Other Credit Transactions: Davidson, Knowles & Forsythe Ed.)

CHAPTER 27
OTHER CREDIT TRANSACTIONS
DAVIDSON, KNOWLES & FORSYTHE

Business Law: Cases and Principles
in the Legal Environment (8th Ed.)
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
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.
© 2004 West Legal Studies in Business
A Division of Thomson Learning 2
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).
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.
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.
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.
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.
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.
MORTGAGE LOANS
 Statutes that apply to mortgage loans:
– Mortgage lending acts.
– Mortgage banker and broker acts.
– Secondary mortgage acts.
– Home improvement contract acts.

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.
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.

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.

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.

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.
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.

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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CHAPTER 27

OTHER CREDIT TRANSACTIONS

DAVIDSON, KNOWLES & FORSYTHE

© 2004 West Legal Studies in Business

 Limits liability of cardholders if cards are used

© 2004 West Legal Studies in Business

errors without liability until error is investigated.

of credit cards issued to person without an

© 2004 West Legal Studies in Business

© 2004 West Legal Studies in Business

FTC CONSUMER CREDIT RULES

FTC CONSUMER CREDIT RULES

© 2004 West Legal Studies in Business

© 2004 West Legal Studies in Business

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