FTC Red Flag Regulation for Creditors and Financial Institutions

As part of the Fair and Accurate Credit Transactions (FACT) Act of 2003 the Federal Trade Commission (FTC), the National Credit Union Administration (NCUA) and the federal bank regulatory agencies together have initiated the ‘Red Flags Rules’ (regulations) that now requires financial institutions and creditors to implement written identity theft prevention programs.

This program is to help prevent identity fraud by detecting and mitigating any instances of it. These instances, responses, patterns or specific activities that could lead to identity theft are termed ‘Red Flags”. It is an attempt on part of the regulators to make organizations handling vulnerable consumer accounts, keep an eye out for red flags that signal identity theft.

The Red Flags Rules apply to financial institutions and creditors with covered accounts. Under the rules a covered account is an account that involves multiple payments or transaction. Examples of a covered account would be credit card accounts, automobile loans, mortgage loans, margin accounts, telephone bills, utility accounts, checking accounts, and savings accounts. These accounts are typically consumer accounts for personal, family or household purposes. A covered account may also include accounts of small businesses or sole prop accounts as they can also attract the risk of identity theft.

From a creditor’s standpoint it is interesting to note that by merely accepting credit cards as a form of payment does not in and of itself make an entity a creditor. For the purpose of this regulation a creditor is any entity that regularly:
• extends, renews, or continues credit;
• arranges for the extension, renewal, or continuation of credit;
The creditor can also be any assignee of an original creditor who is involved in the decision to extend, renew, or continue credit.

May 01, 2009 onwards the FTC will start enforcing these regulations. Every creditor and financial institution with ‘covered accounts’ must have in place a written policy to detect, prevent and mitigate the possibility of identity theft in connection with opening, maintaining and operating a covered account.

The current challenge for organizations affected lies in a) identifying their account-specific (covered-account(s)) Red Flags and b) writing a customized ‘Red Flag Program’.
As an example the written program may include things like, unusual account activity, fraud alerts on a consumer report or attempted use of suspicious account application documents. In writing such a program it should simultaneously describe appropriate measures the organization would take to prevent and mitigate anticipated or occurred crime and have provisions to update the program.

The Red Flag Program must be managed by the Board of Directors or senior employees of the financial institution or creditor. It should be inclusive of staff training for Red Flag Program and provide for oversight of any service providers.

This highlights the importance of the credit function in assessing the risk associated with covered accounts and gettting actively involved in developing and implementation of a written identity theft prevention program under the new "Red Flags Rules."

Article contributed by:
Puru Grover MD CreditGuru.com

Canadian Business Bankruptcies drop by 2% in 2008

Feb 11, 2009: According to the latest stats released by the Office of the Superintendent of Bankruptcy for the year 2008, 6164 Business Bankruptcies were filed in Canada. This is a 2% drop from the year before i.e. 2007.

Although the absolute drop in numbers 2008 over 2007 is 2%, if we compare this to the 6.8% drop in the numbers of 2007 over 2006 the trend seems to be reversing.
This 6.8% decrease in business insolvencies in 2007 came in a more favourable economic climate wherein the gross domestic product growth (GDP) was 2.71%. This number has dropped to 0.95% in 2008!

The current economic climate is threatening the GDP growth which is primarily driven by consumer demand, consumer expenditure, government expenditure and business expenditure. Media constantly bombards us with bad economic news which kills consumer confidence and it is consumer spending that drives two thirds of an economic recovery cycle. While the economic indicators of inflation, job loss, housing starts and consumer confidence are not showing a very encouraging start in 2009, the Bank of Canada, Governor Mark Carney projects a 3.8 per cent growth for the Canadian economy in 2010. It is heartening to note this optimism which the governor denotes confidently as realism.

Consumer Bankruptcies Rise in 2008 in Canada

Feb 09, 2009
Consumer Bankruptcies:
Comparing 2008 numbers to 2007
These following numbers were released on Monday by the Office of the Superintendent of Bankruptcy Canada.



