CHAPTER 27 OTHER CREDIT TRANSACTIONS DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed.)

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 2 INTRODUCTION Businesses need credit in making purchases of raw materials to produce goods. Businesses need credit in making purchases of raw materials to produce goods. Businesses need to grant credit to make sales of finished goods. Businesses need to grant credit to make sales of finished goods. Consumers use credit to purchase major and non-major items. Consumers use credit to purchase major and non-major items. Transactions that fall out of scope of Article 9, are unsecured transactions. Transactions that fall out of scope of Article 9, are unsecured transactions.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 3 LETTERS OF CREDIT UCC Article 5 governs LOC. UCC Article 5 governs LOC. Device designed to reassure both buyer and seller, especially in an international transaction, that each party will receive the benefit of his/her bargain. Device designed to reassure both buyer and seller, especially in an international transaction, that each party will receive the benefit of his/her bargain. Applicant (Buyer) obtains commitment from Issues (Buyer’s Bank) that will honor LOC upon receipt of certain documents from Beneficiary (Seller). Applicant (Buyer) obtains commitment from Issues (Buyer’s Bank) that will honor LOC upon receipt of certain documents from Beneficiary (Seller).

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 4 UNSECURED CREDIT Creditor agrees to grant credit to debtor without the use of any collateral. Creditor agrees to grant credit to debtor without the use of any collateral. Creditor relies on debtor to repay loan or honor debt without benefit of some form of security in event debtor defaults obligation. Creditor relies on debtor to repay loan or honor debt without benefit of some form of security in event debtor defaults obligation. May take form of signature loan, which lender agrees to make the loan on basis of borrower’s signature. May take form of signature loan, which lender agrees to make the loan on basis of borrower’s signature.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 5 UNSECURED CREDIT Found with most public utility accounts, bank credit cards, and travel and entertainment cards. Found with most public utility accounts, bank credit cards, and travel and entertainment cards. Regulation primarily matter of state law. Regulation primarily matter of state law. Federal regulation concerned with information provided to debtor prior to creation of debt and with acceptable methods of collection if debtor defaults. Federal regulation concerned with information provided to debtor prior to creation of debt and with acceptable methods of collection if debtor defaults.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 6 UNSECURED CREDIT Truth in Lending Act (TILA) requires creditors to provide credit applicants with certain information about the cost of the credit. Truth in Lending Act (TILA) requires creditors to provide credit applicants with certain information about the cost of the credit. Creditor uses methods to enforce claim: Creditor uses methods to enforce claim: – Self-help; – Writ of attachment; – Writ of garnishment; – File suit for breach of contract; – Hire a collection agent. Usury: charging an illegal rate of interest. Usury: charging an illegal rate of interest.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 7 INSTALLMENT LOANS Loans for a fixed time period and with fixed periodic payments. Loans for a fixed time period and with fixed periodic payments. May be secured or unsecured. May be secured or unsecured. Subject to many of the same regulatory provisions as are unsecured loans. Subject to many of the same regulatory provisions as are unsecured loans. Federal level lender governed by, TILA and Fair Debt Collection Practices Act. Federal level lender governed by, TILA and Fair Debt Collection Practices Act. State level covered by Article 3 of UCC, Uniform Consumer Credit Code, and state laws. State level covered by Article 3 of UCC, Uniform Consumer Credit Code, and state laws.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 8 MORTGAGE LOANS Real estate is used as collateral by debtor to secure credit. Real estate is used as collateral by debtor to secure credit. Commonly installment loans, but repayment term is longer. Commonly installment loans, but repayment term is longer. State regulations are substantial. State regulations are substantial. Federal regulations are TILA and Real Estate Settlement Procedures Act (RESPA). Federal regulations are TILA and Real Estate Settlement Procedures Act (RESPA). RESPA: a disclosure act. RESPA: a disclosure act.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 9 MORTGAGE LOANS Statutes that apply to mortgage loans: Statutes that apply to mortgage loans: – Mortgage lending acts. – Mortgage banker and broker acts. – Secondary mortgage acts. – Home improvement contract acts.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 10 CREDIT CARDS Types of credit cards: Types of credit cards: – Bank cards. – Travel and entertainment cards. – Store/merchant cards. Holder of card involved in a “revolving credit” rather than a loan. Holder of card involved in a “revolving credit” rather than a loan. Methods for computing charges and fees are different from a “standard” loan. Methods for computing charges and fees are different from a “standard” loan.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 11 CREDIT CARDS Federal regulations: Federal regulations: – 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 without authorization. Limits liability of cardholders if cards are used without authorization. – The Equal Credit Opportunity Act: Requires businesses to make credit without discrimination. Requires businesses to make credit without discrimination.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 12 CREDIT CARDS Federal regulations: Federal regulations: – The Fair Credit Billing Act: Provides method for cardholders to challenge billing errors without liability until error is investigated. Provides method for cardholders to challenge billing errors without liability until error is investigated. – Unsolicited Credit Card Act: Protects customer from potential liability for misuse of credit cards issued to person without an application submitted by that person. Protects customer from potential liability for misuse of credit cards issued to person without an application submitted by that person.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 13 CREDIT CARDS State regulation tends to be more enabling than restrictive. State regulation tends to be more enabling than restrictive. State usury provisions and contract laws are applicable. State usury provisions and contract laws are applicable. Transaction may be subject to provisions of Article 9 of the UCC. Transaction may be subject to provisions of Article 9 of the UCC.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 14 FTC CONSUMER CREDIT RULES Federal Trade Commission enacted credit practice rules to provide consumer debtors with protections, not enjoyed under other areas of law. Federal Trade Commission enacted credit practice rules to provide consumer debtors with protections, not enjoyed under other areas of law. Two credit practice rules are: Two credit practice rules are: – 1) Federal Trade Commission Holder in Due Course: Debtor retains all rights, claims, and defenses that consumer could have asserted against seller. Debtor retains all rights, claims, and defenses that consumer could have asserted against seller.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 15 FTC 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 creditor in a consumer credit transaction to take a contract containing a confession of judgment clause or a waiver of exemptions clause.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 16 PAYDAY LOANS Very short-term loans for small amount (e.g., $500). Very short-term loans for small amount (e.g., $500). Borrower writes a post-dated check to lender to be cashed on payday. Borrower writes a post-dated check to 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?