Business Law Chapter 26

judgment proof

(i.e., has little or no property or no income that can be garnished), the creditor may never collect.

county recorder's office

. These filings are public record and alert the world that a mortgage or deed of trust has been recorded against the real property. This record gives potential lenders or purchasers of real property the ability to determine whether there are any existing liens (mortgages) on the property.

Mortgage

.collateral agreement where a property owner who borrows money from a creditor may use the real estate as collateral for repayment of the loan a two-party instrument. The owner-debtor is the mortgagor, and the lender-creditor is the mortgagee

default

A debtor that does not make the required payments on a secured real estate transaction

foreclosure sales.

All states permit foreclosure sales Under this method, the debtor's default may trigger a legal court action for foreclosure. Any party having an interest in the property—including owners of the property and other mortgagees or lienholders—must be named as defendants. ( If the house sells for $575,000, the bank keeps $500,000 and must remit $75,000 to Christine. Most state statutes permit the mortgagee-lender to recover the costs of the foreclosure and judicial sale from the sale proceeds before remitting the surplus to the mortgagor-borrower.)

A debt collector is not allowed to contact a debtor in some circumstances, including the following:

At any inconvenient time. The FDCPA provides that convenient hours are between 8:00 a.m. and 9:00 p.m., unless this time is otherwise inconvenient for the debtor (e.g., the debtor works a night shift and sleeps during the day). At inconvenient places, such as at a place of worship or social events. At the debtor's place of employment, if the employer objects to such contact. If the debtor is represented by an attorney. If the debtor gives a written notice to the debt collector that he or she refuses to pay the debt or does not want the debt collector to contact him or her again.

land sales contract(carry the paper)

In this contract, the owner of real property agrees to sell the property to a purchaser, who agrees to pay the purchase price to the owner-seller over an agreed-on period of time. often used to sell undeveloped property, farms, and the like. If the purchaser defaults, the seller may declare forfeiture and retake possession of the property.

universal default rule

Prohibits the application of the universal default rule from being applied retroactively to existing balances that the cardholders have on their credit cards (allowed all credit card companies with whom a cardholder had a credit card to raise the interest rate on the card, including on the existing balances, if the cardholder was late in making a payment to any credit card company. The act does not eliminate the universal default rule; it allows credit card companies to apply the rule only to future balances.)

Credit Card Accountability Responsibility and Disclosure Act of 2009,( Credit CARD Act)

Requires that the terms of the credit card agreement must be written in plain English and in no less than 12-point font (thus avoiding "legalese" and fine-print agreements). Credit cards cannot be issued to anyone under the age of 21 (used to be 18) unless they have a co-signer (e.g., parent) or they can prove they have the means to pay credit card expenses. Requires that payments above the minimum payment be applied to pay higher-interest balances first (previously, issuers applied payments to lower-interest balances first). The minimum payment can be applied to pay off lowest-interest-rate balances first. Prevents card companies from retroactively increasing interest rates on existing balances. Provides that if cardholders cancel a card, they have the right to pay off existing balances at the existing interest rate and existing payment schedule (e.g., current minimum monthly payment). Provides that cardholders who have been subject to an interest rate increase because of default but then pay on time for 6 months must have the interest rate returned to the rate prior to the rate increase. Prohibits the application of the universal default rule from being applied retroactively to existing balances that the cardholders have on their credit cards. The universal default rule (which was used extensively by credit card companies prior to the act) allowed all credit card companies with whom a cardholder had a credit card to raise the interest rate on the card, including on the existing balances, if the cardholder was late in making a payment to any credit card company. The act does not eliminate the universal default rule; it allows credit card companies to apply the rule only to future balances. Requires card companies to place a notice on each billing statement that notifies the cardholder how long it would take to pay off the existing balance plus interest if the cardholder were to make minimum payments on the card. Requires card companies to place a notice on each billing statement that notifies the cardholder what monthly payment would be necessary for the cardholder to pay off the balance plus interest in 36 months.

