March 16, 2010
"This is a construction industry device," said Jim Fullerton, Esq., Fullerton & Knowles, P.C., referring to joint check agreements (JCAs) during his most recent NACM teleconference. Indeed, JCAs tend to be prevalent in the world of construction, whether for subcontractors, general contractors or suppliers, and like many security instruments used in the construction industry, they're flexible and offer a unique set of pitfalls.
"The biggest thing is that there's no such thing as a standard joint check agreement," said Fullerton. "There's no law explaining how they work; there's no federal joint check law and there's no state joint check law. It's a free contract thing. It can be written any way the parties want it." Simply having the documents to review prior to agreeing to them and knowing the terms becomes critical when dealing with JCAs and trying to shape them to be creditor-friendly. "You always want to draft it, whichever side you're on," he added. "You need to review and modify any agreement sent to you by somebody else. That tells us what your status is. It depends entirely on the wording of the JCA."
A JCA requires approval from more than just the creditor and the debtor. The JCA-seeking creditor, in most instances a supplier, needs the consent of not only their debtor customer but also the customer's buyer, which is typically the general contractor (GC). "The GC is kind of neutral on this issue," said Fullerton. "Even the debtor is neutral on this issue. The JCA determines your position among other creditors in the event of insolvency. The people you're negotiating with don't really care that much. You're just improving your position among other creditors in the event that the debtor files bankruptcy."
Fullerton then went through the language to include in a successful, worthwhile JCA. "The real key is some sort of guarantee," he said, "some sort of security interest or some sort of trust fund provision." Structuring a JCA in such a manner will put the creditor ahead of others in the event of insolvency, which has become ever more prevalent in today's still slowly-recovering economy. Fullerton also offered two example JCAs—one that was creditor-friendly and one that was GC-friendly—before discussing the specific tenets of an effective, clear agreement.
To learn more about other ways construction creditors can protect themselves from debtor payment problems, be sure to catch Fullerton's presentation at NACM's upcoming Credit Congress, scheduled from May 16-19, 2010 in Las Vegas, NV. For more information, or to register, click here. Additionally, a replay of Fullerton's teleconference is available by contacting Tracey Flaesch at 410-740-5560 or email@example.com.
Jacob Barron, NACM staff writer
Go on the Red Rock Canyon Tour at Credit Congress
Perhaps the most recognizable feature of Red Rock Canyon is the striping in the rocks themselves. The canyon sits on a thrust fault which forced the gray carbonate rocks of what was an ancient ocean floor over the younger red sandstone millions of years ago.
Red Rock Canyon also contains a surprising amount of other details and wildlife that you have a good chance of seeing during the tour including:
- Wild horses and burros
- Antelope squirrel
- Joshua trees
- Petroglyphs and pictographs left by Native Americans
- And perhaps even one of an estimated 80 bighorn sheep that live in the conservation area
Morning is a great time to be in Red Rock. Many animals are more active during this time, before the day gets too hot. For more information and to register for this tour, click here.
Red Rock Canyon Tour, Monday, May 17, 8:00am-Noon
Despite some mixed messages and dissent of late within the Federal Reserve, the Federal Open Market Committee (FOMC) appears unlikely to make changes to the rock-bottom federal funds rate any time soon coming out of its latest policy-making meeting.
The FOMC emerged from its March 16 meeting to again leave the federal funds rate unchanged, in part because of the slow economic recovery and the present inflation situation that includes "substantial resource slack." Additionally, the Fed's statement reaffirmed that most voting members believe it is appropriate for the rate to remain low for some time.
It was widely expected that voting members of the Fed would leave the rate, presently at a range between 0% and 0.25%, unchanged despite evidence that the economy is rebounding. Still, there is a long way to go in recovering from the worst economic downturn since the Great Depression, and that fact should stave off growing concerns from some Fed members, conservative lawmakers and analysts arguing that inflationary pressure could start to rear its ugly head.