Consumer bankruptcies in 2008 jumped up by 13.5% over 2007. In all of last year 90,620 Canadians filed for bankruptcy as opposed to 79,847 that filed in the year 2007.
In 2007, the number of consumer insolvency cases per thousand residents 18 years of age and older increased by 0.1 cases over 2006. Whereas the same metrics increase now in 2008 over 2007 would be close to 0.3 cases.

Considering the job losses announced and poor housing starts for January, consumer bankruptcies are predicted to go higher in the coming months.

Credit Unions Vs Banks and the Credit Sub-prime Crisis

It was Freidrich Raiffeisen, the mayor of Flammersfeld, Germany who conceived of the idea for a credit union more than 150 years ago. Today about 150 million people are members of approximately 42,000 credit unions in around 90 countries worldwide.

So what is a Credit Union and how does it compare to a Bank?

A Credit union is essentially structured as co-operative which is owned and directed by its members. It is a federally chartered financial institution and is regulated federally.

Federal regulations and required laws establish the requirement for credit unions to issue common shares and hold them as equity in the credit union. A nominal issue price formalizes the relationship credit unions have with their customer-owners through their share accounts.

Ownership with Credit Union therefore includes a one time investment that stays on deposit in a 'common share account' (savings), and may be redeemed upon the withdrawal of membership from the credit union. This common share requirement is not a “fee” to join but is an investment. This investment is retained as equity in on behalf the customer who also becomes a part owner in the business of the credit union. With the ownership share(s), the owner-customer has access to all products and services and has a say in the matters of the credit union. The customer as a member now can attend Annual General Meetings, voice opinions and elect and vote for the Board of Directors which sets policies and objectives. Many credit unions reserve the right to expulsion of a member.

A relatively smaller deposit ($5 to $30) than a bank is required to open an account at a credit union

Because membership represents ownership, it fosters a stronger relationship with Credit Union than a regular bank. The credit unions thus call their customers 'customer-owner'.

Credit unions are supposed to be not-for-profit financial institutions and any money made above the cost of operations is to be shared with its members through dividends, service enhancements, granting loans on reduced interest rates.

Typically members with a common bond collaborate to make credit unions such as place of worship; an organization; place of employment; community based; trade union etc.

Only people who are credit union members can borrow at the credit union where they have membership. Unlike a bank where the borrower is assessed based on his or her 'ability' to repay the credit union principles are based on the 'character' of the member wherein the 'desire to repay' is considered more important than the ability to repay. In essence, members are borrowing their own money and that of their fellow members and member service is the foundation of the of the credit union movement.

In general credit unions have weathered the current sub-prime crisis better than the banks as bulk of their activity is carried out through deposits by their own members and holding their loans in-house. Since they are member-owned there is risk aversion where lending principles and standards are not compromised. As not-for-profit cooperatives they do not usually charge as much as banks and don't have to pay taxes on their net income. This perhaps gives them an added edge to provide better rates on credit cards, one-year CDs and one-year adjustable-rate mortgages to their members.

Credit unions essentially make no subprime loans but in these tough economic times it is more than likely that a credit union may be willing to look at those with poor credit. When banks are tightening their screws it is likely that a credit union may be in a better position to approve your loan expeditiously as their relatively smaller size makes them more nimble, personal and understanding.

In today's tough market condition consumers should try and include credit unions in their comparison shopping at financial institutions. Eligibility may become a hurdle but requirements have been relaxed tremendously in recent years and people now can become members of a credit union just based on where they work or reside. Don't go by the name or size of the credit Union. Find out what the eligibility requirements are for membership. Don't discount a credit union for its small size, as large credit unions very often will help smaller credit unions. As for the misconception that credit unions are local and as a member one gets tied-down to a financial institution locally, credit unions have gone well beyond that issue with shared branching and a network of cooperative ATMs.