Avnet, Inc. v. Catalyst Resource Group, LLC(Case 26.2 FEDERAL COURT CASE Personal Guaranty)

The U.S. court of appeals affirmed the district court's grant of summary judgment to Avnet that enforced Wild's personal guaranty. (When Catalyst did not pay the loan, Avnet contacted Wild to honor his personal guaranty. Wild refused to do so. Avnet sued Wild in U.S. district court to recover the unpaid loan. Wild argued that he was not bound to pay Avnet because his personal guaranty had been to Laurus and not to Avnet, and that he had not intended that his guaranty be assigned to any other party. The district court concluded that Avnet could enforce Wild's personal guaranty and granted summary judgment in Avnet's favor. Wild appealed.)

Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)

The act is the most sweeping financial reform law enacted since the Great Depression in the 1930s. Major goals of the act are to regulate consumer credit and mortgage lending. (The act provides civil remedies for borrowers to sue lenders for engaging in deceptive and predatory practices and for violating the provisions of the act. The act provides civil remedies for borrowers to sue lenders for engaging in deceptive and predatory practices and for violating the provisions of the act.)

Consumer Financial Protection Bureau (CFPB

The bureau has authority to supervise all participants in the consumer finance and mortgage area, including depository institutions, such as commercial and savings banks, and nondepository parties, such as insurance companies, mortgage brokers, credit-counseling firms, debt collectors, and debt buyers. provides uniform model forms that covered parties can use to make required disclosures. has authority to prohibit unfair, deceptive, or abusive acts or practices regarding consumer financial products and services. ( The automobile industry is exempt from bureau supervision and is subject to oversight by the Federal Trade Commission (FTC)) (has authority to enforce federal consumer financial protection laws and is authorized to adopt rules to interpret and enforce the provisions of the acts it administers. The bureau has investigative and subpoena powers and may refer matters to the U.S. attorney general for criminal prosecution.)

secured credit.

The collateral secures payment of the loan. (The creditor who has a security interest in collateral is called a secured creditor, or secured party) (Security interests may be taken in real, personal, intangible, and other property. If the debtor fails to make the payments when due, the collateral may be repossessed to recover the outstanding amount. Generally, if the sale of the collateral is insufficient to repay the loan plus interest, the creditor may bring a lawsuit against the debtor to recover a deficiency judgment for the difference.)

right of redemption

The common law and many state statutes give the mortgagor the right to redeem real property after default and before foreclosure requires the mortgagor to pay the full amount of the debt—that is, principal, interest, and other costs—incurred by the mortgagee because of the mortgagor's default. Redemption of a partial interest is not permitted. ( the mortgagor receives title to the property, free and clear of the mortgage debt. Most states allow the mortgagor to redeem real property for a specified period (usually 6 months or 1 year) after foreclosure.)

borrower(debtor)

The party borrowing the money

Title III of the Consumer Credit Protection Act

This federal law allows debtors who are subject to a writ of garnishment to retain the greater of (1) 75 percent of their weekly disposable earnings (after taxes) or (2) an amount equal to 30 hours of work paid at federal minimum wage. State law limitations on garnishment control are often more stringent than federal law

collateral

To minimize the risk associated with extending unsecured credit, a creditor may require a security interest in the debtor's property

Old Republic National Title Insurance Company v. Fifth Third Bank(Case 26.1 STATE COURT CASE Mortgages and Liens)

When Santen and Hughes commenced a foreclosure action against McCarthy's house, Fifth Third and Centex were brought into the suit. The trial court held that the Santen and Hughes's lien had first priority. (The court of appeals reversed the decision of the trial court and ruled that the priority of the security interests on McCarthy's house were by the recording date: first, Santen and Hughes; second, Fifth Third; and third, Centex.)

reconveyance( satisfaction of a mortgage)

When a mortgage is repaid in full, the lender files a written document with the county recorder's office, which is proof that the mortgage has been paid.

construction lien (also known as a mechanic's lien)

a contract's, laborer'r and material person's statytory lien that make the real property to which services or material have been provided security for the payment of the services and materials (supplier's lien (also called material person's lien) )(supplier's lien (also called material person's lien) for those parties supplying materials, laborer's lien for persons providing labor, and design professional's lien for those parties providing architectural and design services) (To prevent foreclosure, Landowner must pay Roofing Company for its work. Landowner ends up paying twice for the roofing work—once to General Contractor, the general contractor, and a second time to Roofing Company, the subcontractor. Landowner's only recourse is to sue General Contractor to recover its payment.) (Suppose in the preceding example that Landowner obtained a lien release from Roofing Company, the subcontractor, before or at the time Landowner paid General Contractor, the general contractor. If General Contractor fails to pay Roofing Company, the subcontractor, then Roofing Company could not file a lien against Landowner's house because it had signed a lien release. In this situation, Roofing Company's only recourse would be to sue General Contractor to recover payment for its services.)

