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Published Articles by David Balovich

Published in: Creditworhty News
Date: 9/20/97
This is the first installment of three as this weeks topic is a bit lengthy.

I would like to comment on when it is appropriate to obtain acredit report. Recently, in the Credit Discussion Corner, interest was expressed concerning this and most importantly utilizing credit reports for the purposes of pre-qualifying customers.

The question is, can a commercial credit report be acquired without the customers permission? Some believe it can while others say no. This in turn leaves many confused, who is right?

Although the ECOA (Equal Credit Opportunity Act) is largely consumer in nature there are provisions for commercial (trade) credit grantors. These provisions are contained in Regulation B which is an amendment to the ECOA.

There are numerous sections contained in Regulation B but we will only reference the four that deal with this question.

Section 202.2 defines "application" as an oral or written request for credit or an extension of existing credit and "completed application" as when the creditor has all the information necessary to determine risk including, but not limited to, credit reports.

202.2 further states "The creditor shall exercise reasonable diligence in obtaining such information."

Section 202.9 defines the time frame that the applicant must be notified of the credit decision. There are several situations defined, however, the general rule is:

A creditor shall notify an applicant of the action taken within 30 days after receiving a completed application concerning the creditor's approval of credit, counteroffer to, or adverse action taken on the application.

The notice to the applicant must include the applicants right to a statement of specific reasons for the action taken. The applicant's written request for the reasons imust be received by the creditor within 60 days of the creditors notification, 202.9(a)(3).

This notification is required to be sent to the applicant in writing unless the creditor received less then 150 applications for credit during the previous year. In such cases, the notification may be made orally, 202.9(d).

The statement of reasons for adverse action must be specific and indicate the principal reason(s) for the adverse action. A statement that the adverse action was based on the creditor's internal standards or policies or that the applicant failed to achieve the qualifying score on the creditor's credit scoring system are deemed to be insufficient. 202.9(b)(2).

Next week, the remaining section pertaining to commercial (trade) credit reports.


Q. In 9/4 Creditworthy news, the importance of credit applications were discussed. I don't think having buyer's names on the credit application is a good policy to follow. Knowing who the owner's are is more important. Knowing the owner's home address, home phone #, and SS# is also extremely important if the business folds and you are then faced with placing the account with a collection agency who in turn has to skip trace the responsible parties. You want to have as much information about the responsible parties as possible.

Also, if a store manager or store buyer signs your credit application, what value does it have in the event you have to sue to obtain an outstanding debt. If you have an agreement clause which covers monthly finance charges as well as covering costs of collection and attorney fees in the event of suit, the courts may not award any of the additional fees if the credit application is not signed by one of the owners. You can argue that the buyer or manager is a representative of the company, but I have dealt with situations where the court did not award the additional costs. Being careful as to who signs your credit application can save one a lot of headaches down the road if the account goes delinquent. Dianne Seibert - J.K.M. CREDIT SERVICES, jkmcr@epix.net

A. I do not disagree with what was written because credit not unlike the law, is open to interpretation.

I would like to share my thoughts concerning the items addressed.

Having the buyer's names provides us who to contact for payment. Often we call on accounts payable but they do not have the authority to approve payment rather their authority is limited to processing those invoices that have been approved.

I agree that the owners information is important but only if the customer is a proprietorship or partnership. If the customer is a corporation or limited liability company then this particular request for information is not worth while because it is of no value unless we have received a personal guarantee.

A very valid point is made about having as much information as possible about the responsible parties. If the customer is a corporation or limited liablitity company the responsible party is the buyer.

It really makes no difference who signs the credit application since it is not a legal document. Signing the credit application, generally, is for the purpose of authorizing other creditors to release information to us.

It does matter, however, who signs our terms and conditions. Anyone can sign the credit appllication but we want to make sure the owner, partner or authorized representative is signing our terms and conditions.

Often the reason the court does not award fees and costs is not because of who signed the credit application but who did not sign our terms and conditions. Regulation B states that a written application for credit is not required. Signed written terms and conditions are required if we expect them to be enforced.

We should be very careful who signs our terms and conditions.

Comment: David Balovich is right on when he says credit management has a consulting role in an organization:

- to marketing on contract law and financing mechanisms - to finance on asset management - to sales on dealing with economic buyers - to contracts on negotiation strategies - to distribution on evaluating fright carriers - and to internal audit -- we learn about all the games people play!

Mr. Balovich suggested that credit management should "identify the risk and then make the proper recommendations to management in order to minimize risk." The inference is that credit management makes recommendations, not decisions; and that credit management has no responsibility if management over rules credit managements recommendations.

I would argue strongly that management should not over rule credit management on credit decisions. But if they do, it is a cop-out to say that "the organization" is responsible..." I would consider it a failure on my part if management over ruled me on a credit decision it the receivable had to be written off -- shame on me for not convincing management. Ron Watson

Reply: Thank you for writing and I appreciate your comments, do not disagree with them.

However, you state you would consider it a "cop out" if you were unable to convince management of your arguments.

All too often we are unable to convince management, then what? You either have an alternative solution or you die by the consequences.

My alternative is simply to understand the "game" you mention earlier in your comments. Credit & collections is nothing more then a big game and we should be more concerned about the internal players then the external ones. We can win the "game" if the internal players are all playing for the same team and adhereing to the rules.

Comment: I want to take a moment to thank you for your comments to me regarding the validity of Terms and Conditions attached to credit applications and where the signature of the Debtor appears.

I spoke to my corporate attorney and he immediately said to do whatever I need to in order to make the application a contract. He is not a specialist in Creditors Law and I am no attorney but together we make a formidable team! He had not thought about our credit application when he heard of the issue regarding contract validity. Over the past few days I have spoken with those in my department and we have completed the reformating of the application.

Your help has been invaluable along with that of the Credit Club - with which I have signed up my comany as a member.


In the meantime please continue to express your thoughts. Remember, the purpose of this column is not to tell you how to conduct your business but rather to make suggestions that will make your job easier and more fulfilling. Please send them to Davidb1947@aol.com OR to Creditworthy News at richh@creditworthy.com

I wish you well.

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