Chapter 26 Credit, Mortgages, and Debtor’s Rights

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Credit Credit: Occurs when one party makes a loan to another party Debtor: The borrower in a credit transaction Creditor: The lender in a credit transaction 26-2 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Unsecured Credit Unsecured Credit: Credit that does not require any security to protect payment of the debt Creditor relies on the debtor’s promise to repay the principal (plus interest) when it is due Creditor may bring legal action if the debtor fails to make the payments If the debtor is judgment proof, the creditor cannot collect 26-3 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Secured Credit Secured credit: Credit that requires security that secures payment of the loan Security interests may be taken in real, personal, intangible, other property Collateral may be repossessed to recover the outstanding amount if the debtor fails to make payment 26-4 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Security Interests in Real Property Mortgage: An arrangement where an owner of real property borrows money from a lender and pledges the real property as collateral to secure the repayment of the loan Two-party instrument Owner/debtor is the mortgagor Creditor is the mortgagee Real property is used as collateral 26-5 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Exhibit 26.2 - Mortgage on Real Estate Loan of Funds Owner-Debtor Mortgagor (Borrower) Creditor Mortgagee (Lender) Security Interest in Real Property 26-6 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Security Interests in Real Property Note: An instrument that evidences a borrower’s debt to the lender Deed of trust: An instrument that gives a creditor a security interest in the debtor’s real property that is pledged as collateral for a loan Three-party instrument Legal title of property placed with trustee until owner-debtor (trustor) pays creditor (beneficiary) 26-7 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Exhibit 26.3 - Note and Deed of Trust Loan of Funds Owner-Debtor Trustor (Borrower) Creditor Beneficiary (Lender) Security Interest in Real Property Legal Title If default, can perfect rights Trustee 26-8 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Security Interests in Real Property Recording Statute: A statute that requires a mortgage or deed of trust to be recorded in the county recorder’s office of the county in which the real property is located Public record Gives potential lenders, purchasers notice of claims against property Nonrecordation does not affect legality of instrument or rights of parties 26-9 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Security Interests in Real Property Foreclosure sale: A legal procedure by which a secured creditor causes the judicial sale of the secured real estate to pay a defaulted loan Permitted by all states Power of sale: A power stated in a mortgage or deed that permits foreclosure without court proceedings and sale of the property through an auction Permitted by most states 26-10 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Case 26.1: Mortgages Case Old Republic National Title Insurance Company v. Fifth Third Bank Web 2008 Ohio App. Lexis 4423 (2008) Court of Appeals of Ohio Issue What is the priority of the lien and two mortgages on McCarthy’s house? 26-11 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Security Interests in Real Property Deficiency Judgment: A judgment of a court that permits a secured lender to recover other property or income from a defaulting debtor if the collateral is insufficient to repay the unpaid loan Antideficiency statute: A statute that prohibits deficiency judgments regarding certain types of mortgages, such as those on residential property 26-12 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Security Interests in Real Property Right of redemption: A right that allows the mortgagor to redeem real property after default and before foreclosure The mortgagor must pay the full amount of the debt incurred by the mortgagee because of the mortgagor’s default Land sales contract: An arrangement in which the owner of real property sells property to a purchaser and extends credit to the purchaser 26-13 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Security Interests in Real Property Mechanic’s liens on real property: A contractor’s, laborer’s, and material person’s statutory lien that makes the real property to which services or materials have been provided security for the payment of the services and materials Subject to the debtor’s right of redemption Lien release: A written document signed by a contractor, subcontractor, laborer, or material person, waiving his or her statutory lien against real property 26-14 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Surety and Guaranty Arrangements Surety arrangement: An arrangement in which a third party promises to be primarily liable with the borrower for the payment of the borrower’s debt Guaranty arrangement: An arrangement in which a third party promises to be secondarily liable for the payment of another’s debt Defenses that principal debtor has against creditor may be made by surety or guarantor 26-15 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Collection Remedies Writ of attachment: A prejudgment court order that permits the seizure of a debtor’s property while a lawsuit is pending Writ of execution: A postjudgment court order that permits the seizure of the debtor’s property that is in the possession of the debtor Writ of garnishment: A postjudgment court order that permits the seizure of a debtor’s property that is in the possession of third parties 26-16 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Collection Remedies Title III of the Consumer Credit Protection Act: A federal law that permits debtors who are subject to a writ of garnishment to retain a specified percentage or amount of their earnings Allows debtors who are subject to a writ of garnishment to retain the greater of 75 percent of their weekly disposable earnings an amount equal to 30 hours of work paid at federal minimum wage 26-17 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Consumer Financial Protection Dodd-Frank Wall Street Reform and Consumer Protection Act: A federal statute that regulates the financial industry and provides protection to consumers regarding financial products and services Bureau of Consumer Financial Protection: A federal administrative agency that is responsible for enforcing federal consumer financial protection statutes 26-18 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Consumer Financial Protection Consumer Financial Protection Act of 2010: A federal statute that requires increased disclosure of credit information and terms to consumers and regulates consumer credit providers and others Mortgage Reform and Anti-Predatory Lending Act: A federal statute that is designed to eliminate many abusive mortgage loan practices and mandates new duties and disclosure requirements on mortgage lenders and others 26-19 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Consumer Financial Protection Truth-in-Lending Act (TILA): A federal statute that requires creditors to make certain disclosures to debtors in consumer transactions and real estate loans on the debtor’s principal dwelling Regulation Z: A regulation that sets forth detailed rules for compliance with the TILA Consumer Leasing Act (CLA): A federal statute that extends the TILA’s coverage to lease terms in consumer leases 26-20 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Consumer Financial Protection Fair Credit Billing Act: A federal statute that requires that creditors promptly acknowledge in writing consumer billing complaints and investigate billing errors and affords consumer-debtors other protection during billing disputes Fair Credit Reporting Act (FCRA): A federal statute that protects a consumer who is the subject of a credit report by setting rules for credit bureaus to follow and permitting consumers to obtain information from credit reporting businesses 26-21 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Consumer Financial Protection Fair Debt Collection Practices Act (FDCPA): A federal act that protects consumer- debtors from abusive, deceptive, and unfair practices used by debt collectors Equal Credit Opportunity Act (ECOA): A federal statute that prohibits discrimination in the extension of credit based on sex, marital status, race, color, national origin, religion, age, or receipt of income from public assistance programs 26-22 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Consumer Financial Protection Fair Credit and Charge Card Disclosure Act: An amendment to the TILA that requires disclosure of certain credit terms on credit card and charge card solicitations and applications Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act): A federal statute that requires disclosures to consumers concerning credit card terms, adds transparency to the creditor-debtor relationship, and eliminates many of the abusive practices of credit card issuers 26-23 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 26-24 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.