In the US before you decide to become a member of a particular credit union check to make sure the credit union's deposits are insured. The NCUA is a federal agency that insures most credit unions by the National Credit Union Administration's share insurance fund. Their website: http://ncua.gov/
In Canada visit: http://www.cucentral.ca/

Nortel a tek-wrek : Restructuring & Bankruptcy Protection

Jan 14th 2009: Nortel Networks Inc. (“NNI”) and fourteen (14) of its subsidiaries filed petitions in the United States and Canadian Bankruptcy Courts seeking relief under

• Chapter 11 of the United States Bankruptcy Code (Case No. 09-10138) and


• Companies’ Creditors Arrangement Act (CCAA) in Canada.

Note: Nortel has filed for protection from its creditors and is not in receivership or bankruptcy. Instead, the filing under Chapter 11 and CCAA is an attempt to rescue and plan restructuring so that the debtor (Nortel) diminishes the possibility of going into receivership or bankruptcy. The legislation (CCAA and Chapter 11) aims at facilitating compromises and arrangements between companies and their creditors.

Link to get an overview of CCAA (CANADA): http://www.creditgurublog.com/?p=32

Link to get an overview of Chapter 11 (USA): http://en.wikipedia.org/wiki/Chapter_11


Nortel’s link on its financial and business restructuring: http://www.nortel.com/corporate/restructuring.html

CANADA
Pursuant to the CCAA Order granted by the Ontario Superior Court of Justice, Ernst & Young Inc. was appointed Monitor of the Applicants.
Contact for stakeholders as follows:
Email: Nortel.Monitor@ca.ey.com
Toll Free: 1-866-942-7177
Website: http://documentcentre.eycan.com/Pages/Overview.aspx?SID=89
Creditors may want to read the initial court order at the following link: http://documentcentre.eycan.com/eycm_library/Project%20Copperhead/English/Court%20Orders/Nortel-Initial_Order.pdf
Link to court documents and Monitor’s Report: http://documentcentre.eycan.com/Pages/Main.aspx?SID=89&Redirect=1

USA
For information on the U.S. Chapter 11 proceedings,
Contact established for stakeholders for the U.S. claims agent:
Epiq Bankruptcy Solutions, LLC
Attn: Nortel Address Updates,
757 Third Avenue, 3rd Floor,
New York, NY 10017,
Tel: 646-282-2500 Fax: 646-282-2521
Toll free at 1-866-897-6435
Website: http://chapter11.epiqsystems.com/nortel
Link to ‘Proof of Claim’ Form: http://chapter11.epiqsystems.com/Documents.aspx
Link to court documents: http://chapter11.epiqsystems.com/docket/docketlist.aspx

Canadian Bankruptcy Statistics - Business Bankruptcies decline in July 2008

Sept 5, 2008: According to the latest Canadian Bankruptcy Statistics released today by the Office of the Superintendent of Bankruptcy for the month of July 2008 business bankruptcies have declined by 4% over 2007 for the same 12 months period ending July 31, 2008.
The total business number of bankruptcies for the 12-month period ending on Jul 31 2007 was 6183 as compared to 6,441 for the same 12-month period last year.

While the overall numbers in Canada show a decline, Nova Scotia and Quebec have shown about a 9% increase in the filing of bankruptcies for their respective provinces in 2008 over the same 12 months period ending July 31, 2007.

In comparing the total number of bankruptcies filed just for the month of July there was a drop of 6.4% this year over last year. The month of July 2008 also showed a decline over last month by about 2%. (Refer to the following table for detailed numbers)
Provinces that have shown an increase for the month of July 2008 as compared to July 2007 are Nova Scotia, New Brunswick, Newfoundland, Quebec, Manitoba and British Columbia.

Notable amongst these is Quebec as the province has show an increase of 3.2% for the month of July 2008 as compared to July of 2007. Quebec has also shown an increase of 12% in the number of bankruptcies in the month of July 2008 over June 2008 and an overall increase of 9% over a 12-month period ending July 31st 2008 as compared to the same period in 2007.

