CHAPTER 27 OTHER CREDIT TRANSACTIONS DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles...

CHAPTER 27CHAPTER 27OTHER CREDIT TRANSACTIONSOTHER CREDIT TRANSACTIONS

DAVIDSON, KNOWLES & FORSYTHE DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles Business Law: Cases and Principles

in the Legal Environmentin the Legal Environment (8 (8thth Ed.) Ed.)

2© 2004 West Legal Studies in Business© 2004 West Legal Studies in BusinessA Division of Thomson LearningA Division of Thomson Learning

BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.

INTRODUCTIONINTRODUCTION

Businesses need credit in making purchases Businesses need credit in making purchases of raw materials to produce goods.of raw materials to produce goods.

Businesses need to grant credit to make Businesses need to grant credit to make sales of finished goods. sales of finished goods.

Consumers use credit to purchase major and Consumers use credit to purchase major and non-major items.non-major items.

Transactions that fall out of scope of Article Transactions that fall out of scope of Article 9, are unsecured transactions. 9, are unsecured transactions.



LETTERS OF CREDITLETTERS OF CREDIT

UCC Article 5 governs LOC.UCC Article 5 governs LOC.Device designed to reassure both buyer and Device designed to reassure both buyer and

seller, especially in an international seller, especially in an international transaction, that each party will receive the transaction, that each party will receive the benefit of his/her bargain.benefit of his/her bargain.

Applicant (Buyer) obtains commitment Applicant (Buyer) obtains commitment from Issues (Buyer’s Bank) that will honor from Issues (Buyer’s Bank) that will honor LOC upon receipt of certain documents LOC upon receipt of certain documents from Beneficiary (Seller).from Beneficiary (Seller).



UNSECURED CREDITUNSECURED CREDIT

Creditor agrees to grant credit to debtor Creditor agrees to grant credit to debtor without the use of any collateral.without the use of any collateral.

Creditor relies on debtor to repay loan or Creditor relies on debtor to repay loan or honor debt without benefit of some form of honor debt without benefit of some form of security in event debtor defaults obligation.security in event debtor defaults obligation.

May take form of signature loan, which May take form of signature loan, which lender agrees to make the loan on basis of lender agrees to make the loan on basis of borrower’s signature.borrower’s signature.



UNSECURED CREDITUNSECURED CREDIT

Found with most public utility accounts, Found with most public utility accounts, bank credit cards, and travel and bank credit cards, and travel and entertainment cards.entertainment cards.

Regulation primarily matter of state law.Regulation primarily matter of state law.Federal regulation concerned with Federal regulation concerned with

information provided to debtor prior to information provided to debtor prior to creation of debt and with acceptable creation of debt and with acceptable methods of collection if debtor defaults.methods of collection if debtor defaults.



UNSECURED CREDITUNSECURED CREDIT Truth in Lending Act (TILA) requires creditors to Truth in Lending Act (TILA) requires creditors to

provide credit applicants with certain information provide credit applicants with certain information about the cost of the credit.about the cost of the credit.

Creditor uses methods to enforce claim:Creditor uses methods to enforce claim:– Self-help;Self-help;– Writ of attachment;Writ of attachment;– Writ of garnishment;Writ of garnishment;– File suit for breach of contract;File suit for breach of contract;– Hire a collection agent.Hire a collection agent.

Usury: charging an illegal rate of interest.Usury: charging an illegal rate of interest.



INSTALLMENT LOANSINSTALLMENT LOANSLoans for a fixed time period and with fixed Loans for a fixed time period and with fixed

periodic payments.periodic payments.May be secured or unsecured.May be secured or unsecured.Subject to many of the same regulatory Subject to many of the same regulatory

provisions as are unsecured loans.provisions as are unsecured loans.Federal level lender governed by, TILA and Fair Federal level lender governed by, TILA and Fair

Debt Collection Practices Act.Debt Collection Practices Act.State level covered by Article 3 of UCC, State level covered by Article 3 of UCC,

Uniform Consumer Credit Code, and state laws.Uniform Consumer Credit Code, and state laws.



