1. Objective 4.01 Understand financial, credit, and bankruptcy law
4.01 Financial Law
Objective 4.01
Understand financial, credit, and bankruptcy law

2. Federal Deposit Insurance Corporation (FDIC)
Independent agency of the federal government created by Congress in 1933
Created to maintain the publics confidence in banks and encourage stable banking practices
FDIC pays a depositor up to $250,000 per account, if an insured bank fails

3. Electronic Fund Transfer Act
Protects consumers against unauthorized electronic fund transactions including:
Debit and credit card purchases
ATM withdrawals
Automatic bank account withdrawals/payments
Permits consumers to challenge billing errors and have them corrected within 60-days
Limits consumer liability on lost cards to $50 if reported as lost within 2 business days.

4. Home Equity
The current market value of a home minus the remaining mortgage balance
Home Equity Line of Credit
Allows consumers to borrow money while using their home as collateral

5. Home Equity Consumer Protection Act
Requires creditors to disclose the conditions, rates, and terms of home equity loan plans
If creditors change the terms, the consumer has the right to refuse to open the plan and full refund of application fees

6. Home Equity Consumer Protection Act (cont.)
When the consumer receives the loan application, it must include:
Annual percentage rate
Payment terms
Miscellaneous fees
Information concerning variable interest rates

7. Right to Financial Privacy Act
Grants consumers’ personal financial records a reasonable amount of privacy from federal government searches
This act stems from the Fourth Amendment protection for bank records
Requires government agencies to give banks time to object to the search of consumer personal records

8. Thrift and Fraud Act
Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990 increased the government’s ability to combat bank fraud
Increased the amount of prison time and penalties for people found guilty of bank fraud
Increased the FDIC’s power to enforce actions against unsafe banking practices

9. Bank Fraud
The act of obtaining credit, assets, money, funds, or securities under the custody of a financial institution through false pretenses
Penalty for bank fraud:
Fined up to $1,000,000
Prison term up to 30 years
Both fine and prison

10. Credit Laws & Bankruptcy
Objective 4.01
Understand credit, and bankruptcy law.

11. Credit Basic Terms Credit Creditor Debtor
A contractual agreement in which one party receives something of value now and agrees to pay the lender in the future
Creditor
Person or business providing credit
Debtor
Person or business that receives the credit

12. Why Credit? Advantages: Able to buy needed items now
Don’t have to carry cash
Creates a record of purchases
More convenient than writing checks
Consolidates bills into one payment

13. Why Credit? Disadvantages: Interest (higher cost of items)
May impose additional fees
Financial difficulties may arise if one loses track of how much has been spent each month
Increased impulse buying may occur

14. Credit Terminology
Collateral – Property that is the subject of the loan
Cosigner – Helps protect a loan when a borrower’s credit rating is poor
Creditor: Party who sells the goods on credit or lends the money
Debtor: party who buys the goods or credit or borrows the money
Interest: The fee creditors charge for lending money or extending credit
Repossession – Property is returned because of non-payment
Secured Party – Lender or seller who holds secured interest

15. Types of Credit
Borrowing Money
Interest Rates
Closed end credit – Credit given for a specific amount of money.
Open end credit – Credit given that can be increased by debtor up to a limit set by creditor. A “line of credit” is given.
Open-end Credit & Charge Cards

16. Obtaining Credit Secured Loans – Low Risk Unsecured Loans – High Risk
Collateral
Security Interest
Default
Unsecured Loans – High Risk
No Collateral
Creditors make sure that debtor is reliable and able to pay back loan
Example (Credit Cards)
Attachment of Security Interest
Perfection of Security Interest
Guarantors and Sureties
Guarantor – second party pays if debtor defaults
Surety – primary party paying debt – pledge or formal promise
Establishing
Credit

17. Types of Credit Installment Credit
Installment Loans are typically for merchandise and services and paid for in two or more regularly scheduled payments of a set amount.
Usually offered by retail businesses, such as car and appliance dealers.
Commercial banks
Money may be loaned for a special purpose, with the consumer agreeing to repay the debt in two or more regularly scheduled payments
Savings and loans
Consumer Finance Companies

18. Types of Loans Revolving Credit
Items may be bought using this plan as long as the total amount does not go over the credit user’s assigned dollar limit
Repayment is made at regular time intervals for any amount at or above the minimum required amount. Interest is charged on the remaining balance.
Typically offered by retail stores
Also offered by financial institutions that issue credit cards
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19. Credit Worthiness Three “C’s” of Credit
Character - will you repay the debt?
From your credit history, does it look like you possess the honesty and reliability to pay credit debts?
Have you used credit before?
Do you pay your bills on time?
Do you have a good credit report?
Can you provide character references?
How long have you lived at your present address?
How long have you been at your present job?

20. Credit Worthiness Three “C’s” of Credit
Capital - what could you or I sell if you do not pay?
Do you have any valuable assets such as real estate, savings, or investments that could be used to repay credit debts if income is unavailable?
What property do you own that can secure the loan?
Do you have a savings account?
Do you have investments to use as collateral?