"I doubt a rate increase will happen because, just a few weeks ago, Fed Chairman [Ben] Bernanke testified before Congress that the low rate will be here for an 'extended' period of time," said Xiaobing Shuai, senior economist with Chmura Economics & Analytics. "With monthly job numbers still negative, it's just not very likely."
Typically, the Fed officials have increased the rate from its cyclical low at least one year after the height of unemployment, said Torsten Slok, director of global economics at Deutsche Bank Securities Inc. at FCIB's recent International Round Table event in New York. Coming out of this downturn, Slok predicts the Fed will hike the rate about six months after this cycle's unemployment peak, which is widely expected to occur during the present quarter. Slok attributes the likely drop in unemployment to improving economic conditions and the necessary hiring of Census 2010 workers in April.
Although the idea of continuing to keep the federal funds rate near 0% has come under attack by some, most notably FOMC member Thomas Hoenig, the policy drew rave reviews last week at a National Association of Business Economics conference. Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair, who emerged as one of the few white knights of the financial downturn because of her agency's handling of takeovers of failing banks like California's IndyMac, called the low rates "clearly appropriate." She said the low rates were necessary to help spur lending to consumers and small businesses in part to counteract what have become overly tight lending standards on the part of large banks that are holding "record amounts of liquid assets." Additionally, Bair intimated that the economy has not completely exited troubled waters yet.
"As we meet today [March 8], the initial crisis has receded," said Bair. "But we continue to deal with the aftermath of that crisis, which includes persistent high unemployment, impaired household balance sheets and high levels of problem loans and troubled financial institutions."
Brian Shappell, NACM staff writer
NACM Teleconference: Social Networking
Hazel Walker, president of the Referral Institute of Indiana, will lead an NACM teleconference on use of social networking in a business environment on March 17th at 3:00pm (EST). Walker believes those who can find ways to use various social media platforms (LinkedIn, Facebook, Twitter, etc.) in both a business and personal manner with industry contacts tend to be a step ahead in connecting with, educating and learning about customers. It also helps in keeping tabs on the competition.
"You have to go where people are," Walker said in the upcoming April edition of Business Credit magazine. "If your customers or colleagues are on social networking sites, why would you not be there? It doesn't make sense not to."
For more information on the March 17th teleconference, click here.
While outsourcing has seemed increasingly en vogue as companies look to Mumbai or Manila to cut their operating costs, moving the credit function overseas or simply out from underneath a company's umbrella isn't so popular, or profitable, according to NACM's most recent monthly survey.
When asked "Has your company, or former company, ever outsourced all or part of the credit function?," an overwhelming 77% of respondents answered "no," while 21% of respondents said "yes." The remaining 2% didn't know.
Among credit professionals whose companies had outsourced or were outsourcing a part of the credit function, collections seemed to be the first function moved beyond a company's control. "We have outsourced about 85% of our U.S. and Canada collections to a team in India," said one respondent. "In Mexico we use an outside contractor to do our collections." Others noted that their outsourcing partner had a specific collection expertise in one particular industry. "Our experience with our outsourcing partner has been positive," they said. "Our partner focuses its efforts on companies in a similar industry so they are knowledgeable and offer suggestions on items for improvement and trends they are seeing in the industry. Getting to know our partner through regular communication and on-site visits has helped build a strong relationship."
Several "yes" respondents, however, added that their outsourcing experience was less than productive or that outsourced functions had already been moved back in-house. "It wasn't the best situation because it required too much monitoring and concern over alienating customers," said one respondent. "We brought the positions back to the U.S. for lack of satisfactory work while outsourced," said another.
Unsatisfactory work and fear of customer alienation were cited by many respondents as reasons why their companies avoided outsourcing altogether. "We have a variety of customers all over the world in a variety of types of businesses," said one participant. "I feel we would lose the pulse of the customers and marketplaces if we were to outsource any of the functions."
