The election is now behind us but, unfortunately, a
new President and Congress won’t put an end to the recessionary issues
affecting this country.
The recently issued Federal Reserve report states
that “lending is tight and
probably will get tighter”.
Eighty-five (85%) percent of domestic banks – up substantially from
sixty (60%) percent in July – reported tougher lending standards for
large and mid-size business loans. During the same period seventy-five
(75%) percent of banks reported tightening their lending standards for
As for credit cards, don’t anticipate the same
amount of activity as in previous months or years. Nearly sixty (60%)
percent of banks responding to a Fed survey said they had strengthened
their standards for existing credit card accounts. The same number of
respondents also reported cutbacks on credit card accounts granted to card
holders who failed to meet their credit-score thresholds.
One would expect banks to be lowering or declining
credit to nonprime borrowers or those at risk of not paying their bills as
sixty (60%) percent of banks reported. But twenty (20%) percent of all
domestic banks reported reduced credit limits on existing credit card
accounts to prime borrowers, those who either pay the minimum payment
amount on time or retire the entire credit card balance each month.
Ninety-five (95%) percent of banks that had
implemented reduced limits citied “a
less favorable or more uncertain economic outlook and reduced tolerance
for risk”, as reasons
for the reductions according to the Federal Reserve.
The Federal Reserve also reported fifty (50%) percent
of all banks reporting to have increased minimum required credit scores on
credit card accounts during the previous three months and plans to
continue monitoring those minimums during 2009.
The same number of reporting banks indicated they had
become either “somewhat or much
less willing” over the past three months to make installment loans,
up from thirty-five (35%) percent in the July report and the largest
percentage in more than two decades.
For the last two decades trade creditors have
bemoaned the fact that customers were using their open credit facilities
more like a bank loan then a thirty (30) day term. Trade creditors along
with their customers citing “industry
standards” have permitted their terms of sale to be treated as
installment credit causing customers to owe in excess of not only
established credit lines/limits but also their capacity and capital. Now,
with the bank and financial industry unwilling to make capital available
not only to the subprime but also the prime borrower, the trade creditors
are now being asked to assume increased risk in a time of unprecedented
bankruptcy filings and business failures.
The most often asked question has always been, “What
can we do to minimize risk?”
However, in today’s economy it is being asked
seriously because if the answer is not paid proper attention than the
prospect of the trade creditor becoming one of those business failures is
a very realistic
We are advising our clients to take the following
Make sure that your active accounts are up-to-date and
contain the most current information. Review existing credit lines and
identify those accounts whose balances currently exceed the assigned
Obtain a current copy of your states’ Commerce &
Business Code. You and your staff should be completely familiar with
Article 2 (sales contracts), Article 3 (negotiable instruments), Article 4
(bank deposits & collections) and Article 9 (secured transactions), of
the Uniform Commercial Code. This information will inform you of yours and
the debtor’s rights. Also, obtain copies of your states anti-trust laws
and review the federal anti-trust law, Robinson-Patman Act.
Review your present credit policy and procedures and make
certain everyone affected is aware of the current policy.
Finally, understand that decisions concerning credit
policy, extension of credit and credit lines/limits, during these
uncertain times, should not fall to one department or individual. During
these times these decisions should be business not credit decisions. We
strongly urge credit professionals to form committees comprised of credit
personnel, sales personnel and senior management to review company credit
policy, key customers, marginal customers, and general business and
industry concerns in determining the company’s terms and enforcement of
terms to ensure the success of your organization.
Remember asking for assistance is a sign of strength
not one of weakness.
I wish you well
The information provided above is for
educational purposes only and not provided as legal advice. Legal advice
should be obtained from a licensed attorney in good standing with the Bar
Association and preferably Board Certified in either Creditor Rights or