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Virus Relief Bill Could Harm Lending, Collections Landscape

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By David Dormont, Gregory Donilon and Maura Russell

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Law360 (September 8, 2020, 5:31 PM EDT) —

David Dormont
David Dormont
Gregory Donilon
Gregory Donilon
Maura Russell
Maura Russell

As the COVID-19 pandemic continues to impact the U.S., Congress may potentially alter the legal landscape for creditors and debtors.

The U.S. House of Representatives recently passed H.R. 6800 — the Health and Economic Recovery Omnibus Emergency Solutions, or HEROES, Act. This $3 trillion, 1,852-page bill contains provisions that would significantly affect the extension of credit to and the collection of debts from individuals, small businesses and nonprofit organizations.

In short, most legal collection and enforcement efforts against covered entities and individuals would likely be stayed nationwide for the foreseeable future. 

Since the pandemic began, creditors attempting to collect debts and/or enforce judgments and security interests have faced a hodgepodge of state and local procedures restricting such measures. Under the HEROES Act, those collection actions that have been allowed to proceed may actually grind to an indefinite halt. 

Highlighted below are several important provisions of the act that, if passed, would abruptly shift the playing field for creditors and debtors. These provisions also raise a host of questions and potential pitfalls. As detailed further, this well-intended legislation may actually be fraught with unintended consequences for both creditors and debtors — unintended consequences that could exacerbate already-distressed economic conditions.

The Bill

As a proposed amendment to the Fair Debt Collection Practices Act, the HEROES Act would prohibit most collection actions against small businesses and nonprofits from the date of the law’s enactment until 120 days after the end of the president’s national emergency declaration. This covered period figures to be a long pause, which may continue well into 2021.

The upshot of this legislative moratorium is that creditors may be saddled with large receivables that they cannot legally attempt to collect for at least a year. Once the act’s moratorium ends, it is likely that creditors attempting to seek relief through the court system could still encounter an unprecedented backlog of cases.

Additionally, the act would expand the FDCPA’s definition of a “debt collector” to include essentially any person or entity that engages in the collection of a debt and may require such person or entity to follow the requirements that the FDCPA places on debt collectors.

There are two important exceptions to the foregoing. First, a mortgage loan is not covered in the definition of a debt. Second, the restrictions do not apply to “an obligation arising out of a credit agreement entered into after the effective date” of the act.

Thus, if after the act becomes effective, (1) the debtor signs a new credit agreement, and (2) the creditor lends new money or tenders new goods based on that new credit agreement, then the creditor will not be restricted by the provisions of the act in collecting that new accumulated debt. 

Prohibited Collection Activity

The HEROES Act would bar various collection measures, including:

  • Enforcing a security interest;
  • Collecting any debt;
  • Commencing or continuing an action to evict a small business or nonprofit organization for nonpayment; and
  • Threatening to take any of the foregoing actions.

As proposed, the act would effectively stop the enforcement of any judgment against a covered business, even if the judgment was obtained before the act’s effective date. Arguably under The HEROES Act, creditors may also be prevented from asserting mechanic’s liens against covered businesses and nonprofits. Further, creditors may be forbidden from renewing existing liens as they expire due to state time limits. 

The HEROES Act’s prohibition on threats to take certain action raises the important question of whether a creditor would be prohibited from even filing a lawsuit against a debtor. In many jurisdictions, the entry of a judgment results in an attachment of the debtor’s real property, which the act would explicitly prohibit.

A lawsuit may therefore be deemed a threat to attach or foreclose on real property. While the act is silent about whether obtaining a judgment would violate the law, it does explicitly prohibit commencing or continuing an action to evict a small business or nonprofit.

As such, there is a potential statutory counterargument that, if Congress had intended to bar a creditor from commencing or continuing a suit for a debt owed, it knew how to do so and determined not to impose such a prohibition.

