Denied!

In a business that deals in perishables, the most enduring asset is trust. The produce industry has relied on handshakes and phone calls for generations.  But in today’s economy, businesses would be wise to follow Ronald Reagan’s approach with the old Soviet Union: trust, but verify.

“I see companies much more actively trying to manage credit with their customers,” says Mark A. Amendola, senior litigation counsel for Martyn & Associates in Cleveland, OH. “Five or ten years ago, credit was passively managed. Today, it’s actively managed.  For example, some of my larger clients have actually created new departments and teams to actively watch the account balances, credit limit, and payment trends of their customers. Since the economic downturn in 2008, the active management of credit has accelerated.”

The poor economy has been a game-changer for both sellers and buyers, agrees Robert S. Shultz, partner in Quote to Cash Solutions LLC in Simi Valley, CA.  “Over the past few years, there have been many changes in the credit-granting landscape—some positive and some not,” he says. “If anything, the business landscape has become increasingly litigious.  If a creditor is accused of abusing the protections offered by regulations such as the Equal Credit Opportunity Act and Fair Credit Reporting Act, it can be costly to defend. The company’s credit manager must ensure that everything is well documented and these regulations are strictly adhered to.”

Historical Perspective

The United States has a long history of legislation and regulation designed to protect the interests of creditors and borrowers. The Sherman Antitrust Act was passed in 1890 and later clarified and supplemented by the Clayton Antitrust Act of 1914. The Robinson-Patman Act of 1936 supplemented the Clayton Act to promote strong competition and prevent the creation of monopolies, in part by protecting independent store operators from chainstore competition.

More recently the Equal Credit Opportunity Act (ECOA) further tightened credit regulation. The ECOA assists in preventing arbitrary discrimination by a seller in denying credit to a buyer in commercial transactions, Shultz says. “No company can be forced to do something that can harm itself,” he explains. “What the Act says is, if you deny a company credit, it can’t be based on age, race, or gender, or any discriminatory or arbitrary reason. It has to be based on a sound credit evaluation.”

If a company does its due diligence and takes an “adverse action” against a potential debtor, it has to notify the party requesting credit that it has been denied. If the request for credit came by phone, the would-be creditor can deny the request verbally; if the request came in a credit application, a written notice must be sent.  If the transaction is for less than $1 million, generally indicating the company is small and more likely to be subject to discrimination, the creditor is required to keep the records for a full year.  If the request is more than $1 million, records must be retained for only 30 days.