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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 [email protected].

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Bad Credit

If You Want Consumers to Lose, Network Regulation is a Must – Digital Transactions

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After the current U.S. Congress was sworn in, a predictable chorus of merchants, lobbyists, and lawmakers demanded new interchange price caps and other government mandates to decrease credit card interchange fees for merchants. The tired attacks on credit cards are an easy narrative that focuses almost exclusively on the cost side of the ledger, while completely ignoring the cards’ important role in the economy and the regressive effects of interchange regulation. 

To lawmakers blindly acting on behalf of retailers, regulation is a brilliant idea—regardless of how it affects their constituents. For decades, they have promised these interventions would eventually benefit consumers. But the lessons from the Durbin Amendment in the United States and price cap regulation in Australia is clear. Although some policymakers bemoan the current economic model, arbitrarily “cutting” rates for the sake of cuts completely ignores the economic reality that as billions of dollars move to merchants, billions are lost by consumers. 

For the uninitiated, let’s break down what credit interchange funds: 1) the cost of fraud; 2) more than $40 billion in consumers rewards; 3) the cost of nonpayment by consumers, which is typically 4% of revolving credit; 4) more than $300 billion in credit floats to U.S. consumers; and 5) drastically higher “ticket lift” for merchants. 

Johnson: “To lawmakers blindly acting on behalf of retailers, regulation is a brilliant idea—regardless of how it affects their constituents.”

These are just some of the benefits. If costs were all that mattered, American Express wouldn’t exist. Until recently, it was by far the most expensive U.S. network. Yet, merchants still took AmEx because they knew the average AmEx “swipe” was around $140, far more than Visa and Mastercard. 

Put simply, for a few basis points, interchange functions as a small insurance policy to safeguard retailers from the threat of fraud and nonpayment by consumers. Consider the amount of ink spilled on interchange when no one mentions that the chargeoff rate for issuing banks on bad credit card debt exceeds credit interchange.

Looking abroad, interchange opponents cite Australia, which halved interchange fees nearly 20 years ago, as a glowing example of how to regulate credit cards. In truth, Australia’s regulations have harmed consumers, reduced their options, and forced Australians to pay more for less appealing credit card products. 

First, the cost of a basic credit card is $60 USD in many Australian banks. How many millions of Americans would lose access to credit if the annual cost went from $0 to $60? Can you imagine the consumer outrage? 

In a two-sided market like credit cards, any regulated shift to one side acts a massive tax on the other. For Australians, the new tax fell on cardholders. There, annual fees for standard cards rose by nearly 25%, according to an analysis by global consulting firm CRA International. Fees for rewards cards skyrocketed by as much as 77%.

Many no-fee credit cards were no longer financially viable. As a result, they were pulled from the market, leaving lower income Australians, as well as young people working to establish credit, with few viable options in the credit card market.

Even the benefits that lead many people to sign up for credit cards in the first place have been substantially diluted in Australia because of the reduction of interchange fees. In fact, the value of rewards points fell by approximately 23% after the country cut interchange fees.

Efforts to add interchange price caps would have a similar effect here in the U.S. A 50% cut would amount to a $40 billion to $50 billion wealth transfer from consumers and issuers to merchants. For the 20 million or so financially marginalized Americans, what will their access to credit be when issuers find a $50 billion hole in their balance sheets? 

The average American generates $167 per year in rewards, according to the Consumer Financial Protection Bureau. Perks like airline miles, hotel points, and cashback rewards would be decimated and would likely be just the province of the rich after regulation. Many middle-class consumers could say goodbye to family vacations booked at almost no cost thanks to credit card rewards.

As the travel industry and retailers fight to bounce back from the impact of the pandemic, slashing consumer rewards and reducing the attractiveness of already-fragile businesses is the last thing lawmakers and regulators in Washington should undertake.

Proposals to follow Australia’s misguided lead in capping interchange may allow retailers to snatch a few extra basis points, but the consequences would be disastrous for consumers. Cards would simply be less valuable and more expensive for Americans, and millions of consumers would lose access to credit. University of Pennsylvania Professor Natasha Sarin estimates debit price caps alone cost consumers $3 billion. How much more would consumers have to pay under Durbin 2.0?

Members of Congress and other leaders should learn from Australia and Durbin 1.0 to avoid making the same mistake twice.

—Drew Johnson is a senior fellow at the National Center for Public Policy Research, Washington, D.C.

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Increase Your Credit Score With Michael Carrington

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More than ever before, your debt and credit records can negatively impact you or your family’s life if left unmanaged. Sadly, many Americans feel entirely helpless about their credit score’s present state and the steps they need to take to fix a less-than-perfect score. This is where Michael Carrington, founder of Tier 1 Credit Specialist, comes in. Michael is determined to offer thousands of Americans an educated, informed approach towards credit restoration.

Michael understands the plight that having a bad credit score can bring into your life. His first financial industry job was working as a home mortgage loan analyst for one of the nation’s largest lenders. Early on, he had to work a grueling schedule which included several jobs seven days a week while putting in almost 12-hour days to make $5,000 monthly to get by barely.

“I was tired of living a mediocre life and was determined to increase the value that I can offer others through my knowledge of the finance industry – I started reading all of the necessary books, networking with industry professionals, and investing in mentorship,” shares Michael Carrington. “I got my break when I was able to grow a seven-figure credit repair and funding organization that is flexible enough to address the financial needs of thousands of Americans.”

