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NACM legislative introduction and position brief 2015: Part 1.

The financial panic of 1893 created a disastrous depression and subsequent severe deflation, both of which stunned businesses. The chemistry of credit was not understood and commercial failures reached record numbers. So serious was the problem that a "Congress of Credit, Collections and Failures" was held as part of the 1893 Great Exposition in Chicago. That meeting, in turn, led to further exploration of the ways that credit practitioners could help each other.

In June of 1896, 82 delegates from several local credit groups met in Toledo to endorse a national movement, creating what is now the National Association of Credit Management. Membership has grown from 600 at the end of 1896, to more than 14,000 today, making NACM one of the oldest and largest business credit organizations in the United States.

NACM is committed to enhancing, promoting and protecting the many credit management interests of the commercial credit grantor. NACM represents business credit grantors in all industries including manufacturing, wholesaling, service industries and financial institutions. NACM is a member-owned association and exists solely to serve and support its members.

The purposes and objectives of NACM are to:

* promote honesty and integrity in credit transactions;

* assure equitable laws for sound credit practices;

* foster and facilitate the exchange of credit information;

* encourage efficient service in the collection of accounts;

* provide credit education through colleges, universities, home study courses, NACM and NACM Affiliates;

* promote and expedite sound credit administration in international trade;

* foster and encourage research in the field of credit;

* disseminate useful and instructive information and ideas with respect to credit management techniques and policies;

* provide facilities for the investigation and prevention of fraud; and

* perform and encourage such other functions as the advancement and protection of business credit may require.

Business credit is an integral part of the American economy. The business credit executive--the NACM member--is an essential participant in our free enterprise system. Virtually every business transaction that concerns another business involves credit. Business credit is the single largest source of business financing by volume, even exceeding bank loans. Without business credit, America's economic system, as we know it, would not exist.

Congress has acknowledged many times that federal regulation of the credit reporting process must tackle a number of issues critical to businesses. Ultimately, NACM continues to note that anything that interferes with the free and complete ability of the business credit grantor to make a sound, accurate and equitable credit decision is an impediment to the commerce of this country.

CONSTRUCTION LAW

Commercial credit, collections and financial risk management professionals who work in the construction industry for subcontractors and materials suppliers comprise more than 50% of NACM's membership. These individuals manage the complex process of extending credit to other companies while navigating the many rules and regulations that govern how work is performed on, or materials are supplied to, a public or private project. Payment on these projects is often secured through the use of liens, bonds and Uniform Commercial Code (UCC) filings, but the rights to these remedies are only extended to certain parties, and only if those parties follow the strict filing and notice requirements that often vary from state to state in cases of liens and bonds.

The concept of payment protection for building and construction is by no means new: the first attempt to enact a law granting mechanic's lien rights came from the urgent desire of founding fathers like Thomas Jefferson and James Madison to establish and improve--as quickly as possible--the future seat of the U.S. government (the District of Columbia). Protections that helped construct the District of Columbia still exist today throughout the country--without them, companies engaged in supplying materials and goods used in construction would take on inadvisable, untenable risks, and the entire construction industry would grind to a halt.

NACM's mission is to ensure that the laws enacted provide adequate payment protection to the businesses that provide materials, equipment and services to public and private projects.

NACM believes that each jurisdiction's laws should facilitate the extension of credit by maintaining and expanding the lien and bond rights of subcontractors and materials suppliers. States should also work to make it easier for these companies to assert and maintain their rights to payment under the law by minimizing administrative and technical hurdles, which have a disproportionately negative effect on smaller companies that are already the least equipped to handle many states' onerous filing and notice requirements. The goal, as always, is to foster the extension of commercial credit, and NACM, on a national level and through its nationwide network of local affiliates, will continue to work with state legislatures to ensure that the construction laws they enact accomplish that crucial goal.

At the federal level, NACM joined an effort with a number of industry groups and trade associations, including the American Subcontractors Association, to request the modification of statues pertaining to the acceptability of individual sureties that will better ensure assets pledged are, in fact, real and readily available. A letter to the administrator for federal procurement policy and the Office of Management and Budget Outlines the need to change Sections 1302 and 1303 of Title 41 in the United States Code, specifically, Part 28.203 of the Federal Acquisition Regulation (FAR).

