Deck 26: The Legal Aspects of Credit

Question 1

Which of the following companies would risk the revocation of its licence for failing to provide accurate information?

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

Answer 1

C

Question 2

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 2

C

Question 3

A new business,Vale Gifts Inc.,hopes to negotiate a loan with BigBank Inc.in order to finance the improvements it wishes to make in its store.Which of the following should Vale expect BigBank Inc.will require as a condition of granting the loan?

A) BigBank will want to assume title of their inventory.
B) BigBank will want a letter of credit.
C) BigBank will likely require a security agreement.
D) BigBank will like provide unsecured credit.

Answer 3

C

Question 4

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 5

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 6

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 7

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 8

What is the name given to an agreement that includes all of the debtor's personal property as collateral?

A) letter of commitment
B) unconscionable transaction
C) financing statement
D) general security agreement

Question 9

Tiki Imports Ltd.plans to purchase items in inventory from a supplier in China.What would Tiki want to assure that it has obtained prior to making payment for those goods to a foreign supplier?

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

Question 10

Gita has entered into a loan contract with ABC Loans Inc.in which Gita agrees to pay 70 percent per annum on the outstanding balance of the loan.Which of the following statements is correct regarding this arrangement?

A) Gita and ABC can agree to whatever interest rate they find mutually acceptable.
B) The interest rate contemplated in the loan violates the Criminal Code.
C) ABC is not permitted to charge more than 25 percent per annum pursuant to the Judgment Interest Act.
D) It is implied that this will be compounding interest.

Question 11

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 12

Which of the following forms of credit does "trade credit" usually assume?

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

Question 13

Brooker Boat Inc.plans to sell 10 boats to a Holiday Boat Sales Ltd.What is the name of the written promise by Holiday's bank to Brooker to pay Brooker when certain specified conditions are met?

A) loan agreement
B) security agreement
C) collateral pledge
D) letter of credit

Question 14

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 15

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

Question 16

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 17

Which of the following is a distinguishing feature of a guarantee?

A) It must be filed.
B) It must be in writing.
C) It must be registered.
D) The issue of consideration will rarely arise.

Question 18

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 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

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 21

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 22

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 23

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 24

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 25

Atlas Vehicle Loans Ltd.has a valid security interest in a truck owned by one of its clients.The client is now in default under the loan agreement and owes $24 000 to Atlas.Atlas has determined the truck will likely only sell for $19 000 on the second-hand market.Will Atlas be able to recover this deficiency from the debtor?

A) yes,by appointing a receiver
B) yes,but only as an unsecured creditor
C) no,because Atlas' collection efforts are limited to its collateral
D) no,because Atlas cannot sue if it elects to seize and sell the collateral

Question 26

Which of the following represents a valid criticism of payday loans?

A) They are inconvenient for customers.
B) They provide credit to individuals with poor credit ratings.
C) They exploit people who are already financially vulnerable.
D) They are too risky for lenders.

Question 27

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 28

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 29

Max and Sylvia Grundy are an elderly couple who were recently persuaded by their nephew to execute a guarantee in favour of a bank that was loaning him money to fund a business venture.They are now having second thoughts.Which of the following might form a basis for the Grundys to avoid liability under the guarantee?

A) The guarantee was not registered with at the Personal Property Security Agency.
B) The court will relieve a guarantor from liability where the guarantor did not receive direct personal benefit from the underlying loan.
C) The Grundys could rely on the acceleration clause contained in the guarantee.
D) A court may relieve a guarantor from liability if it is satisfied that the guarantor did not appreciate the nature and consequences of the guarantee.

Question 30

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 31

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 32

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 33

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 34

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 35

Which of the following represents a restriction on collection agencies when attempting to collect a debt?

A) They cannot contact the borrower directly.
B) They cannot collect a debt when the debtor is deceased.
C) They are prohibited from contacting anyone other than the borrower.
D) They must make all inquiries in writing.

Question 36

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 37

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 38

BigBank Inc.is enforcing a security interest against all,or substantially all,of the inventory,accounts receivable,or other assets of a business debtor.What must BigBank Inc.do before enforcing its security?

A) provide the debtor with 10 days' notice of its intention to enforce its security
B) notify the Ombudsman for Banking Services and Investments
C) file a statement of claim for the amount outstanding
D) first attempt to collect the debt by enforcing personal guarantees

Question 39

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 40

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 41

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 42

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 43

Creditors often include terms in credit agreements that require debtors to carry on business in accordance with specific requirements.

Question 44

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 45

A purchase-money security interest (PMSI)is a special type of security interest that gives the secured party priority over existing perfected security interests.

Question 46

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 47

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

Question 48

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 49

If the debtor defaults,a secured creditor is in a much better position than an unsecured creditor.

Question 50

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 51

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 52

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 53

Once a security interest has been perfected,the secured party will have priority over security interests that have not been perfected.

Question 54

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.

Question 55

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

Question 56

The PPSA does not apply to leases for a term of more than one year or to commercial consignments.

Question 57

The most common form of perfection is by registration.

Question 58

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 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 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 61

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

Question 62

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 63

What is a general security agreement,and how is it different from a security interest in a specific asset?

Question 64

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

Question 65

What is "attachment," and why is it important for a creditor to ensure that attachment has occurred?

Question 66

Outline the typical terms contained in a guarantee agreement.

Question 67

Identify four ways that lenders can reduce the risk of non-payment by debtors.

Question 68

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

Question 69

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

Question 70

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