Note:
Business bankruptcies numbers include the following:
* Any bankrupt commercial entity &
* An individual who as a result of operating a business incurs 50% or more of total liabilities.

Article contributed by: CreditGuru.com

[Statististics sourced from Industry Canada: http://www.ic.gc.ca/]

Commercial Restructuring under the Canadian Bankruptcy and Insolvency Act

Creditor's rights in the event that a business files for a proposal in Canada.

There is a provision under Part III of the Canadian Bankruptcy and Insolvency Act (BIA) for an insolvent business to file a 'Proposal' with its creditors. In layperson's terms it is like making a modified arrangement with its creditors to pay them off in an acceptable manner which is generally over a longer period of time. These kinds of proposals made by businesses are termed Division I Commercial Proposals under Part III BIA.

The BIA (Weblink: http://laws.justice.gc.ca/en/B-3/index.html) was reformed in 1992 with an objective to promote business proposal as an alternative to bankruptcy. While 'Bankruptcy' corresponds to the liquidation of the debtor's business assets and the end of its operations, a Commercial 'Proposal' involves settling debts between the debtor and its creditors, enabling an insolvent business entity to continue operating in the market. The intent was to promote ‘rehabilitation’ of an insolvent over ‘liquidation’ and turn increase recovery for the creditors. However, a proposal if not viable and unacceptable to the creditors fails, which then leads to the business being forced to declare bankruptcy.

Statistics however shows that approximately one in every two business proposals succeeds proving that proposal as an alternative to bankruptcy is working in the Canadian insolvency arena. This in a way proves to be a win-win situation both for the insolvent company and its creditors as the business whose proposal gets accepted, continues to operate and the creditors recover at least something from the debtor-company for the debt owed and perhaps can make up the shortfall by continuing to deal with the company as opposed to the chances of getting near to nothing had the insolvent debtor company filed for bankruptcy.

How does a business make a Commercial Proposal under Division 1 Part III BIA? What is the process?
The procedure of making a Commercial Proposal begins when an insolvent business seeks the help of an administrator who typically is a trustee in bankruptcy or a person appointed by the Superintendent of Bankruptcy. The trustee on behalf of the insolvent company files either a Notice of Intention to Make a Proposal ("Notice of Intention-NIMP" [BIA section 50.4]) or the Proposal itself with the Official Receiver (OR).

What happens after a Proposal is filed with the Official Receiver (OR)?
Within 10 days after filing the proposal with the Official Receiver, the trustee is required to send the OR a ‘Projected Cash Flow Statement’ and its reasonableness and a debtor's endorsed cash flow statement. No extension to this time limit of ten days is allowed and if the cash flow statements are not filed within this 10 day period, the insolvent business, filing the proposal, is deemed to have declared bankruptcy.

Unless protected by court orders, any creditor may obtain a copy of the cash-flow statement on request made to the trustee

After a Notice of Intention is filed with the OR, the trustee then has up to thirty days to file the Proposal itself. If the trustee fails to file the Proposal, the business is deemed to have declared bankruptcy. The effective date of the bankruptcy would be on the expiry date of the thirty-day period. If the trustee is unable to file the Proposal within the thirty-day period, there is a provision in BIA to seek extensions. These extensions are granted in increments not exceeding forty-five days up to a maximum of five additional months. (In essence an insolvent business has no more than six months to file a proposal.) The court reserves the rights to refuse requests for such extensions or alternatively impose special conditions on the extension of a proposal.

Within five days after the filing of a notice of intention, the trustee named therein must notify every known creditor.

Before the expiry of the initial thirty-day time limit for filing the Proposal, or any extension granted in the case of a NIMP or before the first creditor's meeting in the case the proposal has already been filed, any creditor has the right to seek the court's order in having the proposal cancelled. In order to seek the termination order of a Proposal the creditor will have to prove in court that the business making the Proposal lacks due diligence and a viable Proposal is unlikely to be made before the expiry of the time allotted or that the creditors as a whole would be challenged in material respect (materially prejudiced).

