December 15, 2009
The House of Representatives recently approved sweeping financial legislation that would exempt small businesses from having to comply with a controversial portion of the Sarbanes-Oxley Act (SOX), in addition to addressing a strikingly broad array of financial regulatory issues.
H.R. 4173, dubbed the Wall Street Reform and Consumer Protection Act of 2009, passed strictly along party lines by 223-202, with no Republicans voting for the bill and 27 Democrats voting against it. The bill's most controversial provisions create a new agency, the Consumer Financial Protection Agency (CFPA), that will regulate consumer bank transactions. The legislation also increases oversight on the nation's largest banks, including imposing stricter capital requirements, and authorizes the government to dismantle firms that present a larger systemic risk to the nation's economy, combating the existence of firms that are "too big to fail."
Tucked in the legislation was language that exempts small businesses from compliance with SOX Section 404. The amendment faced a late challenge by prominent Democrats, but was ultimately included in the final version of the approved legislation.
Earlier this year, the U.S. Securities and Exchange Commission (SEC) said that firms with a market capitalization below $75 million would have to comply with Section 404's auditor attestation requirement starting in June 2010. Specifically, SOX 404 requires an independent third party audit of a company's internal controls over financial reporting and already applies to firms larger than $75 million.
The amendment was originally introduced by New Jersey representatives Scott Garrett (R) and John Adler (D). Other provisions in the bill address oversight in the nation's derivatives market and increase transparency in the credit rating industry.
The bill now heads to the Senate where action isn't expected until after the New Year.
Jacob Barron, NACM staff writer
The 2010 NACM-National Honors & Awards Program
Do you know someone who...
» inspires, challenges and teaches you?
» sets a standard for excellence and integrity?
» deserves recognition for exceptional contributions and commitment?
Nominations are being accepted in the following categories:
* National Credit Executive
* CBA, CBF and CCE Designation of Excellence Awards
* Mentor of the Year
* Student and Instructor of the Year Awards
The nominations deadline is January 8, 2010. Visit NACM's Honors & Awards web page for details on nominating a remarkable credit professional for a national award.
While many companies are facing a shortage of demand for their products and services, their workers are simultaneously being asked for higher performance from their superiors.
Customers may be absent and payment may be harder to collect than ever before, but companies still continue to ask much of their salespeople and credit professionals. And more than just trying to maintain, many employees are working to improve their company and their department's performance, even as they face one of history's toughest business environments. "What we're saying is ‘how can we in the credit department improve the quality of the accounts receivable (A/R)?'" asked Scott Blakeley, Esq. of Blakeley & Blakeley LLP. "Their responsibility in this recession is to find a way to improve the quality or collectability of their A/R on the one hand, yet on the other hand they have customers pushing invoices past what the credit professional originally evaluated."
"We find then that the role of the credit professional instead is a relationship builder at the highest level," he added.
As customer payment has become ever more elusive and infrequent due to tightened credit nationwide, delinquencies have kept pace and creditors have struggled to grasp to keep the customers they have, let alone find new ones. "We don't have the customer base that we did two years ago where we could hold the order and call on other companies," said Blakeley. Maintaining a relationship with customers who have failed to live up to their expectations can be a difficult process however, and Blakeley, in the recent NACM teleconference "Getting Paid on Your Delinquent Account," illuminated the many in-court and out-of-court options available to creditors and debtors looking to work out payment and keep their trade relationship intact.
The first step for creditors is to determine whether or not their account is actually delinquent. The simplest way to do this is to look at the original invoice. "The easiest measure is the terms that we established at the evaluation stage," said Blakeley. However, a less quantitative measure can often more firmly establish a customer as delinquent or not. "Where the rub can be is the customer's efforts to extend out those terms through excuses," he added.
Once an account is considered delinquent, many creditors can wind up with legal exposure if they become too accommodating of the customer's new, later payment schedule. "We need to be mindful that accommodating that customer's cash flow may result in a dispute with the customer on course of dealings," said Blakeley. "If we're committed to 45-day terms but routinely accept payment outside of those, the customer may say that course of dealings controls the sale." Under the Uniform Commercial Code (UCC), a debtor can cite "course of dealings" as a reason to keep from paying a creditor what's technically owed.
Blakeley also discussed a number of other pitfalls for creditors to avoid, as well as different ways to ensure a customer's payment before things wind up heading south.
Jacob Barron, NACM staff writer
Protecting Trade Creditors From Customer Bankruptcy
Join one of NACM's most popular speakers, Bruce Nathan, Esq., on December 16th at 3:00pm EST for his upcoming teleconference, "Protecting Trade Creditors From Customer Bankruptcy Risk: No Need to Cry the Blues!"
