reflect changes in the economy and the marketplace," said SBA Administrator Karen Mills. "This review and proposed changes will help make these critical programs available to more small businesses and ensure the SBA is in a position to be a real partner in helping our nation's entrepreneurs and small business owners succeed."
In a release, SBA acknowledged that changes in industry structure, market conditions and business models have left the size standards for several different sectors inaccurate or outdated. This proposal is the first part of the agency's initiative to review all existing industry size standards to ensure they align with economic realities. The newly-proposed rules are also available for public comment, as is the SBA's methodology by which they evaluate and arrive at their size standards.
"The proposed increase in size standards for these various small businesses will undoubtedly help thousands of companies utilize the full range of the SBA's critical lending, contracting and counseling programs," said Senator Olympia Snowe (R-ME), ranking member on the Senate Committee on Small Business and Entrepreneurship. "The issue of outdated size standards has been discussed at recent committee roundtables and I am pleased that the SBA has been actively listening to stakeholders, experts and policymakers to tackle this difficult issue."
Prior to this most recent review, the last time the SBA's size standards were revised was more than 25 years ago, leading many to note that this is long overdue. "Given that some size standards have not been reviewed in over two decades, it is high time the federal government's definitions match the reality facing small businesses that are struggling to compete and survive," Snowe added.
Public comments on the proposal and on the SBA's standard-setting methodology can be submitted through December 21, 2009 at www.regulations.gov.
Jacob Barron, NACM staff writer
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NACM wants to know what you think about its flagship publication, Business Credit magazine. Which portion or topics in the magazine do you find most valuable? Let us know by participating in this month's online survey! Participants automatically receive .1 CEUs and are entered into a drawing to win a FREE teleconference registration!
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Stephen Peer idolized the French performer Jean Francois Gravelet-Blondin—simply known around the world as "The Great Blondin." Blondin was an acrobat and tightrope walker. His feats made him a celebrity in the United States as well as in Europe. The young Peer was inspired to follow in Blondin's footsteps and, at the defiant age of 19, decided he would pursue fame as a tightrope walker.
As Blondin had done multiple times as part of a variety of acts, Peer also took to crossing the splendor of Niagara Falls on a tightrope. He had accomplished the feat several times, and on June 22, 1887, Peer tightrope walked from one side of the falls and back again. Three days later, confident in his abilities, palling around with friends, Peer attempted the tightrope walk again, only to plunge to his death.
It's a tragic example of how an individual can take the most harrowing of feats and falsely categorize them as mundane and safe. That sense of invulnerability and a momentary lapse in judgment oftentimes results in tragedy.
It's also a testament to having a viable out when a situation goes awry.
For Peer, a parachute, tether or safety net would likely have been the only remedies to avoid disaster. Thankfully for businesses, there are some safety measures already built in.
Every day in the commercial world, millions of dollars in trade is conducted and often the safety net is simply a signature: a promissory note to repay that doesn't offer 100% assurance. Unfortunately, with corporate bankruptcies continuing to plod upward, it has become increasingly necessary for commercial trade creditors to become knowledgeable of the routes available to them—the parachutes they can deploy—to avoid losses in case of a customer's tumble into insolvency. They need to be aware of contract outs and reclamation rights as well as stoppage of delivery rights and their results.
There are few documents more important to recovery than the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). It has had a profound impact on creditor's rights and has established some of the most significant instruments available to trade creditors.
"Reclamation rights are becoming less and less effective, but still should be pursued," admitted Bruce Nathan, Esq., partner, Bankruptcy, Financial Reorganization and Creditors' Rights Group at Lowenstein Sandler PC. "The 503(b)(9) 20-day goods priority has probably been the best remedy you have in bankruptcy as a trade creditor trying to obtain collection of your claim."
During the NACM-sponsored teleconference, "A Seller's 20-Day Goods Administrative Priority Claim, Reclamation and Other Collection Remedies: The Silver Lining," Nathan described in detail the opportunities for enhanced recovery that sellers of goods have available to them under BAPCPA and the Uniform Commercial Code (UCC).
One of the first options Nathan discussed was UCC Section 2-609, which covers adequate assurance demand. At the end of 2008, auto industry suppliers panicked because of the overall weakness of the United States' big three auto manufacturers. A collapse and a string of bankruptcies seemed inevitable, especially as chief executives testified before Congress admitting their companies were quickly running out of cash, and a government bailout was imperative.
Nathan had a client who was a supplier to Chrysler. "They had a purchase order that required them to continue to deliver goods to Chrysler on credit terms that were 60 days," said Nathan. "We didn't have a contract with a lot of provisions that would give us the basis to switch terms to cash in advance, except for anything short of default. And Chrysler was not in default with my client."
Since Chrysler was current on their payment obligations, there was no basis for stoppage of delivery. Nonetheless, the market rumors and statements from Chrysler executives that the company was on the verge of bankruptcy provided an available remedy under the UCC.