Protected Businesses

The HEROES Act would protect a wide array of businesses from collections, including small businesses and almost all nonprofits organizations, including most universities, schools, hospitals, religious organizations and charities.

With respect to small businesses, the act defines the term as having the same definition as the term “small business concern” in Section 3 of the Small Business Act. In addition to certain criteria enumerated in the SBA, classification as a small business concern under the SBA is dependent upon the definition of “small” under industry size standards categorized using North American Industry Classification System codes.

The industry size standards are generally based on the average number of employees over the previous year or average annual receipts over the past three years. 

Creditors should take note that these standards vary from industry to industry and some businesses may still qualify as a small business concern and, thus, a small business under the HEROES Act, despite having as many as 1,500 employees or up to approximately $40 million in average annual receipts depending upon the applicable industry.

Indeed, the SBA definition of a “small business concern” encompasses more than just the typical mom-and-pop shop and includes a large segment of U.S. businesses. Given the complexities of identifying a small business under the HEROES Act, and before pursuing any collection activity against another business, creditors should seek assistance from legal counsel to determine whether a particular business is a small business protected by the act.

Tolling

The HEROES Act would toll “[a]ny applicable time limitations for exercising an action” against a small business or nonprofit for the duration of the covered period. Accordingly, the act attempts to protect creditors who are unable to timely pursue claims as a result of the act’s restrictions

This provision of the act, however, raises the constitutional question of whether this federal act can modify a state’s statute of limitations period. This question may need to be addressed by the courts in coming years. 

Penalties

Violations of the collection provisions of the proposed HEROES Act are subject to the penalties set forth in Section 813 of the FDCPA. Along with those potential damages specified under the FDCPA, in any successful action to enforce the foregoing liability, the costs of the action and reasonable attorney fees may be awarded.

While pursuing such claims may seem like a bonanza for plaintiff’s firms, under the unique Catch-22 of the HEROES Act, any judgment obtained against a small business could not be enforced and, arguably, may not even be commenced.

Protections for Consumer Debts

The HEROES Act also offers a variety of protections to individuals that parallel those offered to small businesses and nonprofits, including a proposed eviction moratorium, and prohibitions of the same broad array of collection efforts. The HEROES Act also clarifies that, after the covered period ends and debt-collection protections expire, individuals will not be forced to repay those debts at an accelerated rate. 

The HEROES Act creates a credit facility for creditors and debt collectors who suffer losses caused by loan forbearance to consumers.

But companies seeking these loans will be subject to extra restrictions, including (1) the companies must grant automatic forbearance “upon the request of a consumer,” and (2) they may not charge “fees, penalties, or interest (beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the loan contract) … to the borrower in connection with the forbearance.”

The exact requirements for obtaining these credit facilities and how such facilities will be rolled out are not spelled out in the act and will require significant regulatory input and clarification. 

Impact on Creditors

At first blush, the proposed restrictions on collection efforts under the HEROES Act appear to give struggling businesses and nonprofits the needed breathing room to stabilize their operations and cash flow, and get back on their feet.

In practice, due to the act’s expansive effect, imprecise definitions and indefinite duration, the act’s long-term impact on small businesses and nonprofits may have the opposite effect. In particular, other businesses large and small may hesitate doing business with such entities due to the increased credit risk posed by such transactions.

During the covered period, lenders, vendors and suppliers looking to do business with small businesses and/or nonprofits would no longer be able to rely on the ordinary business terms and relationships that existed prior to the effective date of the HEROES Act.

In order for post-effective date lending, extensions of credit, and delivery of goods to fall outside the restrictions of the act, new credit agreements would need to be entered into before the extension of credit or other business transaction with the small business or nonprofit.

Vendors and suppliers without a new credit agreement may consider providing goods or services to a small business or nonprofit on a cash in advance or a cash on delivery basis to protect themselves from being unable to collect from a small businesses or nonprofit that fails to timely perform or satisfy even post-HEROES Act debt obligations.

