1. Its Legal, Ethical & Global Environment 6 th Ed. Its Legal, Ethical & Global Environment 6 th Ed. B U S I N E S S MARIANNE M. JENNINGS Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. Chapter 15 Financing Of Sales And Leases: Credit And Disclosure Requirements

2. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 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  Additional terms required in Credit Contract Amount financed Rate of Interest Payments required Penalties for late payments Disclaimer of collateral Other statutory disclosures required

3. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 3 Statutory Requirements for Credit Contracts  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  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

4. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 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 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 Statutory Requirements for Credit Contracts

5. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 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 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 Statutory Requirements for Credit Contracts

6. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 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 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) Statutory Requirements for Credit Contracts

7. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 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?  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? Statutory Requirements for Credit Contracts

8. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 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 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) Statutory Requirements for Credit Contracts

9. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 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)  Truth-in-Lending Act (TILA) Open-end disclosure requirements Interest (finance charges) Billing dates Security interest Closed-end disclosure requirements (see Exhibit 15.3) Statutory Requirements for Credit Contracts

10. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 10  Fair Credit and Charge Card Disclosure Act of 1988 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 and Charge Card Disclosure Act of 1988 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 Statutory Requirements for Credit Contracts

11. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 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 Act (TILA) Closed-end transactions Amount being financed Finance charges APR (annual percentage rate) Number of payments and when due Statutory Requirements for Credit Contracts

12. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 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 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 Statutory Requirements for Credit Contracts

13. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 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 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 Statutory Requirements for Credit Contracts

14. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 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?  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? Statutory Requirements for Credit Contracts

15. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 15  Cancellation of credit contracts REGULATION Z gives three-day cooling- off period Home Equity Loan Consumer Protection Act of 1988 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)  Cancellation of credit contracts REGULATION Z gives three-day cooling- off period Home Equity Loan Consumer Protection Act of 1988 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) Statutory Requirements for Credit Contracts

16. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 16  Fair Credit Billing Act 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 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 Statutory Requirements for Credit Contracts

17. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 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 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) Statutory Requirements for Credit Contracts

18. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 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 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 Statutory Requirements for Credit Contracts

19. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 19  Fair Credit Reporting Act 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 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 Statutory Requirements for Credit Contracts

20. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 20  Case 15.3Stevenson v. TRW, Inc. (1993) What would you do differently if you were trying to correct your report? Are the damages reasonable?  Case 15.3Stevenson v. TRW, Inc. (1993) What would you do differently if you were trying to correct your report? Are the damages reasonable? Statutory Requirements for Credit Contracts

21. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 21  Identity Theft Facilitated via online databases  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  Identity Theft Facilitated via online databases  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 Statutory Requirements for Credit Contracts

22. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 22 Enforcement of Credit Transactions  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  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

23. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 23 Enforcement of Credit Transactions  Collection Rights 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  Collection Rights 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

24. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 24  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  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 of Credit Transactions

25. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 25  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  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 of Credit Transactions

26. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 26  Case 15.4 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?  Case 15.4 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? Enforcement of Credit Transactions

27. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 27  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)  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 of Credit Transactions

28. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 28  Bankruptcy: The End of the Line on Enforcement of Debts Chapter 7 Liquidation of all assets (personal or business) Chapter 11 Reorganization New plan for repayment Chapter 13 Consumer debt adjustment plan Can be voluntary or involuntary  Bankruptcy: The End of the Line on Enforcement of Debts Chapter 7 Liquidation of all assets (personal or business) Chapter 11 Reorganization New plan for repayment Chapter 13 Consumer debt adjustment plan Can be voluntary or involuntary Enforcement of Credit Transactions

29. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 29  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)  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 of Credit Transactions

30. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 30  International Credit Issues Bankruptcy in Japan Most business debts require guarantees Higher suicide rates for people with insurance  International Credit Issues Bankruptcy in Japan Most business debts require guarantees Higher suicide rates for people with insurance Enforcement of Credit Transactions