Deck 26: The Legal Aspects of Credit

Question 1

Consumer protection laws relating to lending institutions are scattered throughout a number of pieces of legislation. What is the unifying theme that each seeks to regulate?

A) prohibiting misleading statements in credit applications
B) the ongoing respectability of licensed credit bureaus
C) licensing, permitted activities, and terms of credit
D) protecting borrowers from exorbitant interest rates

Answer 1

C

Question 2

Which of the following is a valid criticism of the regulations currently affecting banks and other lending institutions in Canada with respect to consumer debt?

A) Federal government intervention in the system of credit hampers lenders' profit motive.
B) Time is required to shop around for better terms and less restrictive lending conditions.
C) Banks have the ability to extract whatever promise of security is deemed necessary to protect a loan.
D) The regulations are unable to limit lenders from extracting blanket personal guarantees for loans.

Answer 2

C

Question 3

A lender considering a commercial loan application examined the potential customer's intellectual property and its accounts receivable history. Which of the following would most strongly influence the lender's position with respect to advancing the loan in this instance?

A) the lender's unfair bargaining advantage
B) regulations ensuring the accuracy of complied information
C) the assets' current value and any existing creditor's claims
D) the respectability of the lender's credit history

Answer 3

C

Question 4

Which of the following would be the result of granting credit arrangements that are outside normal business activities?

A) the lender's requirement for formality and security would increase
B) the borrower's rights and obligations would increase
C) the security utility of the borrower's assets would be limited
D) the borrower would make a collateral promise to repay

Question 5

Which of the following is a distinguishing characteristic of an unsecured debt?

A) the loan must be advanced within a designated period
B) the financing arrangements are formal and deliberate
C) the incidental feature of routineness
D) the absence of security interest in debtor's assets

Question 6

Which of the following is a valid characterization of the borrower's promise to repay a loan and the lender's collateral or security if the borrower fails to repay?

A) They are the major elements of the credit agreement.
B) Each refers to any interest in property that is of value to a lender.
C) Each reflects the need for extensive security due to uncertain value.
D) They are the lender's value in any property interest.

Question 7

What would an importer of goods want to assure it has obtained prior to making payment for those goods to a foreign supplier?

A) title documents
B) a letter of commitment
C) credit arrangements
D) collateral security

Question 8

What type of financing agreement would contain conditions relating to the provision of, among other things, an invoice, shipping receipt, and proof of insurance?

A) collateral security agreement
B) letter of credit
C) blanket security agreement
D) letter of commitment

Question 9

Marina borrowed $5000 of the $25 000 she required to purchase her car from ImaBigBank. The only financing document Marina signed was ImaBigBank's loan agreement. Marina had a number of problems with the car and subsequently sold it. The outstanding balance of the loan is $1500. What will be the most likely result if Marina defaults on the loan?

A) The bank will give Marina notice of its intention to begin collection proceedings.
B) Fraud charges will be brought, as the bank holds title to the car pending debt repayment.
C) The bank will review Marina's cash flow projections and extend time for payment.
D) A judgment will be obtained and satisfied from Marina's general financial resources.

Question 10

What is the maximum rate of interest that can be charged under the Criminal Code?

A) 25%
B) 35%
C) 50%
D) 60%

Question 11

Which of the following is a valid criticism of the federal government's delegation of the regulation of payday lending costs to the provinces?

A) The provinces have been slow to establish a regulatory framework.
B) The permitted rate of fees, charges, and commissions are often too low.
C) The permitted costs of borrowing are inconsistent among the provinces.
D) The actual cost of these loans will continue to exceed 1000 percent.

Question 12

ImaBigBank has completed its risk assessment for a commercial loan application and has decided to grant the loan. What is the legal term given to the form of notice ImaBigBank will provide to the application detailing basic terms of the proposed loan?

A) letter of intent
B) letter of commitment
C) letter of acceptance
D) letter of credit

Question 13

What is the purpose of a financing statement in a secured lending transaction?

A) It advises borrowers to seek legal advice.
B) It is registered as evidence of a security interest.
C) It is evidence that a security interest has priority.
D) It is the agreement between the creditor and debtor.

Question 14

Which of the following companies would risk the revocation of its operating licence for harassing, threatening, and exerting undue pressure on a defaulting borrower?

A) banking institution
B) collection agency
C) credit bureau
D) credit card company

Question 15

Which of the following would typically be requested by a lender being asked to grant a large commercial operating line of credit?

A) blanket coverage over all assets as security in the event of default
B) stabilization and enhanced regulation of the credit market
C) priority over other creditors' pre-existing secured claims
D) maintenance of continued utility in the assets used to secure the loan

Question 16

A lender has been fined, its licence has been suspended, and it is subject to an order by the regulator prohibiting further violations. What may the complainant seek as additional remedies in these circumstances?

A) protection of the personal information the borrower was required to provide
B) time to shop for better terms and less restrictive lending conditions
C) a prohibition against misleading statements in ensuing credit reports
D) loan terms adjusted by a court and a claim for damages

Question 17

What is one of the criticisms levelled against new federal legislation regulating payday loans?

