Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning Chapter 15 Financing of Sales and Leases: Credit & Disclosure Requirements Its Legal, Ethical, and Global Environment MARIANNE M. JENNINGS 7 th Ed.

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 2 Establishing a Credit Contract Additional terms required in Credit Contract: –Amount financed. –Rate of Interest. –Payments required. –Penalties for late payments. –Disclaimer of collateral. –Other statutory disclosures required.

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 3 State Usury Laws: –Set maximum rates for interest charges. –Charging in excess can result in: Forfeiture of interest and principal. Forfeiture of Just interest. Other penalties. Statutory Requirements

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 4 Equal Credit Opportunity Act. –Passed to be certain credit was awarded on applicant’s merits and not on extraneous factors such as age, sex, race, color, religion, or national origin. Equal Credit Opportunity Act

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 5 Equal Credit Opportunity Act. –Cannot consider: Marital status. Receipt of public assistance income. Receipt of alimony or child support. Plans for children. –Spouses have rights to individual credit applications. Equal Credit Opportunity Act

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 6 Equal Credit Opportunity Act. –Penalties: Actual damage plus punitive damages of up to $10,000. Class action—punitive damages of up to $500,000 or 1 percent of creditor’s net worth (whichever is less). Equal Credit Opportunity Act

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 7 Case 15.1 A.B. & S. Auto Service, Inc. v. South Shore Bank of Chicago (1997). –What, according to Bonner’s expert is the impact of considering criminal records of applicants? –Do you think a criminal record is an indication of character? ECOA Violation?

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 8 Truth-in-Lending Act (TILA). –Part of Consumer Credit Protection Act. Purpose was full disclosure. Elaboration and forms are found in Regulation Z. –Application: Consumer credit transactions. Open-end transactions (credit cards and lines of credit). Closed-end transactions (loans; financing). Truth in Lending

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 9 Truth-in-Lending Act (TILA). –Open-end disclosure requirements. Interest (finance charges). Billing dates. Security interest. –Closed-end disclosure requirements (see Exhibit 15.3). Case 15.2 Roberts v. Fleet Bank (2003). –Was there adequate disclosure by Fleet? Truth in Lending

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 10 Fair Credit and Charge Card Disclosure Act of –Minimum or fixed finance charges. –Transactions charges. –Grace periods (if any). –How average daily balance is computed. –When payments are due. –If there is a late payment fee. –Any charges for exceeding credit limit. Fair Credit/Charge Card

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 11 Truth-in-Lending Act (TILA). –Closed-end transactions. Amount being financed. Finance charges. APR (annual percentage rate). Number of payments and when due. Truth in Lending

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 12 Truth-in-Lending Act (TILA). –Closed-end transactions. Total cost of financing (price of goods plus all interest). Penalties for prepayment or late payment. Security interest or lien. Credit insurance. Truth in Lending

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 13 Truth-in-Lending Act (TILA). –Advertising regulation. If parts of credit terms disclosed, must disclose the whole thing. If payments disclosed, must disclose all. –Credit card liabilities. Creditor cannot send an unsolicited card. No debtor liability for theft of an unsolicited card. Maximum of $50 liability for loss or theft of valid card so long as there is notification. Truth in Lending

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 14 Case 15.2 State v. Terry Buick, Inc. (1987). –Did it matter that no one was deceived by the ads? –Did the court need the testimony concerning the salesman’s words? Credit Advertising

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 15 REGULATION Z gives three-day cooling-off period. –Home Equity Loan Consumer Protection Act of –Penalties under TILA. Two times the amount of finance charges. Minimum of $100 and maximum of $1,000. Class action = $500,000 or 1 percent of creditors’ net worth (the lesser of). Canceling Credit Contracts

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 16 Requires monthly statement on open-end transactions. Bill must have address to write for errors. Debtors must write bill objections to get damages. –Must send within sixty days of bill’s receipt. –Creditor has thirty days to acknowledge. –Creditor has ninety days to take action. Fair Credit Billing Act

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 17 Fair Credit Billing Act. –Debtor need not pay protested amount or finance charges during protest period. Once resolved, must pay. If creditor does not comply with time limits, debtor need not pay (even if creditor is correct). Fair Credit Billing Act

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 18 Fair Credit Reporting Act. –Applies to consumer reporting agencies: third parties (not creditors). –Limitations on disclosure: Can disclose to debtor his/her own report. Can disclose to creditor with signed credit application. Can disclose to potential employer. Can disclose for court subpoena. Fair Credit Reporting Act

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 19 Limitations on content: –No bankruptcies longer than fourteen years ago. –No lawsuits finalized longer than seven years ago. –No disclosures of criminal convictions finalized more than seven years ago UNLESS applying for $50,000 in credit or $20,000/year job. –Debtor’s right of correction. Notify agency. If no connection, debtor can write 100-word statement of clarification. Fair Credit Reporting Act

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 20 Disclosure Case 15.4 Phillips v. Grendahl (2002). –Did any of the defendants have a right to the information? –What liability will the defendants have? –Was the information beyond the scope of a credit report?

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 21 Case 15.5 Stevenson v. TRW, Inc. (1993). –What would you do differently if you were trying to correct your report? –Are the damages reasonable? Inaccurate Report?

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 22 Consumer Leasing Act. –Full disclosure in leases. –What it costs at beginning and end. –Article 2A added to UCC to govern lease contracts—adopted in ten states. Consumer Leasing Act

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 23 Use of Collateral. –Take Article 9 security interest: is a lien on personal property. –Written agreement required. –Gives creditor the right of repossession in the event the debtor defaults. Enforcement

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 24 Collection Rights of the Creditor. –Regulated by FDCPA (Fair Debt Collections Practices Act) if it is a consumer debt. –Application: Third party collection agencies. Attorneys. –Prohibits unreasonable collection practices by collection agencies. Enforcement

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 25 Collection Rights. –Collectors’ obligations. Must provide written verification of debt if debtor asks or within five days after contact with debtor. Must include amount of debt, name of creditor, debtor’s right to disputed debt. Enforcement

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 26 Collection Rights. –Collector’s restrictions. Debtor contact. Third party contact. Prohibited Acts. –Penalties or FDCPA violations. FTC responsible for enforcement. Injunction. Debtor may collect actual damages. Debtor may collect up to $1,000 in additional damages. Enforcement

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 27 Case 15.6 Trull v. GC Services Ltd. Partnership (1997). –What violations of FDCPA does the court find? –Will Trull be permitted to go forward with her suit? Collections

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 28 Suits to Enforce Debts. –Reduce to judgment. –Use garnishment for wages, accounts, and so on. Limits wage garnishments to 25 percent of wages (50 percent for child support). Enforcement

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 29 Bankruptcy: The End of the Line on Enforcement of Debts. –Chapter 7: Liquidation of all assets (personal or business). –Chapter 11: Reorganization. Requires a plan for repayment. –Chapter 13: Consumer debt adjustment plan. Can be voluntary or involuntary. Enforcement

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 30 The End of the Line on Enforcement of Debts: Bankruptcy. –Debts discharged in bankruptcy except: Alimony. Child support. Student loans (seven years). Taxes (three years). Enforcement

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 31 International Credit Issues. –Bankruptcy in Japan. –Most business debts require guarantees. –Higher suicide rates for people with insurance. International Credit