"The UCC gives a trade creditor that sells goods, if they have reasonable grounds to believe that the debtor is not going to be able to perform on their contract, the right to send a demand for adequate assurance," said Nathan. "The selling party can essentially suspend performance, at least in the case of sale of goods. They can say, 'We're suspending the terms and changing to cash terms.' Effectively, if there is no adequate assurance provided by the buyer that they can perform on their obligations, the seller can even treat the contract as repudiated."
These are the grounds that the UCC provides sellers in case contracts don't provide these terms. Nathan and his client sent the assurance demand letter to Chrysler, which resulted in almost immediate results. "The nice thing about the adequate assurance demand is that it allowed us to put something in front of Chrysler and allowed us to sit down with them and renegotiate our terms," said Nathan. "Originally, before we filed, we were on 60-day terms. We ended up renegotiating our terms to 15 days."
Nathan further discussed state law reclamation and delved into stoppage of delivery rights and how exercising those rights might actually result in expedited payment on claims. He explained how creditors have asserted this priority claim to take advantage of their expanded rights to significantly enhance their recoveries.
NACM members that missed Nathan's presentation can contact Tracey Flaesch at 410-740-5560 or firstname.lastname@example.org to hear a replay of the presentation.
Matthew Carr, NACM staff writer
Article 9 of the UCC: Securing Equipment, Inventory and Receivables
With the economic struggles the country is facing, there is more value placed on secured transactions. It is even more imperative to be knowledgeable of provisions under the Uniform Commercial Code (UCC) and the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Lenders and trade creditors can take a security interest on collateral owned by a debtor, while the law provides creditors with an opportunity to establish enhanced legal relief in case of default or bankruptcy. In all 50 states, Article 9 of the UCC governs secured transactions where security interests are taken on personal property. Greg Powelson, director, NACM's Mechanic's Lien and Bond Services (MLBS), will educate members about the power of this Article during the "Article 9 of the UCC: Securing Equipment, Inventory and Receivables" teleconference on November 9th. Powelson will show how credit managers can make a marginal account secure by integrating security agreements into their finance and credit policies.
Members interested in learning more about Article 9 of the UCC can register here.
A piece of legislation proposed in China could potentially have negative effects on trade creditors doing business in the region by restricting access to credit information.
The Chinese Legislative Affairs Office of the State Council recently issued a consultation paper outlining the legislation which, if enacted, would impose a minimum capital requirement of 50 million renminbi (RMN) on all credit information companies operating in the country. Companies that cannot meet this threshold would be forced out of business. Additionally, the legislation would require consent from a business before collecting information about them, as well as consent from the company subject to an inquiry before any information about them is shared with the inquiring company.
According to a report from the Business Information Industry Association (BIIA), the unintended consequences of this legislation could make doing business in China even more difficult and lead many companies to take their business elsewhere due to an unpalatable increase in risk. "In the desire to bring some order into the Chinese credit information infrastructure, regulators are trying to impose regulations that can potentially be detrimental to the economy," said BIIA. "Credit and information experts are of the opinion that the requirements will limit information availability and hinder the development of trade credit, increasing the risk of trading between companies, with potentially negative consequences for the Chinese economy."
Furthermore, the legislation would require disclosure of the source and recipient of information, making the relationships between buyers and sellers of information, as well as relationships with sources, transparent. Criminal sanctions would also be imposed on violators and could potentially lead many credit information firms to leave the market.
"Commercial credit information performs a critical function in the process of granting and monitoring trade credit," said the BIIA report. "In essence, trade credit and credit information are intertwined, which means that if there is no information, there will be no trade credit granted."
Jacob Barron, NACM staff writer
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Have you recently been honored with an industry award, gotten recognized for your community service or for improving company processes, or promoted within the credit department?
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The real estate sector was a boon for lenders in the tender years of the new millennium. Banks and investors were dumping billions of dollars into large scale projects and enjoying significant returns. Then the real estate market collapsed. The devastation caused a worldwide economic downturn and plunged the United States and Europe into the throes of recession.
The snapback of a rocked financial and real estate sector has been a clamp down on lending and a stall on new development. A more serious problem on the horizon is the maturity of loans doled out during those years when the market was hopping, which, now, as the financial climate in the country has cooled, are expected to lead to a massive series of defaults.
"The construction loan side is one of those things where nobody really has a good handle on the details and the pain and implications of it," said Mike Kelly, president and co-founder, Caldera Asset Management. "Based upon the values on which the loans were given—where the prices and where the world was two to three years ago—all these loans are coming up on their maturity periods without any home."
Most construction loans have a 3-year term with two one-year built-in extensions. Loans that originated in 2005 have already expired and the developers are currently staying afloat by the extensions. And with each passing month, the number of those loans extensions increases.
"When most people were building, they were trending rents, which has not occurred. Rents have actually gone down and underwriting standards have gone up," explained Kelly. Added to the situation is that permanent loan holders, like commercial mortgage-backed securities (CMBS), have been wiped out, leaving few venues for this debt to go or few parties that want to take a risk holding such debt.
