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,
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
Next week, the remaining section pertaining to commercial (trade) credit
QUESTIONS FROM READERS
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, firstname.lastname@example.org
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
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
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 email@example.com
I wish you well.