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“Creditors have better memories than debtors.”
Benjamin Franklin
I. Teacher to Teacher Dialogue
incumbent upon us, as instructors, to put this material in perspective at the outset by reminding
students of this larger universe.
In addition to creating a sense of relative proportion, this universal perspective allows us to
impart another important point—that few credit problems are isolated. Most people who find
II. Chapter Objectives
1. Distinguish between unsecured and secured credit.
2. Describe security interests in real property, such as mortgages and deeds of trust.
3. Compare surety and guaranty arrangements.
5. Describe the Consumer Financial Protection Bureau.
III. Key Question Checklist
What is the difference between secured and unsecured credit?
What are the various ways in which security interests are created in real property?
CREDIT, REAL PROPERTY
FINANCING, AND DEBTOR’S RIGHTS
26
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IV. Text Materials
Introduction to Credit, Mortgages, and Debtor’s Rights
The U.S. economy is a credit economy. Consumers borrow money to make major purchases.
Because lenders are sometimes reluctant to lend large sums of money simply on the borrower’s
Credit
Unsecured Credit
Instead of relying upon collateral to protect payment of a debt, the creditor relies on the debtor’s
promise to pay. If the debtor fails to pay, the creditor may bring an action and obtain a judgment
Secured Credit
Collateral may be used to secure payment on a loan. If the debtor fails to pay when due, the
Security Interest in Real Property
A security interest in real property is created if an owner borrows money from a lender and
Mortgage – Mortgages are two-party instruments where the owner/debtor uses their real property
Note and Deed of Trust – Instead of using a mortgage, some states employ a system that use a
note as the instrument that evidences a borrower’s debt to a lender, and a deed of trust, which is
an instrument that serves as a security interest in the real property. A deed of trust is a three-party
Recording Statute – Recording statutes require that mortgages and deeds of trust must be
Credit, Real Property Financing, and Debtor’s Rights
Foreclosure Sale – Foreclosure sales are triggered by defaulting on a mortgage, and require
Case 26.1 Mortgages and Liens: Old Republic National Title Insurance Company v. Fifth Third
Bank
2008 Ohio App. Lexis 4423 (2008), Court of Appeals of Ohio
Facts: James and Heather McCarthy (McCarthy) owned a house in Cincinnati, Ohio. The house
was purchased with a mortgage loan from Countrywide Home Loans, which recorded its
mortgage in the appropriate county recorder’s office. McCarthy borrowed money from
Fifth Third Bank and gave the bank a mortgage but the bank did not record the mortgage. After
this McCarthy took loan from Centex Home Equity Company to refinance the original mortgage
Issue: What is the priority of the lien and two mortgages on McCarthy’s house?
Decision: The court of appeals 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,
Ethics Questions: A recording statute is 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.
Some of the students can argue that since Centex was not aware of McCarthy’s loan from Fifth
Deficiency Judgment – Some states permit a deficiency judgment action to be brought to recover
mortgages.
Right of Redemption – Many state statutes allow the mortgagor to redeem real property after
default but before foreclosure, and some states allow a right of redemption for a specified period
Land Sales Contract – Most states permit the transfer and sale of real property pursuant to a
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that permit them to file a mechanic’s lien against the improved real property. Mechanic’s liens are
Procedure for Obtaining a Material Person’s Lien – In order to have a valid lien, a notice of
release of lien from all contractors.
Surety and Guaranty Arrangements
Surety Arrangement – This arrangement calls for a third person designated as the surety or co-
debt when it is due.
Guaranty Arrangement – In a guaranty arrangement, a third person, the guarantor, agrees to
Collection Remedies
Writ of Attachment – Attachment is a prejudgment court order that permits the seizure of a
judicial sale of that property.
Writ of Garnishment – Garnishment is a postjudgment court order that permits the seizure of a
Consumer Financial Protection
Dodd-Frank Wall Street Reform and Consumer Protection Act – It is a federal statute that
Contemporary Environment: Bureau of Consumer Financial Protection
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V. Key Terms and Concepts
in the debtor’s possession while a lawsuit against the debtor is pending.
Beneficiary (creditor)—The creditor involved in a deed of trust.
Bureau of Consumer Financial Protection—A federal government agency created by the
Dodd-Frank Wall Street Reform and Consumer Protection Act.
most common collection remedies.
Consumer financial protection—These laws cover the extension and collection of credit.
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.
Credit—It occurs when one party makes a loan to another party.
Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act)—
A federal statute that requires disclosures to consumers concerning credit card terms, adds
of credit card issuers.
Creditor—The lender in a credit transaction.
Credit report—Information about a person’s credit history that can be secured from a credit
bureau.
Default—A debtor that does not make the required payments on a secured real estate
transaction is in default.
Deficiency judgment—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.
products and 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.
Execution—A postjudgment court order that permits the seizure of the debtor’s property that
is in the possession of the debtor.
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proceedings.
Primarily liable—The first party who is liable in a civil problem or debt.
Reconveyance—A document that is proof that a mortgage has been paid.
Recording statute—A state statute that requires the mortgage or deed of trust to be recorded
in the county recorder’s office of the county in which the real property is located.
defaults and the creditors have attempted unsuccessfully to collect the debt from the debtor.
Secured credit—Credit that requires security (collateral) to secure payment of the loan.
Secured creditor—A creditor who has a security interest in a collateral.
Secured party—A secured creditor.
with the borrower for the payment of the borrower’s debt.
Surety—The third person that agrees to be liable in a surety arrangement.
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.
debtors in consumer transactions.
Universal default rule —Is the term for a particular lender to change the terms of a loan from
the normal terms to the default terms (i.e. the terms and rates given to those who have missed
payments on a loan) when that lender is informed that their customer has defaulted with
another lender, even though the customer has not defaulted with the first lender.
payment of the debt.
Unsecured creditor—A creditor who has not taken any security (collateral) to protect the
payment of the debt.
Writ of attachment—A prejudgment court order that permits the seizure of a debtor’s
property while a lawsuit is pending.