Once a trustee files a Notice of Intent or a Commercial Proposal on behalf of an insolvent business, it cannot be withdrawn. The main outcomes could be an acceptance by the creditors (which allows the business to continue) or rejection (which leads to bankruptcy and ultimate liquidation of the company).
However, during this entire process the insolvent business can declare bankruptcy at any time.

What happens once a Notice of Intention or a Proposal has been filed?
Once a Notice of Intention or a Proposal has been filed a 'Stay of Proceedings' (stay) takes effect. The stay applies to secured and unsecured creditors.
Under this stay, creditors cannot terminate leases or amend existing contracts and agreements. However, after the Notice of Intention or the Proposal has been filed, going forward, creditors are under no obligation to extend any future credit and can insist on cash-terms for any goods or services sold in future to the insolvent business. The same would apply to any rental payments on leased property.

This stay remains in effect until the Proposal has been performed without default or the debtor goes bankrupt. This allows the insolvent business to restructure its debt with its creditors and formulate the Proposal without interference.

A Commercial Proposal is made to all creditors. All unsecured claims constitute one class, unless the proposal provides for more than one class of unsecured claim. Secured creditors can be separated into classes based on "commonality of interest" [BIA 50. 1.4]. This commonality is based on factors like the structure of the debt, its hierarchy, the remedies of default or otherwise as to how the court decides the interests of the creditors.

Some exceptions to the Stay of Proceedings:
If a secured creditor serves the insolvent business with a Notice of Intention to Enforce Security under the BIA more than ten days before the debtor filed a NIMP (notice of intention) then the stay does not apply to that particular secured creditor. [BIA subsection 244(1)]
If secured creditor took possession of secured assets of the insolvent business for the purpose of realization before the notice of intention (NIMP) was filed from dealing with those assets
If the Commercial Proposal does not address the claims of a particular secured creditor, the stay in that case does not apply to that creditor
If a certain class of secured creditors rejects the Proposal, then the stay does not apply to the secured creditors in that class.

Voting on the Proposal:
The following creditors with proven claims are entitled to vote:
All unsecured creditors, and
Those secured creditors in respect of whose secured claims the proposal was made;

The creditors vote by class, according to the class of their respective claims, and for that purpose
All unsecured claims constitute one class, unless the proposal provides for more than one class of unsecured claim, and
The classes of secured claims [As determined under BIA subsection 50(1.4)];

The votes of the secured creditors do not count, but are relevant only for the purpose of BIA subsection 62(2); and

The Proposal shall be deemed to be accepted by the creditors if, and only if, all classes of unsecured creditors vote for the acceptance of the proposal by a majority in number and two thirds in value of the unsecured creditors of each class present, personally or by proxy, at the meeting and voting on the resolution.

Upon acceptance of the Proposal the trustee, within five days, applies to the court for its formal sanction (the court has to accept the Proposal).
Fifteen days before the hearing, the trustee sends a notice of the hearing date and place to the insolvent business, the OR, and to all creditors with proven claims.
Ten days before the hearing, the trustee sends a report on the Proposal to the OR and files this report with the court at least two days before the hearing.

If a Proposal is accepted, it is binding on all unsecured creditors and on those secured creditors whose claims were dealt in the Proposal and whose class voted to for it.

If a Proposal is rejected, the business is automatically assigned into bankruptcy and the trustee administering the Proposal immediately calls for a meeting of all known creditors to consider the affairs of the now bankrupt business and to confirm the appointment of the existing trustee or to appoint a new one as a trustee in bankruptcy.

Certain claims, such as wages and the Trustee's fees and expenses; Government claims, such as source deductions and GST and PST, are given special priority.
The Proposal must include a provision for payment in full within six months after approval of the Proposal for amounts that were owed to the federal or provincial government when the Notice of Intention or Proposal was filed.