Equal Credit Opportunity Act (ECOA)

a federal statute that prohibits discrimination in the extension of credit based on sex, marital status, race, color, national origin, religion, age, or receipt of income from public assistance programs. The ECOA applies to all creditors that extend or arrange credit in the ordinary course of their business, including banks, savings and loan associations, automobile dealers, real estate brokers, credit card issuers, and so on. (The creditor must notify the applicant within 30 days regarding the action taken on a credit application. If the creditor takes an adverse action (i.e., denies, revokes, or changes the credit terms), the creditor must provide the applicant with a statement containing the specific reasons for the action. If a creditor violates the ECOA, the consumer may bring a civil action against the creditor and recover actual damages (including emotional distress and embarrassment).)

Fair Debt Collection Practices Act (FDCPA)

a federal statute that protects consumer-debtors from abusive, deceptive, and unfair practices used by debt collectors. expressly prohibits debt collectors from using certain practices: (1) harassing, abusive, or intimidating tactics (e.g., threats of violence, obscene or abusive language); (2) false or misleading misrepresentations (e.g., posing as a police officer or an attorney); and (3) unfair or unconscionable practices (e.g., threatening the debtor with imprisonment). (limits the contact that a debt collector may have with third persons other than the debtor's spouse or parents. Such contact is strictly limited. Unless the court has given its approval, third parties can be consulted only for the purpose of locating a debtor, and a third party can be contacted only once. A debt collector may not inform a third person that a consumer owes a debt that is in the process of collection. A debtor may bring a civil action against a debt collector for intentionally violating the FDCPA.)

Fair Credit Billing Act (FCBA)

a federal statute that regulates billing errors involving consumer credit.

Fair Credit Reporting Act (FCRA)

a federal statute that regulates credit reporting companies. This act protects a consumer who is the subject of a credit report by setting rules for consumer reporting agencies—that is, credit bureaus that compile and sell credit reports for a fee. Consumers may request the following information at any time: (1) the nature and substance of all the information in their credit file, (2) the sources of this information, and (3) the names of recipients of their credit report. (If a consumer challenges the accuracy of pertinent information contained in a credit file, the agency may be compelled to reinvestigate. If the agency cannot find an error, despite the consumer's complaint, consumers may file a 100-word written statement of their version of the disputed information. If a consumer reporting agency or user violates the FCRA, injured consumers may bring a civil action against the violator and recover actual damages. The FCRA also provides for criminal penalties.)

Fair Credit and Charge Card Disclosure Act

a federal statute that requires disclosure of credit terms on credit card and charge card solicitations and applications. The regulations adopted under the act require that any direct written solicitation to a consumer display, in tabular form, the following information: (1) the APR, (2) any annual membership fee, (3) any minimum or fixed finance charge, (4) any transaction charge for use of the card for purchases, and (5) a statement that charges are due when the periodic statement is received by the debtor.

beneficiary

a person who is to receive life insurance proceeds when the issured dies

power of sale

a power stated in a mortgage or deed that permits foreclosure without court proceeding and sale of the property through an auction, although this must be expressly conferred in the mortgage or deed of trust (Under a power of sale, the procedure for that sale is provided in the mortgage or deed of trust itself. No court action is necessary. Some states have enacted statutes that establish the procedure for conducting the sale. Such a sale must be by auction for the highest price obtainable. Any surplus must be paid to the mortgagor.)

credit

a situation in which one party make a loan to another party

guaranty arrangement,

a third person, the guarantor, agrees to pay the debt of the principal debtor if the debtor defaults and does not pay the debt when it is due. ( In this type of arrangement, the guarantor is secondarily liable on the debt. In other words, the guarantor is obligated to pay the debt if the principal debtor defaults on the debt and the creditor has not been able to collect the debt from the debtor)

surety arrangement

a third person—known as the surety or co-debtor— promises to be liable for the payment of another person's debt. A person who acts as a surety is commonly called an accommodation party or co-signer ( Along with the principal debtor, the surety is primarily liable for paying the principal debtor's debt when it is due. The principal debtor does not have to be in default on the debt, and the creditor does not have to have exhausted all its remedies against the principal debtor before seeking payment from the surety.)