This will make an already bad credit situation even worse. As the term “credit agreement” is not defined under the HEROES Act, lenders, vendors and suppliers, even if unsure as to whether or not a business is considered a small business or nonprofit organization under the act, would be well served to memorialize further lending and extensions of credit in a new master credit agreement, evidencing the timing and the credit terms.

It is important to note that, under the act, pre-HEROES Act debt is not being forgiven. It is merely being postponed. As many lenders, vendors and suppliers will continue to do business with many small businesses and nonprofits, the act’s standstill could lead to financial difficulties for these creditors themselves. Moreover, these same creditor entities may or may not be protected from their own creditors by the HEROES Act.

If they are not protected, these lenders, vendors and suppliers could be faced with creditor workouts or bankruptcy scenarios of their own. Lenders, vendors and suppliers will be faced with important decisions of whether they want to continue to do business with business entities under these circumstances.

The HEROES Act will most certainly influence — and in many instances negatively — key components of the bankruptcy system. Indeed, without the need to file for bankruptcy protection, the act serves as a massive, unsupervised automatic stay for tens of millions of individuals and businesses.

Not only would collection efforts be stayed under the act, but creditors — now all classified as debt collectors — are likely prohibited from, among other things, commencing an involuntary bankruptcy proceeding against a small business or nonprofit organization that is in default on its payment obligations to such creditor on account of a pre-HEROES Act covered debt.

Instead, the creditor must stand by and wait until the covered period expires, in the hopes that the small business or nonprofit organization has stabilized itself and has the necessary cash flow to resume payments under the payment plans imposed by the HEROES Act. 

Preferring Creditors

The HEROES Act expressly does not prohibit a small business or nonprofit “from voluntarily paying, in whole or in part, a debt,” thereby allowing small businesses and nonprofits to prefer one creditor over another during the covered period. In a bankruptcy proceeding, a trustee is vested with avoidance powers to recover such preferential payments and redistribute them among the debtor’s creditors.

Given the duration of the covered period, many payments made to preferred creditors during the covered period would no longer be avoidable in a subsequent bankruptcy case or state court insolvency proceeding because the applicable look back period (usually 90 days) under the U.S. Bankruptcy Code and certain state laws will have expired.

Thus, unless the lookback period is extended, preferential payments made by a small business or nonprofit to certain of their creditors during the covered period may ultimately be unrecoverable to the detriment of other creditors that were not paid and were faced with the restrictions of the HEROES Act.

Furthermore, given the broad definition of a “debt collector,” the act might even prevent a trustee in a pending bankruptcy case from commencing or continuing any preference avoidance action against a small business or nonprofit organization until such time as the covered period is over.

While affording small businesses and nonprofits with the necessary breathing room for the near future, the HEROES Act may do little more than delay the inevitable rush to the bankruptcy court that may still occur after the covered period.

Unsecured lenders, vendors and suppliers who continue to do business with these small businesses and nonprofits may find that, even with a new credit agreement as discussed above, once the covered period is over, they stand in a very long line for payment with all of the other creditors of such small business or nonprofit.

Absent a perfected lien or security interest, such unsecured lender, vendor or supplier will have no preferred status over other pre-HEROES Act creditors. 


David Dormont, Gregory Donilon, and Maura Russell are partners at Montgomery McCracken Walker & Rhoads LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

For a reprint of this article, please contact reprints@law360.com.

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Fall 2020 Brings Increased Regulatory Focus on Financial Institution Detection of Human Trafficking | Moore & Van Allen PLLC

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On October 15, 2020, the Financial Crimes Enforcement Network of the U.S. Department of Treasury (FinCEN) released its Supplemental Advisory on Identifying and Reporting Human Trafficking and Related Activity (Supplemental Advisory). The last time FinCEN provided guidance on identifying trafficking in anti-money laundering (AML) processes was in Guidance on Recognizing Activity that May be Associated with Human Smuggling and Human Trafficking – Financial Red Flags on September 11, 2014. The evolving tactics of human traffickers and behaviors of victims required updated guidance in order for financial institutions to better meet Bank Secrecy Act (BSA) obligations to assist the government in detecting and preventing money laundering. 

