25-1 chapter 26 credit, mortgages, and debtor’s rights

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Chapter 26

Credit, Mortgages, and Debtor’s Rights

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Credit

Credit: Occurs when one party makes a loan to another party

Debtor: The borrower in a credit transaction Creditor: The lender in a credit transaction

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 26-2

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Unsecured Credit

Unsecured Credit: Credit that does not require any security to protect payment of the debt

Creditor relies on the debtor’s promise to repay the principal (plus interest) when it is due

Creditor may bring legal action if the debtor fails to make the payments

If the debtor is judgment proof, the creditor cannot collect


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Secured Credit

Secured credit: Credit that requires security that secures payment of the loan Security interests may be taken in real, personal,

intangible, other property Collateral may be repossessed to recover the

outstanding amount if the debtor fails to make payment


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Security Interests in Real Property

Mortgage: An arrangement where an owner of real property borrows money from a lender and pledges the real property as collateral to secure the repayment of the loan

Two-party instrument

Owner/debtor is the mortgagor

Creditor is the mortgagee

Real property is used as collateral


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Exhibit 26.2 - Mortgage on Real Estate

Loan of FundsLoan of Funds

Security Interest in Security Interest in Real PropertyReal Property

Owner-Debtor Mortgagor (Borrower)

Creditor Mortgagee (Lender)


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Note: An instrument that evidences a borrower’s debt to the lender

Deed of trust: An instrument that gives a creditor a security interest in the debtor’s real property that is pledged as collateral for a loan

Three-party instrument

Legal title of property placed with trustee until owner-debtor (trustor) pays creditor (beneficiary)


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Exhibit 26.3 - Note and Deed of Trust

Loan of FundsLoan of Funds

Security Interest in Security Interest in Real PropertyReal Property

Owner-Debtor Trustor

(Borrower))

Creditor Beneficiary

(Lender)

Trustee

Legal Legal TitleTitle

If default, can If default, can perfect rightsperfect rights


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Recording Statute: A statute that requires a mortgage or deed of trust to be recorded in the county recorder’s office of the county in which the real property is located Public record Gives potential lenders, purchasers notice of

claims against property Nonrecordation does not affect legality of instrument

or rights of parties


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Foreclosure sale: A legal procedure by which a secured creditor causes the judicial sale of the secured real estate to pay a defaulted loan

Permitted by all states

Power of sale: A power stated in a mortgage or deed that permits foreclosure without court proceedings and sale of the property through an auction

Permitted by most states


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Case 26.1: Mortgages

Case Old Republic National Title Insurance Company v.

Fifth Third Bank Web 2008 Ohio App. Lexis 4423 (2008) Court of Appeals of Ohio

Issue What is the priority of the lien and two mortgages

on McCarthy’s house?


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Deficiency Judgment: A judgment of a court that permits a secured lender to recover other property or income from a defaulting debtor if the collateral is insufficient to repay the unpaid loan

Antideficiency statute: A statute that prohibits deficiency judgments regarding certain types of mortgages, such as those on residential property


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Right of redemption: A right that allows the mortgagor to redeem real property after default and before foreclosure

The mortgagor must pay the full amount of the debt incurred by the mortgagee because of the mortgagor’s default

Land sales contract: An arrangement in which the owner of real property sells property to a purchaser and extends credit to the purchaser


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Mechanic’s liens on real property: A contractor’s, laborer’s, and material person’s statutory lien that makes the real property to which services or materials have been provided security for the payment of the services and materials

Subject to the debtor’s right of redemption

Lien release: A written document signed by a contractor, subcontractor, laborer, or material person, waiving his or her statutory lien against real property


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Surety and Guaranty Arrangements

Surety arrangement: An arrangement in which a third party promises to be primarily liable with the borrower for the payment of the borrower’s debt

Guaranty arrangement: An arrangement in which a third party promises to be secondarily liable for the payment of another’s debt

Defenses that principal debtor has against creditor may be made by surety or guarantor


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Collection Remedies

Writ of attachment: A prejudgment court order that permits the seizure of a debtor’s property while a lawsuit is pending

Writ of execution: A postjudgment court order that permits the seizure of the debtor’s property that is in the possession of the debtor

Writ of garnishment: A postjudgment court order that permits the seizure of a debtor’s property that is in the possession of third parties


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Collection Remedies

Title III of the Consumer Credit Protection Act: A federal law that permits debtors who are subject to a writ of garnishment to retain a specified percentage or amount of their earnings Allows debtors who are subject to a writ of

garnishment to retain the greater of 75 percent of their weekly disposable earnings an amount equal to 30 hours of work paid at

federal minimum wage


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Consumer Financial Protection

Dodd-Frank Wall Street Reform and Consumer Protection Act: A federal statute that regulates the financial industry and provides protection to consumers regarding financial products and services

Bureau of Consumer Financial Protection: A federal administrative agency that is responsible for enforcing federal consumer financial protection statutes


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Consumer Financial Protection Act of 2010: A federal statute that requires increased disclosure of credit information and terms to consumers and regulates consumer credit providers and others

Mortgage Reform and Anti-Predatory Lending Act: A federal statute that is designed to eliminate many abusive mortgage loan practices and mandates new duties and disclosure requirements on mortgage lenders and others


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Truth-in-Lending Act (TILA): A federal statute that requires creditors to make certain disclosures to debtors in consumer transactions and real estate loans on the debtor’s principal dwelling

Regulation Z: A regulation that sets forth detailed rules for compliance with the TILA

Consumer Leasing Act (CLA): A federal statute that extends the TILA’s coverage to lease terms in consumer leases


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Fair Credit Billing Act: A federal statute that requires that creditors promptly acknowledge in writing consumer billing complaints and investigate billing errors and affords consumer-debtors other protection during billing disputes

Fair Credit Reporting Act (FCRA): A federal statute that protects a consumer who is the subject of a credit report by setting rules for credit bureaus to follow and permitting consumers to obtain information from credit reporting businesses


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Fair Debt Collection Practices Act (FDCPA): A federal act that protects consumer- debtors from abusive, deceptive, and unfair practices used by debt collectors

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


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Fair Credit and Charge Card Disclosure Act: An amendment to the TILA that requires disclosure of certain credit terms on credit card and charge card solicitations and applications

Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act): A federal statute that requires disclosures to consumers concerning credit card terms, adds transparency to the creditor-debtor relationship, and eliminates many of the abusive practices of credit card issuers


25-1 chapter 26 credit, mortgages, and debtor’s rights

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