With his vast experience in the business world, establishing himself as a well-respected business leader, Michael Carrington felt he had the power to help millions of Americas in restoring their credit. Michael learned the FICO system, stayed up to date on the Fair Credit Reporting Act (FCRA), found ways to improve his credit score, and started showing others.

The Tier 1 Credit Specialist uses a tested and proven approach to educate their clients on everything credit scores. Michael is leveraging his experience as a home mortgage professional, marketing executive, and global business coach to inform his clients. He and his team take their time to carefully go through their client’s credit records as they try to find the root of their problem and find suitable financial solutions.

The company is changing lives all over America as it helps families and individuals to repair their credit scores, gain access to lower interest rates on loans and get better jobs. What Tier 1 Credit Specialists is offering many Americans is a chance at financial freedom.

Michael Carrington has repaired over $8 million in debt write-ups and has helped fund American’s with over $4 million through thousands of fixed reports. “I credit our success to being people-focused,” he often says. “The amount of success that we create is going to be in direct proportion to the amount of value that we provide people – not just our customers – people.”

Because of its ‘people-focused goals, the Tier 1 Credit Specialist is determined to help millions of Americans achieve financial literacy. It is currently receiving raving reviews from clients who are completely happy with the credit repair solutions that the company has provided them.

Today, Michael Carrington is continuing with a new initiative to serve more Americans who suffer from bad credit due to little or no access to affordable resources for repair.

The Tier 1 Credit Socialist brand is changing the outlook of many families across America. To do this, the company has created an affiliate system that will provide more people with ways of earning during these tough economic times.

As a well-respected international business leader and entrepreneur with numerous achievements to his name Michael Carrington aims to help millions of Americans achieve the financial freedom, he is experiencing today. Tier 1 Credit Socialist is one of the most effective credit repair brands on the market right now, and they have no plans for slowing down in 2021!

Learn more about Michael Carrington by visiting his Instagram account or checking out the Tier 1 Credit Specialist website.

Published April 17th, 2021



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Does Having a Bank Account With an Issuer Make Credit Card Approval Easier?

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Better the risk you know than the one you don’t.

When it comes to personal finance, nothing is guaranteed. That goes double for credit. That’s why, no matter how perfect your credit or how many times you’ve applied for a new credit card, there’s always that moment of doubt while you wait for a decision.

Issuing banks look at a wide range of factors when making a decision — and your credit score is only one of them. They look at your entire credit history, and consider things like your income and even your history with the bank itself.

For example, if you defaulted on a credit card with a given bank 15 years ago, that mistake is likely long gone from your credit reports. To you and the three major credit bureaus, it is ancient history. But banks are like elephants — they never forget. And that mistake could be enough to stop your approval.

But does it go the other way, too? Does having a bank account that’s in good standing with an issuer make you more likely to get approved? While there’s no clear-cut answer, there are a few cases when it could help.

A good relationship may weigh in your favor

Credit card issuers rarely come right out and say much about their approval processes, so we often have to rely on anecdotal evidence to get an idea of what works. That said, you can find a number of stories of folks who have been approved for a credit card they were previously denied for after they opened a savings or checking account with the issuer.

These types of stories are more common at the extreme ends of the card range. If you have a borderline bad credit score, for instance, having a long, positive banking history with the issuer — like no overdrafts or other problems — may weigh in your favor when applying for a credit card. That’s because the bank is able to see that you have regular income and don’t overspend.

Similarly, a healthy savings or investment account with a bank could be a helpful factor when applying for a high-end rewards credit card. This allows the bank to see that you can afford its product and that you have the type of funds required to put some serious spend on it.

Having a good banking relationship with an issuer can be particularly helpful when the economy is questionable and banks are tightening their proverbial pursestrings. When trying to minimize risk, going with applicants you’ve known for years simply makes more sense than starting fresh with a stranger.

Some banks provide targeted offers

Another way having a previous banking relationship with an issuer can help is when you can receive targeted credit card offers. These are sort of like invitations to apply for a card that the bank thinks will be a good fit for you. While approval for targeted offers is still not guaranteed, some types of targeted offers can be almost as good.

For example, the only confirmed way to get around Chase’s 5/24 rule (which is that any card application will be automatically denied if you’ve opened five or more cards in the last 24 months) is to receive a special “just for you” offer through your online Chase account. When these offers show up — they’re marked with a special black star — they will generally lead to an approval, no matter what your current 5/24 status.

Credit unions require membership

For the most part, you aren’t usually required to have a bank account with a particular issuer to get a credit card with that bank. However, there is one big exception: credit unions. Due to the different structure of a credit union vs. a bank, credit unions only offer their products to current members of the credit union.

To become a member, you need to actually have a stake in that credit union. In most cases, this is done by opening a savings account and maintaining a small balance — $5 is a common minimum.

You can only apply for a credit union credit card once you’ve joined, so a bank account is an actual requirement in this case. That said, your chances of being approved once you’re a member aren’t necessarily impacted by how much money you have in the account.

In general, while having a bank account with an issuer may be helpful in some cases, it’s not a cure-all for bad credit. Your credit history will always have more impact than your banking history when it comes to getting approved for a credit card.

For more information on bad credit, check out our guide to learn how to rebuild your credit.

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