"You're going to have a lot of maturity defaults to start coming in the next six months on for the next 2-3 years as all these deals mature," Kelly said. "They've already had their one extension or two. But this time it's not going to help them."
According to Caldera, hard hit sectors, like apartment construction lenders, are facing losses of $22 billion as asset values have tumbled downward 25% during the last couple years. That loss amount represents 17% of total loan balances. Because of the real estate market bubble burst, investors who anted up the 10% equity during the 2005 boom have already lost that investment. Apartment construction loans from 2005 to 2008 totaled roughly $137 billion. Equity represented approximately 10% of that sum, around $12.5 billion, while construction debt accounted for another $125 billion outstanding. That original equity has been evaporated as the total value of those projects has fallen to $103 billion this year.
Furthermore, Kelly believes that the days of that 80-90% loan-to-value (LTV) ratio that was available in 2005 are gone for the foreseeable future. Lenders today want to have a lot less exposure, with around 65% LTV. That means if the original developers wanted to refinance those completed apartment assets, they would need to come up with $36 billion in new equity.
The current economic situations forces banks into a difficult position. New loans aren't problematic—conditions now are very optimal for lending. It's that the payments on existing loans have slowed considerably and are not being repaid at the rate the banks had originally anticipated. This creates a clog where, even though conditions are ripe for banks to fund new projects, the exposure they already have on their books and the loans they are waiting to receive payment on won't let them supply more capacity to the marketplace.
"Apartments were the belle of the ball on the investment side," said Kelly of the boon years between 2005 and 2008. "But those days are gone. If the money is not being recycled through, the bank isn't going to add to its exposure in an asset class where there is a lot of uncertainty."
Now, the near-term future for the construction market is going to be smaller deals in "bulletproof" markets like Washington, D.C. The days of a $100 million project backed by a single lender are done. But for developers, another tough obstacle to overcome is that banks that lent heavily to the construction sector, like Washington Mutual, are also gone.
"You had a lot of these guys that were aggressive who aren't there anymore," explained Kelly. "Now, banks don't want to put that much exposure into the sector or with an individual developer or with an individual project. That means you're going to have a lot more equity and the deals are going to get tighter and tighter and tighter because your equity wants a higher return."
Even though Kelly believes there is plenty of money on the sidelines waiting to be put into play, he doesn't think there's enough upside right now for anybody to leap into the game. "The pain can sort of be mitigated. However, nobody has a lot of real incentive to jump in front of the train. Not from the lenders' standpoint, from the FDIC's standpoint, from the borrowers' standpoint or the buyers' standpoint," Kelly said. "What that is going to do is kill new development going forward because there's not going to be any capacity. So, the developers are going to start taking hits and laying people off and it's just going to be a vicious cycle."
Matthew Carr, NACM staff writer
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Is the recession truly over? Most of the evidence says "yes," although there will be problems to contend with for the next few months. In many ways, the best way to characterize the situation is to say that the beatings on the economy have stopped, but that every bone has been broken. The recovery started slowly in the last few months and will continue to progress slowly and not without some reversals from time to time, but news from the last few days of October was especially solid with the third quarter GDP numbers stronger than anticipated—3.5% growth after four quarters in the negative category. Even more significant from the perspective of credit availability is that the Credit Managers' Index (CMI) broke past the 50 neutral barrier for the first time in over a year. The index started in that direction in September when the service side of the equation improved to 50.1, but manufacturing still lagged, finishing at 49.6. Now both sectors are showing expansion and the CMI as a whole is pointing toward growth.
The significance of these findings is hard to overestimate given the kind of analysis taking place around the improved GDP numbers. The dominant theme is that four factors were at work with third quarter GDP: the impact of the stimulus package, the "Cash for Clunkers" program, the $8,000 new home-buyer credit and the Fed keeping interest rates low. These are all important factors, but are not the only ones at work—the CMI data makes this pretty clear. The private sector is also engaging in this economic comeback with the CMI tracking this activity in both the service and manufacturing sectors.
This month, progress was made in both the positive and negative indicators in contrast to the numbers in September where the majority of the progress was in the negative indicators. NACM's Economic Analyst Dr. Chris Kuehl said that there were two streams of good news, "Not only has there been some expansion in terms of credit availability, but there continues to be evidence that companies are catching up on their debt. Over the last few weeks, I have spoken at several NACM events and have heard similar stories at each. Companies that had been behind in their obligations are catching up in anticipation of further growth and the need to ask for more credit in the future. By the same token, comments by attendees suggest that there is more money starting to filter into the system, making credit more accessible than it has been in some time."
The CMI data show a significant improvement in dollar collections and that the amount of credit extended is higher than it has been in well over a year. There were also far fewer accounts placed for collection and fewer applications rejected. This latter point is important to note as one would expect more rejections in a much more restrictive credit environment. This means that many of the applicants are more creditworthy than they have been in past months.
To view past eNews issues or to visit the NACM Archives, click here.