Since 1935, the federal Miller Act has protected subcontractors and suppliers from the risk of nonpayment by requiring the prime or principal contractor on a federal project to provide a surety bond that assures the project itself will be completed and that contracted parties will be paid. These bonds must be provided by companies or "corporate sureties" that the U.S. Department of the Treasury has determined are capable of meeting the bond's payment obligation, or, under the terms of the FAR, by either corporate sureties or by licensed persons, also referred to as "individual sureties." Individual sureties are neither vetted by the federal government nor are they required to relinquish custody and control of any assets they pledge in order to secure a surety bond. This means, in many instances, these assets are insufficient to properly cover the bond's payment obligation, difficult to convert to cash, or nonexistent altogether.

As noted in the letter supported by NACM and ASA, coverage presently provided by FAR language in Subpart 28.2 (Sureties and Other Security for Bonds) provides the contracting officer insufficient guidance, as an unethical individual surety can, and often has, pledge assets that provide only illusory protection. Verifying these remains a core challenge for contracting officers, as they face so many challenges in determining if the acceptable assets truly exist and can be liquidated in reasonably expedient fashion to pay valid claims against a payment bond.

Even the most seasoned contracting officer in the acquisition of construction generally operates at a disadvantage doing this for reasons such as a property in question being located far from the contracting officer's location, difficulties in interpreting the sufficiency of documentation on the asset and the security interest or escrow arrangement as well as a near-impossibility of keeping abreast of the many ongoing contract awards and contract administration actions coupled with often thin staffing at many small companies. The latter issue especially can open the door for a focused, unscrupulous individual surety to take advantage of the system. Losses caused by such activity have unfortunately been documented countless times in recent years, with many resulting in a crippling loss to a small subcontractor or supplier even on the smallest contract.

Modifying FAR Part 28.203.2 (Acceptability of Assets) to conform to the existing standards of FAR Part 28.204 would reduce that existing administrative burden by making information more readily available for contracting officers and confirm that assets pledged by an individual surety in support of its bonds are real, sufficient in amount, readily available and in the possession of the U.S. Government.

The most recent Congressional effort to expand Miller Act bond requirements to individual sureties and end fraud and abuse at the expense of subcontractors and materials suppliers on federal construction projects came in the form of 113th Congress' Security in Bonding Act (H.R. 776), which NACM supported as a welcome step in this direction.

Concern that payment for work performed will never be received due to an individual surety's inadequate bond pledge keeps many quality small business subcontractors and materials suppliers out of the federal procurement process. Such legislation would help alleviate this concern by giving subcontractors and materials suppliers the confidence they need to extend credit, enabling them to further contribute to economic and business growth and ultimately increase competition in the federal marketplace. All of this drives down costs to the benefit of the American taxpayer.

NACM also supports both federal and state efforts to expand the Miller Act's protections for subcontractors and suppliers to apply to construction jobs funded by public-private partnerships (P3s). The use of this innovative form of financing for public construction projects has expanded greatly in recent years, as federal agencies, and state and local governments, have sought to more efficiently use taxpayer dollars by incentivizing private firms to design, build and operate structures on public land for public use. But this effort to enable private entities to more easily fill in funding gaps for public projects only pays dividends if the payment protections for subcontractors and materials suppliers are preserved in the P3 arrangement, which they frequently are not.

The body of law governing P3s has not kept pace with their expanded use, meaning that most subcontractors and materials suppliers entering into a project funded through a P3 today will be granted no payment protections, and contracting agencies and entities that are authorized to enter into P3 arrangements are not required to grant any. State lien laws that provide subcontractors and materials suppliers with payment protections on private projects often do not apply because the P3 project is ultimately for public use, and public property is not subject to liens.