21. Credit Worthiness Three “C’s” of Credit
Capacity - can you repay the debt?
Have you been working regularly in an occupation that is likely to provide enough income to support your credit use?
Do you have a steady job?
What is your salary?
How many other loan payments do you have?
What are your current living expenses?
What are your current debts?
How many dependents do you have?
3 “C’s”
Of Credit

22. Credit Responsibilities
The 20–10 Rule: Never borrow more than 20% of your yearly net income
Monthly payments should not exceed 10% of your monthly net income
Borrow only what you can repay.
Read and understand the credit contract.
Pay debts promptly.
Notify creditor if you can not meet payments.
Report lost or stolen credit cards promptly
Never give your card number over the phone unless you initiated the call or are certain of the caller’s identity.
Maintaining
Good Credit

23. Credit Worthiness Credit Bureaus
Credit bureaus sell lenders credit information about credit users such as debt records, payment history, and if any action has been taken to collect overdue bills.
Credit Report
Credit Rating
Credit Bureaus

24. Credit Basic Terms Credit Report
Report that summarizes a consumer’s financial history including number of credit cards, payments to credit cards, and number of late payments (if any)
Creditors use this report to determine a credit applicant is “creditworthy” or a good credit risk

25. Credit Worthiness Your Credit Report
Credit Bureau
Equifax

26. Your Credit Report status type of account code
O Open (entire balance due each month)
R Revolving (payment amount variable)
I Installment (fixed number of payments)

27. Your Credit Report status timeliness of payment
0 Approved not used; too new to rate 1 Paid as agreed
days past due days past due
days past due
5 Pays or paid 120+ days past the due date; or collection account
6 Making regular payments under wage earner plan or similar arrangement
7 Repossession Charged off to bad debt

28. Credit Contracts Credit Contracts
Credit Contracts are legal binding documents that allow debtors to use credit to obtain goods and services.
Debtors should know the content of the credit contract before signing such as:
Amount of finance charges
Repairs covered
Add-on features
Reduction of finance charge if contract paid in full prior to ending date
Receive the copy of the contract
Repossession conditions

30. Federal Trade Commission
Protects consumers right to obtain, use, manage and maintain credit by monitoring and enforcing credit laws

31. Fair Credit Reporting Act
If credit report is incorrect:
Consumers have the right to file a dispute with credit report agency, and the person or business that provided the credit information
Both parties must investigate the dispute
If the dispute is not resolved to the consumer’s satisfaction, the consumer has the right to add explanation to the report
Fair Credit Reporting Act

32. Equal Credit Opportunity Act
Creditworthiness or financial responsibility should be based factors such as:
Income
Expenses
Debits
Credit history
Equal Credit Opportunity Act

33. Fair Debt Collection Practices Act
Restricts credit collection agencies from:
Calling at inconvenient times to collect debt
Telling third parties, such as co-workers, neighbors, or employer, about the debt
Using racial slurs, insults or profane language
Making false accusations or representations, such as, using a fake name or falsely declaring to file a lawsuit
Fair Debt Collections Act

34. Truth in Lending Law
Requires creditors to provide consumers with the terms and cost of credit:
Annual percentage rate(APR)
Finance charge
Credit limit
Minimum payment amount
Truth-In-Lending

35. Usury Law
Sets the maximum amount of interest that can be charged for a loan.
8% in North Carolina
16% $25,000 or less; any rate over $25,000
Corporate – Any Rate Agreed (

36. Fair Credit Billing Act
Provides consumers with a means to dispute a billing error on open-ended credit accounts (credit and charge cards).
Law does not apply to installment loans
Consumer must notify creditor in writing within 60 days from the statement date
Fair Credit Billing Act

37. Fair Credit Billing Act (cont.)
Creditor must acknowledge consumer’s letter within 30 days
Creditor must explain the reason for the charge or fix the mistake within 90 days

38. Fair Credit Reporting Act
Allows consumers to obtain a free copy of their credit report one time every 12 months from each credit reporting agency:
Equifax
Experian
Trans Union
Fair Credit Reporting Act

39. Credit Card Act of 2009
Requires that credit applicants under the age of 21 have a cosigner
Legal guardian, parent, spouse, or person 21 or older able to repay debt of the applicant
Requires creditors to provide clear and simple minimum payment information

40. Credit Card Act of 2009 (cont.)
Minimum Payment Warning: If you make only the minimum payment each period, you will pay more in interest and it will take longer to pay off your balance. For example:
If you make no additional charges using this card and each month you pay…
You will pay off the balance shown on this statement in about…
And you will end up paying an estimated total of…
Only the minimum payment
21 years
$5,936
$95
3 years
$3,411
(Savings = $2,483)
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41. Bankruptcy
What is Bankruptcy

42. Bankruptcy – Chapter 7
Requires the debtor to liquidate (sale) nonexempt property to repay creditors
Non-exempt property includes money from bank accounts, stocks, and bonds

43. Bankruptcy – Chapter 11
Form of bankruptcy that allows businesses to create a plan to “reorganize” and pay off their debts over time.
Examples of reorganization:
Closing stores
Reducing size of workforce
Stop selling certain product lines

44. Bankruptcy – Chapter 12
Form of bankruptcy that allows family farmers and fishing business owners to recover from debt
Repayment plan is created for the business

45. Bankruptcy – Chapter 13
Form of bankruptcy that allows an individual to submit a plan to repay debts in 3 to 5 years.
WORKSHEET:
Fill-In-Blanks
WORKSHEET:
Credit Law
Review
WORKSHEET:
Protection of
Debtors – T/F
PROJECT:
Credit &
Credit Cards
PROJECT:
Chapter 11
Bankruptcy