The Supplemental Advisory focuses on four emerging tactics used by human traffickers to carry out and hide the proceeds from their illicit operations: front companies, exploitative employment practices, funnel accounts, and alternative payment methods. Front companies are lawful, licensed, and registered businesses which are used by traffickers to comingle the illicit proceeds generated from their scheme of human exploitation with that of a legitimate business. Examples include massage parlors, nail salons, even electrician services, and faith-based mission work. 

Labor trafficking can be harder to detect than sex trafficking for AML departments. FinCEN’s Supplemental Advisory alerts financial institutions to examples of exploitative labor practices, including visa fraud, wage withholding, and recruitment fee advances. Note that in 2019, the Federal Acquisition Regulation: Combating Trafficking in Persons was amended to address prohibited recruitment fees and broadened contractor responsibility for violative recruitment fees in supply chains. 

Funnel accounts continue to be a common tactic wherein a trafficker coerces a victim to open one or more bank accounts in their own name, and then directs them to deposit, transfer, wire, and withdraw monies in amounts below a reporting threshold, for the benefit the trafficker or the enterprise. Because the accounts are often held exclusively in the victims’ names, the trafficker remains anonymous. 

Such account activity may lead to an Unusual Activity Report or Suspicious Activity Report but that would erroneously target the victim, not the perpetrator. Accounts may be closed by the financial institution, or at the direction of the trafficker, following overdraft or low balances, which can cause victims to incur bad credit status and prevent them from accessing financial services in the future. 

The Supplemental Advisory further alerts financial institutions to the prolific use of prepaid cards, virtual currencies, smartphone cash applications, and third-party payment processors to advertise their sex trafficking business and receive payment. 

Although the indicators list addended to the Supplemental Advisory is not significantly different than past iterations, it adds a set of case studies. Specific perpetrator and victim vignettes are effective in modernizing detection tools as they allow financial institutions to keep their pulse on real life examples relayed by law enforcement and survivor advocates. The Supplemental Advisory also reminds financial institutions that they are protected from liability for information sharing afforded under Section 314(b) of the USA Patriot Act. Traffickers often implicate multiple financial institutions and only through a wider lens and open communication can otherwise lawful-appearing activity be identified as suspicious.  

Finally, the Supplemental Advisory notes FinCEN’s Customer Due Diligence Rule, promulgated in 2018, which generally requires some financial institutions to identify beneficial owners of commercial customers. Under the Trafficking Victims Protection Act, “whoever knowingly benefits, financially or by receiving anything of value” may be subject to criminal and civil liability. Therefore, diligence and monitoring processes are to include potential third-party participants in an exploitive scheme.  

FinCEN’s advisory on human trafficking is timely. In the last few months, regulators have signaled increased attention on financial institution responses to human trafficking. This past summer, Deutsche Bank was fined $150M by The New York State Department of Financial Services (“NYDFS”) for compliance failures related to client Jeffrey Epstein, his sex trafficking enterprise and correspondent banks. In the Consent Order, NYDFS found the Deutsche Bank “conducted business in an unsafe and unsound manner [and] failed to maintain an effective and compliant anti-money laundering program.” This September, Westpac Bank was fined $920M USD by the Australian Transaction Reports and Analysis Centre (Australia’s financial intelligence, anti-money laundering and counter-terrorism regulator) for failures in AML reporting, record keeping and detection, including transfers indicative of child sex trafficking. This fine is the largest paid to an Australian regulator for violation of money laundering laws to date. Also in September, the United Kingdom announced that the U.K. Modern Slavery Act of 2015 will be strengthened to (i) allocate more funding to enforce its requirements and (ii) mandate that companies’ modern slavery statements cover certain topics ranging from due diligence to risk assessment. 