Regulation Z

an administrative agency regulation, sets forth detailed rules for compliance with the TILA ( The TILA and Regulation Z require the creditor to disclose the following information to the consumer-debtor: Cash price of the product or service Down payment and trade-in allowance Unpaid cash price Finance charge, including interest, points, and other fees paid for the extension of credit Annual percentage rate (APR) of the finance charges Charges not included in the finance charge (such as appraisal fees) Total dollar amount financed Date the finance charge begins to accrue Number, amounts, and due dates of payments Description of any security interest Penalties to be assessed for delinquent payments and late charges Prepayment penalties Comparative costs of credit (optional)) (The uniform disclosures required by the TILA and Regulation Z are intended to help consumers shop for the best credit terms.)

Consumer credit

credit extended to natural persons for personal, family, or household purposes

nonrecordation of a mortgage

deed of trust does not affect either the legality of the instrument between the mortgagor and the mortgagee or the rights and obligations of the parties. In other words, the mortgagor is obligated to pay the amount of the mortgage according to the terms of the mortgage, even if the document is not recorded. However, an improperly recorded document is not effective against either (1) subsequent purchasers of the real property or (2) other mortgagees or lienholders who have no notice of the prior mortgage

Mortgage Reform and Anti-Predatory Lending Act. Title XIV of the Dodd-Frank Act, which is titled the Mortgage Reform and Anti-Predatory Lending Act ((main provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that affect consumer financial protection are the following:))

designed to eliminate many abusive loan practices and mandates new duties and disclosure requirements for mortgage lenders. The act requires that mortgage originators and lenders verify the assets and income of prospective borrowers, their credit history, employment status, debt-to-income ratio, and other relevant factors when deciding to extend credit. The act puts the burden on lenders to verify that a borrower can afford to repay the loan for which he or she has applied.

Consumer Financial Protection Act of 2010. Title X of the Dodd-Frank Act (main provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that affect consumer financial protection are the following:)

designed to increase relevant disclosure regarding consumer financial products and services and to eliminate deceptive and abusive loan practices. The act is also designed to prevent hidden fees and charges. The new law requires disclosure of relevant information to consumers in plain language that permits consumers to understand the costs, benefits, and risks associated with consumer financial products and services

Unsecured credit

does not require any security (collateral) to protect the payment of the debt.Instead, the creditor relies on the debtor's promise to repay the principal (plus any interest) when it is due (The creditor is called an unsecured creditor)(, the unsecured creditor considers the debtor's credit history, income, and other assets. If the debtor fails to make the payments, the creditor may bring legal action and obtain a judgment against the debtor. )

deficiency judgment

entitles the mortgagee to recover the amount of the judgment from the mortgagor's other property. (Kaye defaults, and when the bank forecloses on the property, it is worth only $500,000. There is a deficiency of $100,000 ( Kaye buys a house for $800,000. She puts $200,000 down and borrows $600,000 from a bank, which takes a mortgage on the property to secure the loan. $600,000 loan − $500,000 foreclosure sale price). The bank can recover the $100,000 deficiency from Kaye's other property. The bank has to bring a legal action against Kaye to do so.)

Consumer Leasing Act (CLA)

federal statute that extends the TILA's coverage to lease terms in consumer leases. applies to lessors who engage in leasing or arranging leases for consumer goods in the ordinary course of their business. Casual leases (such as leases between consumers) are not subject to the CLA. Creditors that violate the CLA are subject to the civil and criminal penalties provided in the TILA.

notice of lien

file a notice of lien with the county recorder's office in the county in which the real property subject to the lien is located. (In essence, the lienholder has the equivalent of a mortgage on the property. If the owner defaults, the lienholder may foreclose on the lien, sell the property, and satisfy the debt plus interest and costs out of the proceeds of the sale. Any surplus must be paid to the owner-debtor. Mechanic's liens are usually subject to the debtor's right of redemption.)

