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CA (170,000)
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Chapter 25

MCS 3040 Chapter Notes - Chapter 25: Payment Protection Insurance, Security Interest, Consumer Protection


Department
Marketing and Consumer Studies
Course Code
MCS 3040
Professor
Joseph Radocchia
Chapter
25

Page:
of 3
Chapter 26
Credit arrangements outside normal business activities tend to be more formal and provide more
security to the lender
Lenders will consider 2 major criteria in evaluating the loan application
1. Financial Health of borrower: this evaluation will determine whether the lender grants the loan and if
so on what terms (eg. interest rate will reflect the risk)
2. Security of borrower can provide repayment
A lender usually wants collateral to bay up promise to pay
A lender will carefully review borrowers assets in terms of current value
If the creditor approves the loan, the resulting agreement is a credit agreement (contract)
The lender agrees to lend money based on the terms of the agreement which will require borrower to
repay the money on a specified schedule and provide security in event of default
Default: Failure to may payments on the loan
If a debtor defaults, creditor can take action to have assets seized and sold to satisfy unpaid debts
As extra security a lender may also seek assurance from a person other than the one borrowing
Collateral: Security of a borrowers promise to repay a loan
Regulation of Credit
Consumer Debt: A loan to an individual for a non-commercial purpose
Government intervention in the system of credit is mainly through consumer protection legislation,
which applied to transaction that lead to consumer debt where the borrower is a consumer rather than a
business
Regulations …
1. Are specific rules a business must follow when it extends credit to consumers (otherwise it risks
penalties)
2. These rules function as a guide that businesses can use to protect themselves and to ensure good
consumer relations
Aspects of consumer credit that are subject to regulation…
1. Credit Bureaus: An agency that compiles credit info on borrowers
Lenders use this info to evaluate requests for loans
There are licensing systems to ensure the respectability of credit bureaus ad regulations to ensure the
accuracy of the info compiled
Consumers have access to their files to ensure accuracy
2. Lenders are not allowed to make misleading statements in the application & negotiation process
3. In order to protect borrowers from those who would provide credit at super high rates, the criminal code
prohibits lending at a rate of interest above 60%/year
4. Legislation requires disclosure of the true cost of lending in terms of (A) the amount borrowed, the amount
of interest, any other charges such as registration or insurance, the total balance payable & (2) The annual rate
of interest (as a %) and the period over which the rate applies
5. The remedies a borrower can seek where a lender has failed to observe the regulations including filing a
complaint against the lender (which can lead to fines, license suspension etc), or sometimes claiming damages
6. Collection agencies provide a service to lenders who have a hard time recovering loans. These agencies are
subject to a licensing scheme and cant harass, threaten or exert undue pressure on defaulting borrowers
New regulations that apply to credit cards issued by federally regulated institutions require…
A summary box be shown on applications and contracts that clearly states interest rates & fees
Disclosure of the time to pay off balance by making only the min. payment
Notice of any interest rate increases
Mandatory 21 day interest-free grace period for new purchases
Consumer’s prior consent for increased credit limits
Federal government now allows the provinces to regulate payday loans
These are loans granted for a short period of time by a storefront operation for purpose of
tiding the borrower over until payday
The Credit Agreement
Both lender & borrower must look after their own interests
Much like negotiating the terms of any other contract
The lender sets its credit policies and has the advantage in bargaining power
If lender decides to grant loan, it will offer terms in the form of a letter of commitment
Letter of commitment: A document that is provided by a lender to a borrower & sets out the terms of a loan
including…
Amount of loan
Interest
Renewal
Repayment terms
Security
Events the constitute default
Lender’s remedies
This letter may be the actual agreement or it may lead to other formal documentation
Security
The 2 main elements of the credit agreement are the borrowers promise to repay the loan and lenders
collateral or security if the borrower doesn’t repay
General security agreement: A loan contract that includes all of the assets of a business as collateral
Assets used as security can be classified in terms of whether or not they are meant to be retained in the
business by a debtor
Agreement will require borrower to submit financial reports to the lender at specified intervals and
maintain a specified debt/equity ratio
Security may also include assets to be produced in the future
The federal bank act enables the finished goods to be the security for the loan
As goods are manufactured, the bank gains priority over the inventory against creditors
Credit insurance is available to lenders as an additional source of protection against the risk of
uncollectable accounts
Priority among Creditors
For security to be of value as collateral, lender must be confident of its claim to the assets in the event
of default
Lender needs verification that borrower owns the assets and they aren’t already being used as security
Once loan is granted, lender needs to inform existing and future creditors & potential purchasers of the
assets that it has a claim against the property
All provinces have 2 systems in place to provide creditors with priority over other regarding their
security for loans
1. System in place for real property
2. System in place for personal property
All provinces have 1 statute that applies to all forms of person property security agreements
These have …
1 set of registration rules in each province for all agreements using personal property as security
A creditor registers a financing statement, which identifies the debtor and the property that is
security for the land. Other security is described by item or kind
Financing statements are maintained in centralized computerized public registry
In the event of conflicting claims for the same assets, priority goes to the creditor who registered
the financing statement 1st
Remedies
In the event that a borrower doesn't pay unsecured or general creditors have right to sue the debtor
for unpaid debts and at the end of the process achieve judgements against any assets of the debtor that
aren’t already claimed by secured creditors
Secured creditors have the same remedies but also they have 1st claim against the assets covered in
their security agreement w/ the debtor
Secured Creditor: A lender who, through a registered security interest, has the right to seize and sell specific
assets of a borrower to collect a debt