FTC Delays Red Flags Rule, Announces Greater Business Education Efforts

The Federal Trade Commission (FTC) recently announced yet another delay in the enforcement date for the agency's "Red Flags" rules from August 1, 2009 to November 1, 2009, marking the third time in the regulations' lifespan that a delay in implementation was deemed necessary. Most notably, the announcement of the delay also contained some of the agency's strongest language on the persistent haze of confusion that has consistently surrounded the rules and their application to businesses.

"To assist small businesses and other entities, the Federal Trade Commission staff will redouble its efforts to educate them about compliance with the ‘Red Flags' Rule and ease compliance by providing additional resources and guidance to clarify whether businesses are covered by the Rule and what they must do to comply," said the release. "The three-month extension, coupled with this new guidance, should enable businesses to gain a better understanding of the Rule and any obligations that they may have under it."

As previously mentioned in NACM's eNews, the FTC also concurrently released a collection of FAQs geared toward business creditors, which can be found here. In response to the question "Am I a creditor under the Rule if I extend credit to other businesses?" the FAQ explicitly answers "yes, you're a creditor whether you have consumer or business customers." Other questions the FAQ aims to answer are what it means to "regularly" extend credit and if covered accounts are possible in the entity in question is a business creditor. "There's no bright line definition for ‘regularly,'" says the FAQ. "But if the activities that meet the definition of ‘creditor' are more than just an isolate occurrence for your business, the ‘Red Flags' rule applies to you." In regards to the second issue, regarding covered accounts and business creditors, the FTC noted that "it depends. If you're a creditor with only business-to-business accounts, you have to assess whether those accounts pose a reasonably foreseeable risk from identity theft. If they do, they're ‘covered accounts' under the Rule."

No date was given as to when small businesses and other entities anxious about the regulations will receive the FTC's proposed guidance. For now, the agency offered its "Red Flags" Rule website, wherein companies can design their own compliant identity theft protection program. That site can be found by clicking here.

Other resources for companies can be found in Business Credit magazine, in the March, May and July/August 2009 issues.

CMI Continues To Edge Toward Expansion


For the sixth straight month, NACM's Credit Managers’ Index (CMI) indicates that there is growth in the availability of capital. The recovery in the index started in February of this year, supporting the notion that the economy was starting to show some rebound and “green shoots.” The July index also moved much closer to the magic number of 50, signaling expansion is taking place. The reading is now at 48.

Over the last two months, the dominant economic debate has focused on whether the recession has already ended, is ending now or is in the process of ending. The data coming from the housing sector is generally very positive with sales of both existing and new homes up. There are improvements in some of the manufacturing indicators, and some data suggests overseas sales have been improving. At the same time, there are concerns about the continued high rate of unemployment and the lingering impact of the downturn.

At the core of this debate is consumer confidence. Data from the Conference Board and the University of Michigan show some erosion of confidence lately, but at the core of that measure is whether consumers and businesses are seeing improved access to capital. The latest Credit Managers’ Index suggests that credit markets are continuing to edge toward expansion. If the trend of the last several months continues, the index may soon break above 50. The current score for the combined index is 48, up from June’s number of 46.4. Once the index crests 50, it will signal that expansion is taking place.

“This marks the sixth straight month of improvement in the index, and it now looks likely that expansion will be under way by the end of the third quarter,” said Dr. Chris Kuehl, NACM’s economic analyst. The specific improvements in performance are even more encouraging. Sales and the amount of credit extended both jumped dramatically. Sales were up from 44.8 in June to 48.6 in July, while the credit extended measure went from 46.1 to 48.2. The index of favorable factors as a whole reached the critical 50 point and two of the measures moved into expansion territory as new credit applications moved to 52.6 and dollar collections went to 50.8. The unfavorable indicators also moved in the right direction as there were fewer disputes, fewer bankruptcies, fewer credit rejections and fewer dollars beyond terms. “The sense is that the weakest companies fell by the wayside as the economy toughened and now all that is left are the survivors,” said Kuehl. “The good news is that in a recession, this process allows the solid companies to pick up market share and recover much faster. There is some anecdotal evidence that this process is taking place. As some businesses vanish, their slice of the business is being absorbed by other competitors.”

Manufacturing Sector

One of the more surprising developments in the survey was the solid performance recorded in the manufacturing sector. The index was even higher for manufacturing than for the combined total—48.3 as compared to 48. The improvements noted in the combined elements were even more pronounced when manufacturing was isolated. Sales posted a big gain and so did new credit applications with numbers jumping from 51.1 to 55.3. There was also some improvement in the amount of credit extended. Overall, the manufacturing index jumped 1.8%.