Increased regulatory focus on financial institution responses to human trafficking deserves attention.

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Can I Negotiate a Bad Credit Auto Loan?

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Yes, you can negotiate your deal on a bad credit car loan, though you may not have the same leverage as someone with a better credit score. Without the strength of a high credit score behind you, you may not be able to qualify for as low of an interest rate or monthly payment as you’re looking for. But a lot of things associated with an auto loan can be negotiated.

Preparing to Negotiate a Bad Credit Auto Loan

Before you go toe-to-toe with a dealer, make sure you know what kind of power you have in this arena. This means knowing your credit score and what’s on your credit reports. Without this information, you’re powerless to push back against a lender’s assessment of your credit situation.

Auto Credit Express Tip: Remember, you’re most likely going to be interacting with the special finance manager at a dealership, who talks to the lender on your behalf. The dealer isn’t responsible for the rates and terms you qualify for, and the lender can’t determine how much a dealership is willing to cut a deal.

The only way to know you deserve better terms than you’re being offered is to do your research. Find out what the average car loan looks like for people in similar situations. You don’t want to go into a dealer with unrealistic expectations.

  1. First, get your credit score and credit reports. Now is a great time to do this, because the three major credit bureaus – TransUnion, Experian, and Equifax – are offering U.S. consumers free weekly access to their credit reports. This deal only lasts until April 2021; you can request a copy of your reports by visiting www.annualcreditreport.com.
  2. Next, look online for some national averages on auto lending interest rates and see where you fall on the FICO credit scoring model. Knowing where you stand enables you to prepare for the next steps in your car loan: your budget.
  3. The final step to getting ready to negotiate on your auto loan is to plan your car buying budget. If you don’t know what you have to work with, or how to accurately calculate the out-the-door and overall costs of your auto loan, then you won’t have a leg to stand on when talking to a dealership.

What Are You Negotiating For?

Without a plan or a budget to refer to, you can’t have a goal to negotiate for. When it comes to a bad credit car loan, there’s no point in negotiating just because you can.

You should have a set goal in mind, whether it’s a target interest rate, a specific loan term, or a set monthly payment amount. Don’t give these things away to the dealer, though. Keeping your numbers close to the vest is what gives you the power to make a deal on your terms.

In order to get an auto loan deal you can live with, you have to know what you can afford. To find this out, you can do a few simple calculations that the lender does when determining if your budget can handle a car loan. This is your debt to income (DTI) ratio.

Your DTI ratio lets you know how much of your monthly finances are already being used by your existing monthly bills, including an auto loan and car insurance. If you’re using more than 45% to 50% of your monthly income, a lender may not be willing to add to that burden.

To see how much auto loan you could qualify for, and to find out if those monthly payments fit into your budget, you can check out our car loan and monthly payment calculators.

Know What You Can Negotiate

In order to negotiate on your bad credit auto loan, you have to know what you can and can’t change your lender’s mind on. Not everything on a car loan contract is negotiable.

Here’s a look at what you can have a crack at negotiating:

  • Can I Negotiate a Bad Credit Car Loan?Vehicle selling price – The first thing you should know you can negotiate on when it comes to an auto loan is the price of the car. The sticker price on a new vehicle typically lists the MSRP, or manufacturer suggested sale price, and may list a dealership price, too. You can ask for any price you want, but the dealer may not agree to honor it.
  • Your interest rate – Your APR is likely to be a bit higher than you’d like with bad credit, but you can always ask a dealership or lender if what they’re offering is the best rate you qualify for. Often it’s not, there’s no rule that says dealers have to offer you the lowest rate or best deal that you’re qualified for by a lender. With that said, you don’t have to accept a deal that stretches you too thin, either.
  • Your loan term – Shorter loan terms mean higher monthly payments, but stretching your loan too long means a higher overall cost. Being a payment shopper, only looking at the monthly payment and ignoring the overall loan cost, isn’t the place to be with poor credit.
  • Down payment amount – When you have credit challenges, you generally have to meet a down payment requirement set by your lender. However, it may not be set in stone. Depending on your other rates and terms, you may be able to negotiate the amount you need up front.
  • Your trade-in – If you’re using a trade-in to cover some of your down payment amount, you may be able to negotiate what you’re getting out of it. It also helps to know the value of your trade-in before you head to the dealership so you can have more leverage in negotiation.
  • Prepayment penalties – If you have to take on a longer term to get a more favorable monthly payment, you can save money in the long run by paying more on your loan whenever possible. Look over your contract carefully to make sure you aren’t penalized for this, or ask the lender to remove the clause if you are.
  • Optional features and equipment – Some features on the vehicle you’re choosing could be optional, and carry additional fees which can be negotiated on. Things like window tinting, fabric protection, and certain optional packages like wheel protection or cargo nets could be charges coming from the dealer. You don’t have to agree to these. This also goes for extended warranties and GAP insurance coverage.
  • Dealership documentation fees – A “doc fee” on any auto loan contract, which dealers charge for preparing your paperwork and talking to the lender on your behalf, is pretty standard, but the amount varies. There’s no reason to pay through the nose for this, and many states cap the amount you can be charged. Expect a minimum doc fee, but try to lower it as much as possible.

With all these things to haggle over, there are three main things that are non-negotiable when it comes to a car loan (which are set by the state, so there’s no getting around them):

  1. Taxes
  2. Title fees
  3. License fees

Ready to Negotiate Your Next Car Loan?

If you’ve tried negotiating on a bad credit auto loan in the past and were unsuccessful, don’t give up! Just because one dealership isn’t willing to work with you doesn’t mean that others aren’t.

Remember to keep your search for a car loan to a two-week window. If you apply for multiple loans of the same kind with different lenders within that time frame, you stop multiple hard credit inquiries from affecting your credit score.

Additionally, when you have bad credit and need an auto loan, it’s in your best interest to make sure you’re applying with a subprime lender at a special finance dealer. These lenders are able to help people in many tough credit situations, such as bad credit, no credit, and even bankruptcy.

Here at Auto Credit Express, we’ve cultivated a nationwide network of special finance dealerships, and we want to get you matched to one in your area! We’ll get right to work for you after you fill out our fast, free, and zero-obligation car loan request form.

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Visitors to local dealership website can get their credit score for free

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Honda of Victoria provides free credit score and buying power tool online for all users

VICTORIA, Texas (PRWEB) October 24, 2020

Honda of Victoria, a dealership serving Victoria and the entire surrounding area, provides a tool on their website likely to bring a smile to the face of many shoppers: the ability to obtain one’s credit score for free. The TransUnion VantageScore page on the Honda of Victoria website provides credit score, interest rate, terms and borrowing power information instantly to users.

A Social Security Number is not required to utilize the Honda of Victoria system. The dealership assures users that the system is safe and secure. Getting one’s score does not affect one’s credit, and the service is available in English as well as Spanish.

In addition to the free credit score tool, Honda of Victoria allows customers to get pre-approval for financing online. The dealership makes a point of accepting both good and bad credit, and welcomes all first-time buyers. A finance team is on hand to help every customer find the finance package that works best for their own particularly needs.

To apply for credit pre-approval, users need only fill out a form on the site. The form requires users to enter their contact info, employment info and the vehicle that they are interested in.

Those interested in checking their credit score for free are encouraged to go to the Honda of Victoria website at http://www.hondaofvictoria.com. Alternatively, individuals can reach the dealership by phone through dialing 361-575-0495. Finally, those who wear a mask and practice proper social distancing procedures are welcome to visit the dealership location itself at 116 Huvar Street, Victoria.

For the original version on PRWeb visit: https://www.prweb.com/releases/visitors_to_local_dealership_website_can_get_their_credit_score_for_free/prweb17498137.htm

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