One of the frequent misconceptions is what P3s are meant to cover. President Barack Obama launched the Build America Investment Initiative in July 2014, calling on federal agencies to find new ways to increase investment in ports, roads, bridges, broadband networks, drinking water and sewer systems and "other projects" by facilitating partnerships between federal, state and local governments and private sector investors. "Other projects," however, is problematically misleading. Some states P3 legislation only requires the general contractor to post a payment bond on road, bridge and rail projects. Still other states make a broad-stroke statement by suggesting that if the project is on public property with private investment, the job should be bonded (i.e., a private investor builds new dormitories at a public university). In essence, consistency is an ongoing problem and often difficult for suppliers and contractors to track or anticipate.

At the state level, through April 2015, 33 states had protections for P3 projects. That number stood at only four as of early 2014. Even so, a number of states, including Georgia and Arkansas, already are reworking language found to be insufficient. Places like the District of Columbia recently enacted P3-related statutes, but it remains too early to gauge if similar updates and fixes are needed to ensure adequate protections are in place. Without protections, savvy subcontractors and materials suppliers will either choose not to do business on P3 projects, or will price this added risk of nonpayment into the project, collectively limiting business participation and ultimately driving up the cost for taxpayers.

NACM proposes that any legislation that provides a federal agency with the ability to enter into a P3 arrangement should be amended to require that the agency build in payment assurances for subcontractors and materials suppliers through surety bonds. NACM believes the goal should be to facilitate the extension of credit, rather than limit it by allowing contractors to continue encroaching on subcontractors and materials suppliers' payment rights. Extending standard payment protections to P3s would encourage more companies to participate in projects funded by them, again driving down taxpayer costs while allowing businesses to grow by investing in projects built for the public's benefit.

NACM holds that virtually any law benefitting subcontractors and materials suppliers benefits the entire economy. Its membership stands ready to support the enactment of any law that facilitates the extension of credit on both private and public projects.

UNCLAIMED PROPERTY

Unclaimed property is tangible or intangible property owed to a person or entity yet held by another. Generally speaking, under unclaimed property laws (or escheatment), a holder of unclaimed property that is not ultimately returned to its owner must report and remit that property to the proper state after a designated period of time. It is, in essence, a custodial transfer of money from a private holder to some state government, which acts as a bank of last resort.

Early in 2015, NACM joined on with the America Bar Association, NACM North Central, the Unclaimed Property Professional Organization (UUPA) and the Coalition of State Taxation in urging the Uniform Law Commission (ULC) to add a business-to-business (B2B) exemption for business associations involved in the ordinary course of business. ULC is reviewing this in 2015. We continue to urge the Commission to offer guidance and clarification in the UUPA that states should indeed adopt a B2B exemption as part of the updated UUPA. This is deeply important because the federal legislation from 1995 does not specifically exempt such transactions. Fewer than one-third of all U.S. states have such an exemption in place. It is problematic because so many businesses face a host of onerous and inconsistent unclaimed property regulations in the present landscape. NACM and its partners suggest the following language in any update:

"Notwithstanding any other provision of the [Act], any property due or owing from a business association to another business association including, but not limited to, checks, drafts or similar instruments, credit memoranda, overpayments, credit balances, deposits, unidentified remittances, nonrefunded overcharges, discounts, refunds and rebates, shall not constitute unclaimed property under this [Act]. This section also applies to all amounts due or owing from a business association to another business association that, on the effective date of this section, is in possession, custody or control of a business association

CONSUMER CREDIT REPORT REGULATION VERSUS COMMERCIAL CREDIT REPORT REGULATION

Historically, lawmakers have recognized and respected the differences between commercial and consumer credit and the important differences in how information is used in both arenas. As defined in the Fair Credit Reporting Act (FCRA), whether a purchase on credit is a consumer or a commercial transaction is determined by the end use of the purchase: if the purchase is for personal, family or household use, it is a consumer transaction. On the other hand, purchases made on credit for business use are generally accepted as commercial transactions.

