Chapter 15 Financing of Sales and Leases: Credit & Disclosure Requirements

1. MARIANNE M. JENNINGS Its Legal, Ethical, and Global Environment 7th Ed. Chapter 15Financing of Sales and Leases:Credit & Disclosure Requirements

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.

3. Statutory Requirements • 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. Equal Credit Opportunity Act • 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.

5. Equal Credit Opportunity Act • 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.

6. Equal Credit Opportunity Act • 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).

7. ECOA Violation? • Case 15.1A.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?

8. Truth in Lending • 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).

9. Truth in Lending • 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 15.2Roberts v. Fleet Bank (2003). • Was there adequate disclosure by Fleet?

10. Fair Credit/Charge Card • 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.

11. Truth in Lending • Truth-in-Lending Act (TILA). • Closed-end transactions. • Amount being financed. • Finance charges. • APR (annual percentage rate). • Number of payments and when due.

12. Truth in Lending • 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.

13. Truth in Lending • 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.

14. Credit Advertising • Case 15.2State 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?

15. Canceling 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).

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.

17. Fair Credit Billing Act • 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).

18. Fair Credit Reporting Act • 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.

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.

20. Disclosure • Case 15.4Phillips 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?

21. Inaccurate Report? • Case 15.5Stevenson v. TRW, Inc.(1993). • What would you do differently if you were trying to correct your report? • Are the damages reasonable?

22. Consumer Leasing Act • 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.

23. Enforcement • 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.

24. Enforcement • 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.

25. Enforcement • 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.

26. Enforcement • 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.

27. Collections • Case 15.6Trull v. GC Services Ltd. Partnership(1997). • What violations of FDCPA does the court find? • Will Trull be permitted to go forward with her suit?

28. Enforcement • 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).

29. Enforcement • 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.

30. Enforcement • 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).

31. International Credit • International Credit Issues. • Bankruptcy in Japan. • Most business debts require guarantees. • Higher suicide rates for people with insurance.