"Credit is a sensitive section in any company that needs to be handled by specialized personnel. I have seen other departments within my company using outsourcing and it is a mess," said one respondent. "At one of my prior employers, we discussed the possibility of outsourcing the credit function. The new management at the time outsourced many of the non-financial tasks. It was decided that the customer contact was a key service ingredient and was better serviced internally," said another.
Jacob Barron, NACM staff writer
Certification Exams at Credit Congress
Start off your Credit Congress experience knowing you'll soon have a new designation! Credit Congress offers both an exam review the morning of Sunday, May 16th and exams in the afternoon for each the CBA, CBF and CCE designations. Then unwind from it all with light fare and drinks at the Credit Congress Opening Reception in the Expo on Sunday evening.
A pair of new studies from Equifax and the Mortgage Bankers Association (MBA) indicates that not all news regarding commercial lending was bad in 2009's final quarter, though struggles still remain.
An Equifax study finds that small business bankruptcies, especially outside of the badly struggling Pacific and Mountain regions, declined during the second half of 2009. However, Q4 2009 bankruptcies occurred 14% more frequently than in the same quarter of 2008. Additionally, Equifax statistics indicate small businesses faced a much higher risk of failure within one year (0.85%) last quarter when compared to the risk in the same quarter in 2006 (0.31%). Transportation sector bankruptcy rates continue to be the highest, while the construction sector has become the biggest gainer in the delinquency rate over the last three years.
However, MBA's latest "DATANOTES" statistics for March contend that commercial and multifamily mortgages are among the best performing loans held by domestic banks and thrifts. At the end of Q4 2009, 7.3% of all bank and thrift loans were 30 or more days past due. Comparatively, just 5.06% of commercial and multifamily mortgages were delinquent, said MBA's study. Additionally, the commercial and multifamily loan charge-off rates of 0.8% and 1.1%, respectively, were lower than that of residential mortgages (2.4%), home-equity lending (2.9%), general construction loans (5.4%) and credit card loans (9.1%).
Still, MBA statistics reveal that delinquencies in commercial and multifamily mortgages are on the rise, up 0.5% and 0.9%, respectively, from Q3 2009.
"Like other parts of the economy, the performance of commercial and multifamily mortgages has been negatively impacted by job losses, consumer restraint and manufacturing declines," said the MBA study. "The relatively stable performance and low charge-offs of commercial mortgages through the recent recession, however, have helped, rather than hurt the stability of banks and thrifts."
Brian Shappell, NACM staff writer
Cashing in With Collection Scoring
During this recession, customer risk is increasing, more accounts are in collection and resources remain tight. To manage the impact on your portfolio cost-effectively, you need an early identification solution to segment risk, and for many, statistical collection scoring is the best technology available to more easily do that in this economy.
Join Sam Fensterstock of PredictiveMetrics, for the upcoming NACM teleconference "Cashing in With Collection Scoring." Learn how companies are overcoming this economic challenge by implementing scoring technology to increase cash flow by prioritizing collections based on risk, streamline operations for optimal resource allocation and cost reduction and consider the dollars at risk when creating new collection strategies to identify accounts that will have a larger impact on your cash flow.
To learn more, or to register, click here.
As lawmakers on Capitol Hill continue to focus on job creation, efforts geared toward helping the most distressed areas in the nation are quickly ramping up in the form of loosened credit and increased financing opportunities for businesses in struggling communities.
President Barack Obama's proposed budget features a bump in the budget for Community Development Financial Institutions (CDFIs), lenders whose capital, credit and financial services reach the most underserved and hard-to-reach areas of the country. "The President's FY 2011 budget request of $250 million includes $140 million—a 30% increase—in funding for the CDFI Fund's financial and technical assistance awards to expand the availability of affordable capital in distressed communities," said the U.S. Treasury's Assistant Secretary for Financial Institutions Michael Barr.
