Chapter Four Outline There is a critical need to be aware of the specific government legislation that pertains to business credit. Government legislation not only creates and protects the rights of creditors but also imposes limitations on business activities. Moreover, credit department policies and procedures should be in place to ensure that staffs act within the boundaries of the law. Training department staff is critical in this area.
See next slides for each of these acts After the industrial revolution, corporate giants, among others, drove the typical American small business into the ground by creating tremendous monopolies which resulted in the emergence of many unfair trading practices such as price rigging and restraint of trade. When the monopolies got out of control, antitrust statutes started to appear in the United States to protect the common small business. Four major acts have been passed over the course of the century each of which refine the former laws to eliminate loopholes and make new provisions. The four acts of importance are:
The Sherman Act was the first act passed in 1890 in the United States and was designed to prevent monopolies and unfair restraint of trade. It prohibits contracts, combinations and conspiracies in restraint of trade in interstate commerce. The Clayton Act was passed in 1914 and amended in 1955. It adds to Sherman Act offenses which were to be considered a felony when the effect is to substantially lessen competition or to tend to create a monopoly.
Robinson-Patman Act declares that it shall be unlawful for any person engaged in commerce, or in the course of such commerce, either directly or indirectly, to discriminate in price between different purchasers of commodities of like grade and quality and having the effect of lessened competition. Federal Trade Commission Act rules unlawful methods of competition and unfair or deceptive acts or practices in commerce.
FCRA is Title VI of the Consumer Credit Protection Act and became effective on 4-25-71. The purpose of the Act is to require that consumer reporting agencies adopt reasonable procedures for meeting the needs of consumer credit, personal insurance and other information in an accurate, fair and equitable manner. The purpose of the Act is to require consumer reporting agencies to adopt reasonable procedures for meeting the needs of consumer credit, personnel (employment), insurance and other information that is fair and equitable to consumers. The Act guarantees a consumer a right to know all credit information that is maintained by credit bureaus and consumer reporting agencies.
The Act states the ways in which a debt collector, defined as any person who regularly collects debts owed to others, may go about pursuing payments from a debtor. FDCA was amended in 1986 to include attorneys in addition to creditors in applying laws relative to collection activity. The Act prohibits creditors from attempting to collect money by employing tactics such as extortion, physical threats, threats of defamation among family, friends and colleagues, and annoying inconveniences.
TILA gives consumers the opportunity and right to shop for credit in a fair and informed manner. The Act protects consumers by stating that certain information must be disclosed up front to the applicant of credit. A consumer must know how much credit will cost regardless of how it is repaid.
ECOA became effective in 1987 and was amended in 1989. Its provisions promote the availability of credit to all credit worthy applicants without regard to race, color, religion, national origin, sex or marital status or age. Creditors shall not discriminate on these factors. Business credit grantors must retain records pertaining to credit decisions for 12 months Like many regulations ECOA extends to business credit, as well and requires certain record keeping of applications and material used to deny credit. See page 73 of the text for a list of ECOA and Regulation B rules. Notification of ECOA Compliance For the purposes of notification to ocnsumers, the Federal Reserve Board has created a distinction for trade credit , to differentiate it from other types of business credit. The board defines trade credit as limited to a financing arrangement that involves a buyer and a seller – such as a supplier who finances the sale of equipment, supplies or inventory: the definition of trade credit does not apply to an extension of credit by a bank or other financial institution for the financing of such items. The board created this distinction between trade and business credit as a means to curb discriminatory practices against women and small businesses seeking working or venture capital.
Regulated by the Federal Trade Commission, the Act creates a uniform and nationwide system previously lacking among the states, legally recognizing that a vendor may engage in e-credit transactions throughout the country. An e-signature is an electronic or digital signature created through fingerprint readers, stylus pads or encrypted “smart cards.” Provisions of E-Sign Act: Parties to the contract decide on the form of digital signature technology Businesses may use e-signatures on checks Businesses must require parties to the contract to make at least two clicks of a computer to complete a deal The consumer decides whether to use an e-signature or handwritten signature Cancellation and foreclosure notices must be sent on paper E-signatures on adoptions, wills, and product safety recalls are not allowed Records of e-contracts may be stored electronically
Unclaimed property is tangible or intangible property owed to a person or entity (i.e., “owner”), yet held by another (i.e., “holder”). Under unclaimed property laws (historically referred to as “laws of escheat” or “unclaimed money laws”), 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 (referred to as the “dormancy period,” which varies depending on the type of property involved). A holder that fails to perform these required duties can incur significant liability for the base unclaimed property amount and applicable interest and penalties. For descriptions of Concepts, Procedures and Requirements, see pages 78-81 of the text
The Sarbanes-Oxley Act was created and enacted to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes. Title I: Public Company Accounting Oversight Board – see pages 81-83 of the text Title II: Auditor Independence – see pages 83- 84 of the text Title III: Corporate Responsibility – see pages 84-85 of the text Title IV: Enhanced Financial Disclosures – see page 85 of the text For Titles V – XI see page 86 of the text
An SAS 70 (Statement on Auditing Standard No. 70) Report is used to gain an understanding of the internal controls in operation at a service organization that may be used by a client’s auditors to plan and execute Sarbanes-Oxley 404 attestation and financial audit services. A service organization is an entity (or segment of an entity) that provides services to a user organization (the client) that are part of the user organization’s information system and control environment, such as processing transactions or hosting data. Benefits of SAS 70: Satisfy customer Sarbanes Oxley 404 requirements Satisfy customer audit requirements Compliance with regulatory requirements Satisfy contract requirements Documentation and testing of internal control structure Streamline business processes and controls.