Although the FCRA does not define the term "commercial transaction" specifically, and only governs commercial transactions when a business relies on a consumer report to make a business credit decision, there are a number of important practical characteristics that illustrate the vast differences between commercial credit transactions and consumer credit transactions. Commercial credit executives must review everything from the customer's application, financial statements, business references, commercial credit reports and beyond. To increase the speed and reliability of this decision, and to increase the quality of commercial credit reports, companies share their accounts receivable information, or historical, factual data about their customers' payment habits, with commercial credit reporting agencies. In turn, trade payment information is one of the components used by the nations thousands of credit and risk professionals to arrive at an independent decision about whether or not to sell to a business customer on credit. This information helps business creditors determine the willingness and likelihood of a new customer to pay their obligations as they become due and the level of integrity with which they operate, and to assess their character. It is critical to keep this information flowing freely.

Experts have warned Congress that onerous or poorly conceived regulation in this area could result in serious delays in the availability of business credit information. Such delays could cost the economy an annual sales loss exceeding $60 billion. Any restrictions on the free flow of credit information will retard the economy and further place American businesses at a competitive disadvantage. Ultimately, anything that interferes with the free and complete ability of the business credit grantor to make a sound, accurate and equitable credit decision is an impediment to the commerce of this country. Everyone loses--Not only the businesses themselves, but also the consumer of the goods and services they provide.

Despite the vast differences between consumer and commercial transactions, many people incorrectly and dangerously blur the line between the two. This presents two issues for the commercial credit community from a regulatory standpoint:

Protecting Information

Information on companies and individuals is now more accessible and more freely exchanged than at any previous point in history. As a result, lawmakers have sought to protect individuals from criminals who would use this openness to their own nefarious ends. NACM fully believes in every Americans right to the security of their own financial and personally identifiable information, and wholly supports legislative efforts that seek to guarantee that right. However, NACM urges the federal government and states that any such legislation must be carefully defined and accurately drafted to apply specifically to personal information rather than to the commercial data willingly exchanged between businesses in order to assess creditworthiness. Extending the approach that some state legislators unknowingly tried to take in recent years toward regulating the exchange of consumer information in the same manner as trade credit information would be disastrous for the U.S. economy and must be avoided.

Sources of Negative Commercial Payment Information

In 2013 and 2014, some of the nation's smallest businesses were targeted by marketing companies promising to help improve a business' commercial credit in exchange for a subscription fee, borrowing a tactic that's already in use in the consumer credit arena. In reaction to this deceptive marketing practice, some lawmakers unsuccessfully proposed legislation designed to require disclosure of the identity of a source of negative trade payment information on a commercial credit report should be disclosed. NACM's position is that rescinding a company's right to anonymously share its historical, factual trade payment data would result in a massive chilling effect on business's participation therein and, thus, overall credit-granting activity levels. This would badly impair the economy. It would also require businesses to allocate staff, that it often can ill afford, to respond to inquiries, or decide to omit any trade data that could be construed as negative, distorting a potential debtor's true profile. NACM believes that rather than regulating commercial credit information, educating small companies about commercial credit and about how it differs from consumer credit would correct the problem being caused by savvy marketers in search of fees. NACM also believes that it is critical for lawmakers to use specific language in legislation to ensure that credit extended for business purposes is not swept into regulations that govern credit extended for personal, family or household use. Failure to do so would fail to address existing problems, notably on the consumer side, while creating significant unintended consequences. To support and educate small businesses and legislators on this topic, NACM created a fact sheet, "Commercial Credit: What Every Company Needs to Know," as a basic yet definitive guide.

Bankruptcy Reform

Part II of NACM's Legislative Brief, to be released in a future issue of Business Credit magazine and at a later date in the advocacy section of www.nacm.org, will focus almost solely on its platform of recommendations regarding federal bankruptcy reform.

As one of the largest organizations of unsecured trade credit grantors in the world, NACM is vitally concerned about the effects that bankruptcy law and practices have on the U.S. economy. NACM, as part of its ongoing Government Affairs Committee, has gathered a group of nearly a dozen elite trade credit professionals as part of a committee tasked specifically with setting a course for the associations effort to push reform of Chapter 11 in 2015. The committee is in the midst of carefully reviewing issues such as Section 503(b)(9), venue provisions, preferences, creditors' committees, executory contracts and provisions for very small businesses.
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Publication:Business Credit
Date:Jun 1, 2015
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