A) The new rules are too stringent and costly to enforce.
B) The new rules are too lax and do not address legitimate business concerns.
C) The new rules apply only in limited situations.
D) The new rules delegate responsibility to the provincial governments.

Question 18

In what legislation is the regulation prohibiting transactions where there is no reasonable probability of the debtor making payment in full found?

A) Business Practices and Consumer Protection Act
B) Collection Agencies Act
C) Unconscionable Transactions Relief Act
D) Consumer Protection Act

Question 19

Which of the following is a commonality shared by buildings and inventory with respect to financing a business?

A) Each is subject to a particular set of enforcement procedures.
B) Both can serve as collateral for business loans.
C) Both are commonly used in letters of credit to distribute default risk.
D) Each is subject to a particular set of legal rules.

Question 20

In order to be put into a position to collect the repayment of a debt, a creditor has had to exert its contractual right to sue a debtor. What is the nature of this loan?

A) secured credit
B) unsecured credit
C) letter of credit
D) collateral loan

Question 21

How would a lender be able to call in an entire loan based on the borrower's default of one payment?

A) via the security clause
B) via foreclosure
C) via the deficiency clause
D) via the acceleration clause

Question 22

Why is the unencumbered status of assets considered to be a distinguishing characteristic?

A) They are typically worth more than the existing debt.
B) They are typically acquired after giving a security interest.
C) Lenders typically find them most attractive as security.
D) Lenders typically find their portability to be a risk.

Question 23

Which of the following would offer an additional source of protection to both a commercial lender and a business with accounts receivable against the risk of default on an uncollectable loan?

A) blanket security agreement
B) promissory note
C) credit insurance
D) general security agreement

Question 24

Which of the following would be strongly influenced by the health of the real estate market and the nature of a specific piece of land?

A) lender's credit insurance cost
B) lender's confidence in the event of default
C) the value of land for security
D) the need for environmental due diligence

Question 25

What province limits a lender's remedy, in the event of a borrower's default, to the proceeds from seized assets and prohibits the lender from suing the debtor for any resulting deficiency?

A) Ontario
B) Alberta
C) New Brunswick
D) Nova Scotia

Question 26

Which of the following would likely give a bank unlimited access to the debtor's assets as an unsecured creditor?

A) the floating charge debenture signed by the debtor
B) the creditor's seizure and sale notice requirements
C) the contract of guarantee in favour of the creditor
D) the standard form credit agreement for a particular creditor

Question 27

What is the legal term for the right of a guarantor to recover from the debtor any payments made to the creditor?

A) subrogation
B) joint liability
C) priority interest
D) subversion

Question 28

Which of the following would strongly influence the borrower's ability to challenge an improvident sale?

A) the borrower's right to an ongoing accounting of the state of the loan
B) the Ombudsman for Banking Services and Investments (OBSI)
C) the creditor's insistence on the provision of personal guarantees from a borrower's owners
D) the Model Code for Bank Relations with Small- and Medium-Sized Businesses

Question 29

Which of the following is a characteristic of a personal guarantee?

A) The guarantors cannot be compelled to sign to ensure the granting of a loan.
B) Guarantees are independently negotiated arrangements.
C) Common law permits creditors to change loan terms without the guarantor's consent.
D) Guarantees are one component of a larger credit arrangement.

Question 30

What is the purpose of a letter of commitment?

A) It classifies the borrower's assets in terms of retention by the business.
B) It establishes requirements to maintain inventory and book debts at specified levels.
C) It sets out in a summary manner the basic terms on which the lender is prepared to make the loan.
D) It sets out the borrower's obligation to provide financial reports and maintain specified debt/equity ratios.

Question 31

Is a personal guarantee of a commercial loan considered to be dangerous?

A) No; once signed, the guarantee must be renewed annually.
B) Yes, owing to the unconditional nature of this primary promise.
C) No; personal assets continue to be protected by limited liability.
D) Yes; their continuing nature includes total debt owned at any time.

Question 32

What role does legislation play with respect to enabling a creditor to begin legal action for arrears, retain or take possession of collateral, and appoint a receiver or manager?

A) confirms and supplements contractual remedies
B) protects borrowers' assets in the event of deficiency
C) protects borrowers from acceleration clauses
D) classifies the status of creditors as secured or unsecured

Question 33

Which of the following would be a major factor in determining the remedies available to a borrower's creditors in the event of the borrower defaulting on its repayment?

A) the distinction in the creditors' status between secured and unsecured
B) the priority of registration in the personal property security registry
C) the amount of deficiency remaining after the sale of assets
D) the presence of an acceleration clause in the loan agreement

Question 34

How are assets used as security generally classified with respect to a general security agreement?

A) as a real property mortgage over the business's assets
B) as an assignment of the business's accounts receivable
C) in terms of the degree of control the lender will acquire upon default
D) in terms of whether they are meant to be retained in the debtor's business

Question 35

When a lender has appointed a receiver, its primary objective is redeeming sufficient assets to clear a loan. To which of the following is the ability of the receiver to control the business to the exclusion of the debtor directly related?