MORTGAGE LOANSMORTGAGE LOANSReal estate is used as collateral by debtor to Real estate is used as collateral by debtor to

secure credit.secure credit.Commonly installment loans, but Commonly installment loans, but

repayment term is longer.repayment term is longer.State regulations are substantial.State regulations are substantial.Federal regulations are TILA and Real Federal regulations are TILA and Real

Estate Settlement Procedures Act (RESPA).Estate Settlement Procedures Act (RESPA).RESPA: a disclosure act.RESPA: a disclosure act.



MORTGAGE LOANSMORTGAGE LOANS

Statutes that apply to mortgage loans:Statutes that apply to mortgage loans:– Mortgage lending acts.Mortgage lending acts.– Mortgage banker and broker acts.Mortgage banker and broker acts.– Secondary mortgage acts.Secondary mortgage acts.– Home improvement contract acts.Home improvement contract acts.



CREDIT CARDSCREDIT CARDS

Types of credit cards:Types of credit cards:– Bank cards.Bank cards.– Travel and entertainment cards.Travel and entertainment cards.– Store/merchant cards.Store/merchant cards.

Holder of card involved in a “revolving Holder of card involved in a “revolving credit” rather than a loan.credit” rather than a loan.

Methods for computing charges and fees Methods for computing charges and fees are different from a “standard” loan. are different from a “standard” loan.




Federal regulations: Federal regulations: – TILA, Regulation Z, Subpart B:TILA, Regulation Z, Subpart B:

Prohibits the issuing of unsolicited credit cards.Prohibits the issuing of unsolicited credit cards. Limits liability of cardholders if cards are used Limits liability of cardholders if cards are used

without authorization.without authorization.

– The Equal Credit Opportunity Act:The Equal Credit Opportunity Act: Requires businesses to make credit without Requires businesses to make credit without

discrimination.discrimination.




Federal regulations:Federal regulations:– The Fair Credit Billing Act:The Fair Credit Billing Act:

Provides method for cardholders to challenge billing Provides method for cardholders to challenge billing errors without liability until error is investigated.errors without liability until error is investigated.

– Unsolicited Credit Card Act:Unsolicited Credit Card Act: Protects customer from potential liability for misuse Protects customer from potential liability for misuse

of credit cards issued to person without an of credit cards issued to person without an application submitted by that person.application submitted by that person.




State regulation tends to be more enabling State regulation tends to be more enabling than restrictive.than restrictive.

State usury provisions and contract laws are State usury provisions and contract laws are applicable.applicable.

Transaction may be subject to provisions of Transaction may be subject to provisions of Article 9 of the UCC.Article 9 of the UCC.



FTC CONSUMER CREDIT RULESFTC CONSUMER CREDIT RULES

Federal Trade Commission enacted credit Federal Trade Commission enacted credit practice rules to provide consumer debtors practice rules to provide consumer debtors with protections, not enjoyed under other with protections, not enjoyed under other areas of law.areas of law.

Two credit practice rules are:Two credit practice rules are:– 1) Federal Trade Commission Holder in Due 1) Federal Trade Commission Holder in Due

Course:Course: Debtor retains all rights, claims, and defenses that Debtor retains all rights, claims, and defenses that

consumer could have asserted against seller.consumer could have asserted against seller.



FTC CONSUMER CREDIT RULESFTC CONSUMER CREDIT RULES

Two credit practice rules (cont’d) are:Two credit practice rules (cont’d) are:– 2) Makes it unfair trade practice for a seller or 2) Makes it unfair trade practice for a seller or

creditor in a consumer credit transaction to take creditor in a consumer credit transaction to take a contract containing a confession of judgment a contract containing a confession of judgment clause or a waiver of exemptions clause.clause or a waiver of exemptions clause.



PAYDAY LOANSPAYDAY LOANS

Very short-term loans for small amount Very short-term loans for small amount (e.g., $500).(e.g., $500).

Borrower writes a post-dated check to Borrower writes a post-dated check to lender to be cashed on payday.lender to be cashed on payday.

Fees and interest are added to the ‘loan.’Fees and interest are added to the ‘loan.’FTC is questioning these loans.FTC is questioning these loans.Do they violate state usury loans?Do they violate state usury loans?

CHAPTER 27 OTHER CREDIT TRANSACTIONS DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles...

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