Every credit executive dreads a financially distressed customer and the risk of its bankruptcy filing, but with this session, they'll be fully-versed in the tools they can use to enhance the likelihood of getting their claims paid. Hear about various credit enhancement devices, including letters of credit, consignments, guarantees and legal remedies, that increase your chances of getting paid when a customer goes under.
Additionally, Nathan will discuss credit insurance, puts and other security devices as well as state lien laws and state/federal trust fund rights that trade creditors in certain favored industries can assert to further enhance collection rights, should time permit.
To learn more about this teleconference, or to register, click here.
The U.S. Small Business Administration (SBA) is learning a lesson in sound credit management in the wake of a Government Accountability Office (GAO) report that illuminated the agency's inadequate lender oversight.
The lenders can be viewed as the SBA's customers; they receive guaranteed loan portfolios, which basically amount to money they can distribute in the form of loans to small businesses. While the report noted that the administration had made improvements to its lender oversight, the GAO's research showed that the SBA hadn't been following common industry standards when it came to validating its Loan and Lender Monitoring System (L/LMS). The SBA relies on the system to judge the health of the lenders, but without regular validation, the system is consistently behind economic and industry changes, making it a far more ineffective judge of lender creditworthiness.
Although the agency uses the system to focus their off-site monitoring of lenders, it does not use it to target risky lenders for on-site reviews or to determine the scope of those reviews, unlike fellow regulators like the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Banks. "SBA uses its risk rating system to monitor lenders and portfolio trends, but does not rely on it to target the riskiest 7(a) and 504 lenders for on-site review," said the report. The 7(a) and 504 programs that it refers to are the agency's two largest small business loan programs.
"Instead, SBA focuses on what it thinks is the most important risk indicator—portfolio size—and targets for review those lenders with the largest SBA—guaranteed loan portfolios—that is, 7(a) lenders with at least $10 million in their guaranteed loan portfolio and 504 lenders with balances of at least $30 million," said the GAO. "Of the 477 reviews SBA conducted from 2005 through 2008, 380 (80%) were of large lenders that, based on its lender risk rating system, posed limited risk to SBA. The remaining 97 reviews (20%) were of lenders that posed significant risk to the agency."
As a result of the SBA's decision to rely on portfolio size, rather than risk, 97% of established high-risk lenders did not receive on-site reviews, putting a great deal of the SBA's potential credit at risk. Furthermore, the reviews conducted were not scaled according to potential risk, nor did they even include an assessment of the lenders' credit decisions.
"Just as it is important to ensure small businesses have access to capital, we must ensure that lender oversight promotes proper underwriting, establishes effective standards and safeguards for SBA loans while maintaining reasonable and proportional fees assessed to the lenders for this oversight," said Senator Mary Landrieu (D-LA), chair of the Senate Committee on Small Business and Entrepreneurship. "Ultimately, robust oversight of the SBA loan programs will enhance the ability of the SBA to complete their mission of supporting our nation's small businesses."
Landrieu, along with committee ranking member Olympia Snowe (R-ME), originally asked the GAO to conduct the report in June 2008, following an Inspector General's report that revealed the SBA's oversight of merely four lenders had created a loss of $329 million for the agency's 7(a) loan program. Snowe noted that she would re-introduce legislation, cosponsored by Landrieu, aimed at improving SBA lender oversight.
A full copy of the GAO's report can be found here.
Jacob Barron, NACM staff writer
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• Membership available to all credit professionals who are members of NACM or CRF; direct membership available in areas with no CFDD chapter
The Motors Liquidation Company (MLC), formerly known as General Motors Corporation (GM), recently began objecting to thousands upon thousands of creditors' claims, fighting nearly $7 billion worth of secured, administrative, priority and unsecured debt in five separate omnibus claims objections.
Slightly less than half of the claims to which MLC is objecting, according to dollar value, belong to unsecured creditors.
The objections stem from administrative issues surrounding the originally filed proofs of claim. Four of the five omnibus objections contend that a portion of the claims received by MLC either are out of date, having been amended or superseded by proofs of claim filed more recently, or are mere facsimiles of claims for which MLC has already accounted.
The fifth omnibus objection covered $218 million in claims, $17 million of them unsecured, and MLC objected to them on the basis that they were filed improperly and lacked "sufficient documentation to ascertain the nature or validity of the claim."