Barr noted that CDFIs had a reliable track record of reaching businesses most in need of financing, whether due to low bank penetration in their area or their inability to access credit from traditional sources because of a bruised credit rating that won't get past automated ranking systems. "In today's economic climate, CDFIs' support to businesses, in particular small businesses, is more critical than ever," he said. "Looking back, CDFIs reported providing financing to over 10,000 businesses and over 1,600 commercial real estate properties in 2008. CDFIs also reported that they helped create or maintain over 70,000 full-time jobs in that period."
"CDFIs are there to fill the gaps. They are able to reach these communities through innovative, responsible and affordable financial products and services," Barr added.
CDFIs have previously received aid through the Recovery Act, passed in the first months of Obama's presidency. "The Fund awarded $98 million in financial assistance to 69 CDFIs, spread across 26 states and Puerto Rico. Within 100 days of enactment of the Recovery Act, the CDFI Fund announced these awards, and within 60 days after that, disbursed 100% of the Recovery Act awards," Barr noted. "The Act also provided us with an additional $1.5 billion in New Markets Tax Credit (NMTC) authority for both FY 2008 and FY 2009."
Jacob Barron, NACM staff writer
Things Are Looking Up, But Don't Let Up in Getting Paid
Collect your past-due accounts, large or small, as quickly as possible through NACM Affiliate collection services. Our departments are firm, but fair, with your customers. The primary objective is to collect your money.
Our Affiliate collection departments have tried and true steps in notifying your debtor and making immediate demands for full payment. If direct personal contact is appropriate, we have many resources, including the ability to draw on all of our other Affiliates nationwide. When necessary, we will forward an account to one of the bonded attorneys in our legal network. We exhaust all collection possibilities before recommending litigation to you. All funds collected are placed in separate trust accounts.
NACM Affiliate collection services include:
• Letter Services
• 10-day Demand Service
• Action and Litigation
• Litigation Service
• Status Reports
Click here to learn more about NACM Affiliate Collection Services.
The Supreme Court of the United States has ruled that provisions in the Bankruptcy Code restricting an attorney's ability to advise clients to take on more debt for potentially unethical purposes are not unconstitutional.
In an opinion penned by Justice Sonia Sotomayor, the high court ruled that provisions barring attorneys from advising clients to "load up" on luxury-based debt they know they can't pay in an attempt to abuse the court system do not violate attorneys' free speech rights. The judges found that such a provision in no way prohibits candid, ethical communication between attorney and client. Such "ethical" advice for new debt could include refinancing a home at a better rate or purchasing a new, efficient automobile.
"It would make scant sense to prevent attorneys and other debt relief agencies from advising individuals thinking of filing for bankruptcy about options that would be beneficial to both those individuals and their creditors," Sotomayor wrote.
Minnesota-based firm Milavetz, Gallop & Millavetz P.A. had convinced a Court of Appeals judge for the 8th Circuit in St. Louis to render unconstitutional a provision barring the type of advice Sotomayor characterized as unethical and abusive. Among the firm's contentions was that such a statute was impermissibly vague and unable to withstand constitutional scrutiny regarding protected speech. The high court unanimously disagreed and noted that the firm's argument did not warrant a constitutionality case:
"Under our reading of the statute, of course, the prohibited advice is not defined in terms of abusive prefiling conduct but rather the incurrence of additional debt when the impelling reason is the anticipation of bankruptcy. Even if the test depended upon the notion of abuse, however, Milavetz's claim would be fatally undermined by other provisions of the Bankruptcy Code, to which that concept is no stranger. The Code authorizes a bankruptcy court to decline to discharge fraudulent debts or to dismiss a case or convert it to a case under another Chapter if it finds that granting relief would constitute abuse. Attorneys and other professionals who give debtors bankruptcy advice must know of these provisions and their consequences for a debtor who in bad faith incurs additional debt prior to filing...Against this backdrop, it is hard to see how a rule that narrowly prohibits an attorney from affirmatively advising a client to commit this type of abusive prefiling conduct could chill attorney speech or inhibit the attorney-client relationship."
Brian Shappell, NACM staff writer
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