The Legal Environment of Credit
The Legal Environment of Credit Chapter Four NACM
Learning Objectives <ul><li>Four federal antitrust acts and their purpose </li></ul><ul><li>Fair Credit Reporting Act applications </li></ul><ul><li>Rules for Fair Debt Collection Practices Act </li></ul><ul><li>Requirements under Truth in Lending Act/Regulation Z </li></ul><ul><li>Equal Credit Opportunity Act/Regulation B </li></ul><ul><li>What Constitutes an E-Signature </li></ul><ul><li>Requirements of an Unclaimed Property Holder </li></ul><ul><li>Requirements of the Sarbanes-Oxley Act of 2002 </li></ul><ul><li>Benefits of SAS 70 Reports </li></ul>
The Legal Environment of Credit <ul><li>Antitrust Regulation </li></ul><ul><li>Fair Credit Reporting Act </li></ul><ul><li>The Fair Debt Practices Collections Act </li></ul><ul><li>The Truth in Lending Act/Regulation Z </li></ul><ul><li>The Equal Credit Opportunity Act/Regulation B </li></ul><ul><li>E-Sign Act </li></ul><ul><li>Escheatment/Unclaimed Property </li></ul><ul><li>Sarbanes-Oxley Act of 2002 </li></ul><ul><li>SAS 70 Reports </li></ul>
Sherman Act / Clayton Act <ul><li>The Sherman Act </li></ul><ul><ul><li>Passed in 1890 </li></ul></ul><ul><ul><li>Prevents monopolies and restraint of trade </li></ul></ul><ul><li>The Clayton Act </li></ul><ul><ul><li>Passed in 1971 </li></ul></ul>
Robinson-Patman Act / Federal Trade Commission Act <ul><li>Robinson-Patman Act </li></ul><ul><ul><li>Passed in 1936 </li></ul></ul><ul><ul><li>Prevents unlawful pricing </li></ul></ul><ul><li>Federal Trade Commission Act </li></ul><ul><ul><li>Passed in 1914 </li></ul></ul><ul><ul><li>Prevents false advertising </li></ul></ul><ul><ul><li>Deceiving the public unlawful </li></ul></ul>
Fair Credit Reporting Act (FCRA) <ul><li>Passed in 1971 </li></ul><ul><li>Guarantees a consumer’s rights </li></ul><ul><li>Requires consumer reporting rules </li></ul>
The Fair Debt Collections Practices Act (FDCPA) <ul><li>Was passed in 1977 </li></ul><ul><li>Establishes rules for collection practices </li></ul><ul><li>FDCPA was created to make fair laws for the benefit of debtors when a creditor attempts to recover debts. </li></ul>
The Truth in Lending Act/Regulation Z (TILA) <ul><li>Passed in 1968 </li></ul><ul><li>Protects consumers through education about credit </li></ul><ul><li>Sellers of credit must disclose interest rates, finance charges and fees </li></ul>
The Equal Credit Opportunity Act/Regulation B <ul><li>ECOA (amended in 1990) </li></ul><ul><li>Notification of ECOA Compliance </li></ul><ul><li>Spouses and Personal Guaranties </li></ul><ul><li>Recording Keeping </li></ul>
The Electronic Signatures in Global and National Commerce Act <ul><li>E-Sign Act passed in 2000 </li></ul><ul><li>E-signatures accepted to form a binding contract </li></ul><ul><li>Any symbol constitutes a signature if executed and adopted as authentic </li></ul>
Unclaimed Property Law (Escheatment) <ul><li>All States, the District of Columbia, U. S. Virgin Islands, Puerto Rico, and Guam have enacted unclaimed property laws </li></ul><ul><li>Concepts, Procedures and Requirements </li></ul><ul><ul><li>Jurisdictional Priority </li></ul></ul><ul><ul><li>Unclaimed Property Laws v. Tax Laws </li></ul></ul><ul><ul><li>Statute of Limitations </li></ul></ul><ul><ul><li>Procedures and Requirements </li></ul></ul>
Sarbanes-Oxley Act of 2002 <ul><li>Protects investors </li></ul><ul><li>Title I: Public Company Accounting Oversight Board </li></ul><ul><li>Title II: Auditor Independence </li></ul><ul><li>Title III: Corporate Responsibility </li></ul><ul><li>Title IV: Enhanced Financial Disclosure </li></ul>
SAS 70 Reports <ul><li>SAS 70 (Statement on Auditing Standard No. 70) </li></ul><ul><li>Service organizations are responsible for describing their controls and defining their control objectives </li></ul>