In the objections relating to superseded and duplicate proofs of claim, MLC noted that it was not objecting to the later-filed, accurate versions of the proofs of claim nor was it objecting to the earlier versions of the proofs of claim that the company believes it received twice. However, MLC reserved the right to object to these claims in the future, leaving the door open for a number of other battles for several other GM creditors.
A hearing on the omnibus claims will be held in January.
Jacob Barron, NACM staff writer
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While the causes of the global credit crisis have been pinpointed and stimulus actions taken by countries all over the world, credit, lending and especially trade finance have remained tight. Banks and insurers are still leery of financing business transactions, both domestically and internationally, and those that have the taste for it often require onerous fees to stem their potential exposure.
"Banks are requiring collateral now, the fees are much higher, especially if you're not rated or noninvestment grade," said David Gustin, managing partner at Global Business Intelligence Corp. Gustin recently led an FCIB teleconference, titled "Trade Finance in Crisis," in which he illuminated the current state of the global financing market for a rapt group of attendees who hailed from 12 different countries around the globe.
In addition to tightened credit policies, Gustin noted that regulation had taken its toll on the banking sector and its willingness to lend. "Banks are not lending because of Basel II capital issues and because they've tightened their credit policies," he noted. "Basel II sucks out what capital is available to support trade and creates a capacity issue." The Basel II regulations dictate how much capital banks need to set aside to protect from various types of risk. Money kept for this purpose is geared toward safeguarding the institution from insolvency, and meeting the Basel II requirements means banks have to use their capital for compliance rather than for lending.
The outlook for the future of trade finance is relatively brighter, but the details of the current situation don't necessarily show any major form of relief coming in the near-term. "While the outlook for the credit markets is showing some improvement, credit availability remains tight," said Gustin. "Companies have borrowed more from the bond market than from the banks and the focus has been to lock in cheap long-term funding." In addition to increased reliance on bonds, underwriting standards at banks have also risen across the board, and banks have found that they have very little incentive to lend.
Creditors tired with the world's thrifty banks have turned both to the bond market and to the insurance market, which is also facing major constraints. Gustin noted that insurers' underwriting capacity for trade credit and political risk has been significantly limited, with a loss ratio exceeding 100% for multi-buyer insurance policies and 200% for the single risk structured trade credit market. Rate increases have also bedeviled policies with poor loss ratios, as Gustin noted that struggling policyholders could see their rates triple should their provider deem it necessary.
For more from David Gustin, look for his article in the January 2010 issue of Business Credit magazine. For more on FCIB and their educational programs, visit their website at www.fcibglobal.com.
Jacob Barron, NACM staff writer
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Click here to learn more about NACM's Credit Reports.
Both chambers of Congress have recently tackled issues surrounding the nation's research and development (R&D) tax credit in order to more effectively leverage the measure to boost economic growth and spur innovation.
As part of a broad package of tax measures dubbed the Tax Extenders Act of 2009, the House recently voted to extend the R&D tax credit and several other business tax breaks through the New Year. Action on the bill was considered critical, as many incentives would've expired without congressional intervention. "The tax relief provided in today's bill is essential to stimulating job creation and supporting the needs of struggling American families and businesses," said Rep. Charles Rangel (D-NY), chairman of the House Committee on Ways and Means. "Today's discussion is an important step toward reforming the entire system to simplify the code, provide certainty for families and businesses, and continue our economic recovery."
However, while the House passed a package extending the credits beyond 2009, officials in the Senate were grappling with a new report from the Government Accountability Office (GAO) that illustrated the R&D credit may not be working as effectively as it could be.
Commissioned by Senate Finance Committee leaders Max Baucus (D-MT) and Chuck Grassley (R-IA), along with committee member Orrin Hatch (R-UT), the GAO report found that the R&D credit, which currently gives qualifying taxpayers a choice between a traditional credit and an alternative simplified one, would work better if it included only the alternative simplified credit with an added minimum base. Other recommendations by the GAO included guidance from the U.S. Treasury on what businesses can count as "qualified research expenses."
Earlier in 2009, Baucus and Hatch led a bipartisan proposal to simplify the R&D credit, suggesting that the traditional credit be allowed to expire, the alternative simplified credit be increased and the credit itself be made permanent, which would allow businesses to plan increased research expenditures knowing they will receive the credit.
"America operates in a global economy, and our economic vitality and long-term global competiveness depends on business innovation to fuel new technologies, intellectual property and domestic job growth," said Baucus. "The majority of these benefits go to salaries of U.S. workers performing U.S.‐based research and that's good for jobs. We need to ensure this credit is being used properly with maximum effect."
Jacob Barron, NACM staff writer
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