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CHAPTER 27 OTHER CREDIT TRANSACTIONS

CHAPTER 27 OTHER CREDIT TRANSACTIONS. DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed.). INTRODUCTION. Businesses need credit in making purchases of raw materials to produce goods.

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CHAPTER 27 OTHER CREDIT TRANSACTIONS

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  1. CHAPTER 27OTHER CREDIT TRANSACTIONS DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8th Ed.)

  2. INTRODUCTION • Businesses need credit in making purchases of raw materials to produce goods. • Businesses need to grant credit to make sales of finished goods. • Consumers use credit to purchase major and non-major items. • Transactions that fall out of scope of Article 9, are unsecured transactions.

  3. LETTERS OF CREDIT • UCC Article 5 governs LOC. • Device designed to reassure both buyer and seller, especially in an international transaction, that each party will receive the benefit of his/her bargain. • Applicant (Buyer) obtains commitment from Issues (Buyer’s Bank) that will honor LOC upon receipt of certain documents from Beneficiary (Seller).

  4. UNSECURED CREDIT • Creditor agrees to grant credit to debtor without the use of any collateral. • Creditor relies on debtor to repay loan or honor debt without benefit of some form of security in event debtor defaults obligation. • May take form of signature loan, which lender agrees to make the loan on basis of borrower’s signature.

  5. UNSECURED CREDIT • Found with most public utility accounts, bank credit cards, and travel and entertainment cards. • Regulation primarily matter of state law. • Federal regulation concerned with information provided to debtor prior to creation of debt and with acceptable methods of collection if debtor defaults.

  6. UNSECURED CREDIT • Truth in Lending Act (TILA) requires creditors to provide credit applicants with certain information about the cost of the credit. • Creditor uses methods to enforce claim: • Self-help; • Writ of attachment; • Writ of garnishment; • File suit for breach of contract; • Hire a collection agent. • Usury: charging an illegal rate of interest.

  7. INSTALLMENT LOANS • Loans for a fixed time period and with fixed periodic payments. • May be secured or unsecured. • Subject to many of the same regulatory provisions as are unsecured loans. • Federal level lender governed by, TILA and Fair Debt Collection Practices Act. • State level covered by Article 3 of UCC, Uniform Consumer Credit Code, and state laws.

  8. MORTGAGE LOANS • Real estate is used as collateral by debtor to secure credit. • Commonly installment loans, but repayment term is longer. • State regulations are substantial. • Federal regulations are TILA and Real Estate Settlement Procedures Act (RESPA). • RESPA: a disclosure act.

  9. MORTGAGE LOANS • Statutes that apply to mortgage loans: • Mortgage lending acts. • Mortgage banker and broker acts. • Secondary mortgage acts. • Home improvement contract acts.

  10. CREDIT CARDS • Types of credit cards: • Bank cards. • Travel and entertainment cards. • Store/merchant cards. • Holder of card involved in a “revolving credit” rather than a loan. • Methods for computing charges and fees are different from a “standard” loan.

  11. CREDIT CARDS • Federal regulations: • TILA, Regulation Z, Subpart B: • Prohibits the issuing of unsolicited credit cards. • Limits liability of cardholders if cards are used without authorization. • The Equal Credit Opportunity Act: • Requires businesses to make credit without discrimination.

  12. CREDIT CARDS • Federal regulations: • The Fair Credit Billing Act: • Provides method for cardholders to challenge billing errors without liability until error is investigated. • Unsolicited Credit Card Act: • Protects customer from potential liability for misuse of credit cards issued to person without an application submitted by that person.

  13. CREDIT CARDS • State regulation tends to be more enabling than restrictive. • State usury provisions and contract laws are applicable. • Transaction may be subject to provisions of Article 9 of the UCC.

  14. FTC CONSUMER CREDIT RULES • Federal Trade Commission enacted credit practice rules to provide consumer debtors with protections, not enjoyed under other areas of law. • Two credit practice rules are: • 1) Federal Trade Commission Holder in Due Course: • Debtor retains all rights, claims, and defenses that consumer could have asserted against seller.

  15. FTC CONSUMER CREDIT RULES • Two credit practice rules (cont’d) are: • 2) Makes it unfair trade practice for a seller or creditor in a consumer credit transaction to take a contract containing a confession of judgment clause or a waiver of exemptions clause.

  16. PAYDAY LOANS • Very short-term loans for small amount (e.g., $500). • Borrower writes a post-dated check to lender to be cashed on payday. • Fees and interest are added to the ‘loan.’ • FTC is questioning these loans. • Do they violate state usury loans?

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