CHAPTER 27 OTHER CREDIT TRANSACTIONS

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

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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
  (Buyers Bank) that will honor LOC upon receipt
  of certain documents from Beneficiary (Seller).

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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 borrowers
  signature.

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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.

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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.

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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.

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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.

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MORTGAGE LOANS

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

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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.

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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.

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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.

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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.

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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.

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FTC CONSUMER CREDIT RULES

• Two credit practice rules (contd) 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.

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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?