A) Courts recognize that creditors are in the lending business.
B) Creditors have a duty to deal with assets in a commercially responsible way.
C) The survival of the business is secondary to the creditor.
D) Creditors must avoid creating conflicts of interest.

Question 36

What must be in place in order for a lender to appoint a receiver or manager in the event of default on a commercial operating loan?

A) a deficiency of assets
B) a specific security agreement
C) a general security agreement
D) an acceleration clause

Question 37

Which of the following is a common feature shared among the provinces with respect to personal property security arrangements?

A) they all involve major inconvenience and expense
B) there is a patchwork of different statutes
C) each has one set of registration rules
D) they comply with differing sets of rules

Question 38

What is the unique feature of a purchase-money security interest (PMSI)?

A) It is used to grant security in real property.
B) It gives the secured party priority over existing perfected security interests.
C) It survives bankruptcy.
D) It provides a guarantee of payment.

Question 39

Which of the following is a common means of dealing with payment risk in international transactions?

A) guarantees
B) security agreements
C) a letter of commitment
D) a letter of credit

Question 40

With respect to the priority of registered interests in a personal property security registry, which of the following would be given priority as a result of the limitation regarding after-acquired property?

A) general financing statements
B) blanket financing statements
C) specific security agreements
D) general security agreements

Question 41

A lender who, through a registered security interest, has the right to seize and sell specific assets of a borrower to collect a debt typically has included an acceleration clause in its standard form loan agreement.

Question 42

A secured creditor will achieve secured status only if its loan agreement contains a term that makes the entire loan due if one payment is missed.

Question 43

A pledge given by a borrower to repay the bank for its loan is sufficient to classify the loan as a secured debt.

Question 44

The lenders required EcoEnergy Inc. to pledge the new equipment it had financed as collateral security for the loan. With respect to commercial loans, this is an uncommon practice among lenders.

Question 45

The process of recording a security interest in a personal property security registry is known as registration.

Question 46

A letter of commitment contains the actual loan agreement between the lender and the commercial borrower; the borrower, lacking bargaining power, must meet those terms if it wants the loan.

Question 47

Because of the uncertain future value of pledged assets, the demand by commercial lenders for as much security as possible often results in the current value of those assets exceeding the extent of the lender's risk.

Question 48

In the event of default involving a commercial loan, the potential claims against any shareholders personally are defined by the contracts of guarantee they sign with the bank.

Question 49

Assets acquired by a debtor after pledging a security interest in its current assets are commonly described in financing documents as after-acquired property.

Question 50

A deficiency results when a creditor has been forced to sell assets because of borrower default and the price realized by the sale is less than the outstanding amount of the debt.

Question 51

A financing statement is required to be registered each time a borrower has acquired assets after giving a general security agreement over the borrower's current assets.

Question 52

Credit bureaus provide a service to consumers by compiling personal credit history information created by an individual's lenders and then making the information available to that individual.

Question 53

The terms "guarantee" and "indemnity" basically mean the same thing and are interchangeable.

Question 54

A loan granted to an individual for a non-commercial purpose is governed primarily through provincial consumer protection legislation.

Question 55

Failure to adhere to a loan repayment schedule will allow a creditor to take action to have a debtor's assets seized and sold to satisfy the unpaid balance of the debt.

Question 56

A written promise by a buyer's bank to a seller's bank to pay the seller when specified conditions are met is legally known as a letter of credit.

Question 57

Payday loan lenders must be extremely cautious and take care that the actual cost of loans does not exceed the 60 percent rate allowable under the Criminal Code of Canada. Failure to do so will result in the criminal prosecution of the payday lender.

Question 58

A receiver may be appointed by an unsecured creditor once the creditor has given reasonable notice for calling a loan.

Question 59

The amount of security derived from a business's inventory and accounts receivable pledged in a general security agreement is the value of those assets at any given time.

Question 60

A commercial lender will typically detail the basic terms of its offer of a loan in the form of a commitment letter, which could contain, among other things, a requirement that the borrower maintain a specified financial position.

Question 61

Discuss the letter of commitment and describe the basic terms that are detailed in this type of financing document.

Question 62

Identify three types of security pledges that are typically required for a commercial loan.

Question 63

Identify the new federal government regulations that apply to credit cards issued by federally regulated institutions.

Question 64

Briefly explain what a letter of credit is and discuss the requirements that this type of financing arrangement involves.

Question 65

Are lenders required to take any preliminary steps before taking collection action against defaulting debtors?

Question 66

Briefly explain what an acceleration clause is, what it does, and the incentive it provides.

Question 67

How does the PPSA resolve conflicts when more than one debtor claims a security interest in the same collateral of the debtor?

Question 68

Explain the environmental due diligence process.

Question 69

Identify the source of prevention of hidden charges by a lender that also enables a borrower to appreciate the cost of a loan transaction, and briefly discuss what is required to achieve these outcomes.

Question 70

Identify the document registered as evidence of a security interest in personal property, and explain the registration process and requirements that apply to it.