What if the insolvent business stops making the payments and defaults on the performance of the proposal?
If the insolvent business fails to keep the terms of your proposal and does not remedy the default within thirty days, the trustee informs both the OR and the creditors within thirty days. The creditors have a choice to waive the default if they believe that the default was unintentional or that the insolvent business has intentions of, and the capacity to, remedy the default. If the default is not waived, either the trustee or the creditors may apply to the court for the annulment of the Proposal.

If a Proposal is annulled, it results in automatic bankruptcy for the business making the proposal (the business will be deemed bankrupt on the date of the annulment.) Within five days of the annulment order from the court, the trustee will send out a notice to all known creditors of a creditors' meeting to consider the affairs of the now bankrupt business and to confirm the appointment of the existing trustee or to appoint a new one as a trustee in bankruptcy

What happens after the successful completion of the Commercial Proposal?
A business that successfully complies with the terms of the Proposal receives a ‘Certificate of Compliance’. The debts owed by the business are considered to be satisfied and no action can be brought by any creditor to recover any shortfall between the original debt and the amount paid under the terms of the Proposal.

Does it cost to make a proposal?
There is a filing fee to be paid to the Superintendent of Bankruptcy. In addition, the trustee is entitled to be paid. These fees are prescribed by the Bankruptcy and Insolvency Rules which may be consulted on the Office of the Superintendent of Bankruptcy's (OSB) Web site at: http://osb-bsf.ic.gc.ca.
Typically the business makes all payments prescribed in the proposal to the trustee. The trustee deducts its costs and fees, and the Superintendent's levy (a five percent levy on all payments to creditors) and then distributes the net proceeds to the creditors.

How can Commercial Proposals be statistically viewed?
In 2007 Business insolvencies in Canada declined by 6.8% over 2006 where the number of new cases filed in 2007 totaled 7,624. This is the sixth consecutive annual decrease in business insolvencies — each of them more than 6%. Commercial Proposals on the other hand have shown about a 7% rise in 2007 over 2006. In 2006 the total number of commercial proposals filed was 3,036 as compared to the 3,241 filed in 2007.

The inference drawn from these numbers is that perhaps commercial proposals are helping businesses going in for rehabilitation and averting liquidation. For creditors this is good news as it implies enhanced recoveries of liability dollars in the Canadian world of business insolvencies.


Defining some terms used in this article
Official Receiver (OR): is an employee of the federal government who works in the Office of the Superintendent of Bankruptcy. The duties of the OR, among others, is to accept documents filed in proposals and bankruptcies, examine bankrupts under oath and chair meetings of creditors

Office of the Superintendent of Bankruptcy (OSB): is a Special Operating Agency Industry Canada which supervises the administration of the Bankruptcy and Insolvency Act. The OSB has Division Offices throughout Canada.

Bankruptcy: the action whereby the property of a debtor is taken over by a receiver or trustee in bankruptcy for liquidation and for the benefit of the creditors. This action is conducted as prescribed by the Bankruptcy and Insolvency Act (BIA) in Canada, and may be voluntary or involuntary.

Insolvency or Insolvent: The condition of being unable to pay debts as they become due or having liabilities that exceed the total value of assets.

Secured Creditor: is a person or company (e.g. bank) holding an instrument such as a mortgage or a lien on or against the whole or part of the property of a debtor as security for a debt due from the debtor.

Trustee: is person licensed by the Superintendent of Bankruptcy to administer bankruptcy and proposal estates.

Office of the Superintendent of Bankruptcy (OSB)
http://osb-bsf.ic.gc.ca/

Canadian Bankruptcy and Insolvency Act (BIA)
http://laws.justice.gc.ca/en/B-3/index.html

Trustee Directory- Finding a trustee for a particular jurisdiction
http://strategis.ic.gc.ca/cgi-bin/sc_mrksv/bankruptcy/trusteeSearch/queryTrustee.cgi?refine=0



Adapted from an article written by:

Puru Grover
General Manager

Credit Guru Inc.
Website: http://www.creditguru.com/education
Canadian Corporate Bankruptcy Seminar: http://www.creditguru.com/education/seminar-BIA.html