Fair and Accurate Credit Transactions Act

gives consumers the right to obtain one free credit report once every 12 months from the 3 nationwide credit reporting agencies (Equifax, Experian, TransUnion). Consumers may purchase, for a reasonable fee, their credit score and how the credit score is calculated. The act permits consumers to place fraud alerts on their credit files.

statutory period of redemption.

mortgagor can redeem real property for a specified period (usually 6 months or 1 year) after foreclosure.

security interests in real property

occurs if an owner borrows money from a lender and pledges real estate as security for repayment of the loan.

Truth-in-Lending Act (TILA)

one of the first federal consumer protection statutes enacted by Congress. The TILA, as amended, requires creditors to make certain disclosures to debtors in consumer transactions (e.g., retail installment sales, automobile loans) and real estate loans on the debtor's principal dwelling. covers only creditors that regularly (1) extend credit for goods or services to consumers or (2) arrange such credit in the ordinary course of their business.

Writ of Garnishment

postjudgment court order that permits the seizure of a debtor's property that is in the possession of third parties. The creditor (also known as the garnishor) must go to court to seek a writ of garnishment A third party in this situation is called a garnishee. ( employers who possess wages due a debtor, banks in possession of funds belonging to the debtor, and other third parties in the possession of property of the debtor.)

writ of Execution

postjudgment court order that permits the seizure of the debtor's property that is in the possession of the debtor. Certain property is exempt from levy (e.g., tools of trade, clothing, homestead exemption). a court order directing the sheriff or other government officials to seize the debtor's property in the debtor's possession and authorizes a judicial sale of that property. The proceeds are used to pay the creditor the amount of the final judgment. Any surplus must be paid to the debtor. (Aamir wins a $25,000 judgment against Nicole. Nicole refuses to pay the amount of the judgment to Aamir. Aamir can obtain a postjudgment writ of execution from the court whereby the court directs the sheriff to seize Nicole's automobile and other property and have them sold at public auction to satisfy the judgment she owes Aamir.)

Writ of Attachment

prejudgment court order that permits the seizure of a debtor's property that is in the debtor's possession while a lawsuit against the debtor is pending. To obtain a writ of attachment, a creditor must follow the procedures of state law, give the debtor notice, and post a bond with the court. (Taryn sues Justin for fraud. Taryn lost a large sum of money to Justin when she invested in what she alleges was a fraudulent investment scheme. Because it may take more than one year before the case is heard, Taryn is afraid that Justin will transfer any money or property he has to avoid having to pay a judgment if he loses at trial. Taryn can immediately make a motion to the court to have the court issue a writ of attachment ordering the seizure of Justin's property, pending the outcome of the lawsuit. The court will do so if it determines that there is some merit to Taryn's claim against Justin and there is justification to believe that Justin might dispose of his property prior to the trial)

recording statute

require a mortgage or deed of trust to be recorded in the county recorder's office in the county in which the real property is located.

antideficiency statutes

statutes that prohibit deficiency judgments regarding certain types of mortgages, such as loans for the original purchase of residential property. usually apply only to first purchase money mortgages (i.e., mortgages that are taken out to purchase houses) (Second mortgages and other subsequent mortgages, even mortgages that refinance the first mortgage, usually are not protected by antideficiency statutes.) (Qian defaults on both loans, and when she defaults, the house is worth only $500,000. Both banks bring foreclosure proceedings to recover the house. First Bank can recover the house worth $500,000 at foreclosure. However, First Bank has a deficiency of $100,000 ($600,000 loan − $500,000 foreclosure sale price). Because of the state's antideficiency statute, First Bank cannot recover this deficiency from Qian; First Bank can recover only the house in foreclosure and must write off the $100,000 loss. Second Bank's loan, a second loan, is not covered by the antideficiency statute. Therefore, Second Bank can sue Qian to recover its $100,000 deficiency from Qian's other property.)

deed of trust

the instrument that gives the creditor a security interest in the debtor's property that is pledged as collateral. a three-party instrument. Under it, legal title to the real property is placed with a trustee (usually a trust corporation) until the amount borrowed has been paid. The owner-debtor is called the trustor. Although legal title is vested in the trustee, the trustor has full legal rights to possession of the real property. The lender-creditor is called the beneficiary

note

the instrument that is evidence of the borrower's debt to the lender

creditor(lender)

the lender in a transaction