“The sense is that the first steps are underway in a manufacturing recovery as the pattern of the past suggests that the first indicator of recovery is when companies start to re-engage with their suppliers by asking for credit,” said Kuehl. “There is generally a lag between the period in which new applications jump and when there is evidence that these applications have been granted. At that point, the overall sector begins to show some signs of expansion.”

“It is also heartening to see that some of the unfavorable factors continue to trend in the right direction. The accounts placed for collection category showed improvement, and there were fewer disputes and bankruptcies. Given the challenges that continue to plague the automotive sector, it has been encouraging to see expansion in other sectors. It would appear that manufacturing activity is more diverse than ever and the expansion in new sectors, such as energy, may be offsetting the declines.”

Service Sector

The service sector has seen an increase as well but not as dramatic as that in manufacturing, Kuehl reported. Although there was an increase in sales, there was actually a decrease in the number of credit applications as well as credit granted. “This reflects what has been happening in the retail sector and other vulnerable service sectors such as transportation and financial services,” Kuehl said. The good news coming from the service sector is that the unfavorable factors saw progress: fewer disputes, less dollar exposure and fewer filings for bankruptcy. There is a sense that most of the damage has been done in the service arena and the level of decline will level out sooner than later. This observation is reflected in other studies such as the Fed’s Beige Book which reported the current pace of decline in most regions this period was far less than in previous periods. This is a far cry from an announcement that times are getting better, but the decline has to reach an end before there is a chance for recovery.

Even with some uneven data, there was an improvement over June from a reading of 46.3 to 47.7. That is getting very close to the 50 level, and it can be assumed that this level will be crested in the next month or so, allowing the retail sector to enter expansion territory.

July 2009 vs. July 2008
“The performance from a year ago to this July is stark,” said Kuehl. “In the summer of 2008, the decline was beginning to manifest itself. The index was rising, but only very slightly, resting just above the 50 mark. In the months to come, the index would begin to dive rapidly, with September being the worst in the history of the index. This July, the trend was in the other direction with gains each and every month since February. The expectation is that the index will be above the 50 level by September and possibly by August. The contrast between the two years is becoming as stark as any noted in the last several years.”

A full report and information on the CMI's methodology can be found at http://web.nacm.org/cmi/cmi.asp.

Arkansas Lien Laws Changes Go Into Effect August 1st

NACM wants to remind its members that on August 1, 2009, new amendments to Arkansas’ mechanic’s and materialmen’s lien statutes will go into effect. In March of this year, Arkansas Governor Mike Beebe signed into law Act 454, which began its legislative journey as H.B. 1549, sponsored by Arkansas House Majority Leader Steve Harrelson (D), Representative Bruce Maloch (D) and Senator Jim Luker (D).

Some of the amendments going into effect include that every contractor, subcontractor, material supplier, architect, engineer, surveyor, landscaper, abstractor or title insurance agent putting in soil, drain pipe or drainage tile shall have a lien for each 40 acres or less on which the pipe is placed and the notice requirements will be the same as §§18-44-114 and 115.

Section §§18-44-108 is amended pertaining to the penalties for contractors or subcontractors for refusing to provide an owner of the property a list of all parties doing work or furnishing materials on the project and the amount due to each. It also covers certification that the owner has received an actual preliminary notice. Contractors and subcontractors have five days to provide this information to the owner or face fines up to $2,500.

The law will also trigger changes to §§18-44-113 and 118 that state that the owner must receive the actual notice within 30 days of assignment.

And, under §§18-44-115 will be amended so that no lien upon a residential property containing less than four units will be accepted unless the owner is accurately notified and if the residential contract fails to give notice, they are barred from bringing further action to enforce any provision of the residential contract. The penalty for failing to give notice is a fine of up to $1,000. At the same time, the new statute will allow any lien notice by any subcontractor or material supplier provided before the commencement of work shall be effective for all subcontractors and other claimants.

The full text of the law can be found here.

Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National

Welcome to NACM's Blog!

Welcome to NACM's Blog, "Credit Real-Time: The Latest in Commercial Credit"! Here you'll find up-to-date news and information on all things affecting B2B credit and financial managers including legislative or legal issues along with relevant trends and tips of the trade. Feel free to leave a comment on any one of the stories here and let us know what you think! Please remember, however, to keep comments professional and constructive as we do reserve the right to remove a comment that violates our guidelines.

Also be sure to check us out on Twitter at http://twitter.com/NACM_National and on LinkedIn at http://www.linkedin.com/groups?gid=1925852.

Thanks for reading and enjoy!