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

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning

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

Its Legal, Ethical, and Global Environment

MARIANNE M. JENNINGS

7th Ed.

2 Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning

Establishing a Credit Establishing a Credit ContractContract

• Additional terms required in Credit Contract:– Amount financed.– Rate of Interest.– Payments required.– Penalties for late payments.– Disclaimer of collateral.– Other statutory disclosures required.


• 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.

Statutory Statutory RequirementsRequirements


• 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 Equal Credit Opportunity ActAct


• 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.– 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).



• 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?

ECOA Violation?ECOA Violation?


• 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 LendingTruth 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 15.2 Roberts v. Fleet Bank (2003).– Was there adequate disclosure by Fleet?

Truth in Lending Truth in Lending


• 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/Charge Fair Credit/Charge CardCard


• 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.

• 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).– 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.



• 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?

Credit AdvertisingCredit Advertising


• 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).

Canceling Credit Canceling Credit ContractsContracts


• 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 ActFair 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).

Fair Credit Billing ActFair Credit Billing 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.

Fair Credit Reporting Fair Credit Reporting ActAct


• 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 Fair Credit Reporting ActAct


DisclosureDisclosure• Case 15.4 Phillips 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?


• Case 15.5 Stevenson v. TRW, Inc. (1993).– What would you do differently if you

were trying to correct your report?– Are the damages reasonable?

Inaccurate Report?Inaccurate Report?


• 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.

Consumer Leasing ActConsumer Leasing Act


• 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.

EnforcementEnforcement


• 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.



• 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.– 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.



• Case 15.6 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?

CollectionsCollections


• 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).



• 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.



• 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).



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

insurance.

International CreditInternational Credit

Documents

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