Credit and Policy (Midterm Reviewer) PDF

a. short-term - 1 year or less MIDTERM EXAM b. medium-term – 1 year to 5 years MODULE 2. CREDIT: Classifications; Sources; Documents; c. long-term – over 5 years and Instruments...

a. short-term - 1 year or less MIDTERM EXAM b. medium-term – 1 year to 5 years MODULE 2. CREDIT: Classifications; Sources; Documents; c. long-term – over 5 years and Instruments d. long-term – over 5 years I. Classifications and Sources of Credit C. Credit could also be classified according to “security” A. Credit is generally classified according to purpose for where the loan funds are intended to be used: Loans are also either secured or unsecured. “Security” refers to 1. AGRICULTURAL CREDIT: are loans to be used in the a real or personal property used as collateral, usually cultivation and improvement of farmlands or in the production required by the lender: your jewelry in a pawnshop, your house of agricultural products (poultry, pig farm, rice and corn, and lot for a 20-year home mortgage. These are examples of vegetables, fishes). Some of the more common agricultural loans secured loans. are: Unsecured loans are also called character or clean loans, and also signature loans. The loan is granted simply because of the A. Time loan: usually a secured loan (collateralized by the farm borrower’s reputation or character, the term “character loan” and property where the loan funds are to be used). The loan is all the lender wants is the “signature” of the borrower on the intended for the development or improvement of the farm. It is promissory note, which is the only document required. A referred to as a time or term loan because the loan is for a definite period of time, called term, with a definite maturity, usually one promissory note with only one signature is called a single- name paper (the paper refers to the promissory note), the borrower’s year. character is sufficient to assure the lender of repayment. B. Crop Loan: This called “crop loan” because it finances the production of crops like rice and corn, cassava, tomatoes and cabbage. The maturity of the loan coincides with the harvest 2. SOURCES OF CREDIT cycle. It is borrowed before the planting season and is paid after The biggest sources of credit are the financial institutions. harvest time. The proceeds of the loan are to be used for Financial institutions are either intermediaries or non- fertilizers and farm chemicals, seeds, feeds, farm labor. intermediaries. Financial institutions that are also intermediaries C. Commodity or Quedan loans: This is a loan to finance the channel the savings of individuals and businesses into loans and marketing of harvested crops. investments. An intermediary is a go-between, the one in the middle. 2. COMMERCIAL CREDIT: These are loans, or credit arrangements, for the purpose of financing the production and These financial institutions are perceived as the sources of credit. marketing of commodities. These could be loans granted by In reality, the true sources of credit are the individuals, businesses, banks to businesses, or by business establishments to other and some government entities whose excess funds are placed for businesses. management by these financial institutions, which are eventually used (as loans or capital funds) by the other individuals, Some examples are: businesses, and some other government entities who need them. a. Loans for the purchase of raw materials by a manufacturer These FI provide intermediation by establishing branches and b. Credit provided by the supplier of raw materials. offices where depositors may conveniently put their excess funds c. Credit provided by the manufacturer, in the form of finished and by using their expertise in handling these funds thru prudence in granting loans, and with an experienced and effective collection goods, to the wholesalers and retailers. machinery, the profits of the providers of the funds in the form of 3. INDUSTRIAL CREDIT: Are loans used to finance the interest income are more or less guaranteed on a continuing basis. construction of factory buildings or the purchase of machinery Financial intermediaries pool funds, invest them prudently by and equipment. In this category are bonds (20 to 30 years) and avoiding risks and by diversification. They also provide long-term bank loans. management competence. They have the best manpower development programs and they recruit the best talents from the 4. CONSUMER CREDIT: These are loan funds granted to best campuses in the country. Some of these financial individuals by banks, coops, department stores, credit card intermediaries are: companies, savings and loan associations, the GSIS and SSS (for salary loans) Pag-ibig for multipurpose loans. The loan funds are 1. Banks used to purchase personal items. 2. Insurance companies 3. Pre-need companies 5. COMMODITY LOANS: 4. Pension/retirement funds, SSS/GSIS/Private pension funds A commodity loan is when someone borrows money and uses a 5. Investment Banks valuable item, like cotton or wool, as collateral. This means that 6. Financing companies if they don't pay back the loan, the lender can take the valuable 7. Credit cooperatives item instead. It's like borrowing money and putting your favorite 8. Pawnshops toy as collateral. 9. Lending investors B. Credit could also be classified according to maturity: 3. NON-Financial Institutions SOURCES OF CREDIT There are other sources of credit which are not financial Due to the nature of international dealings, including factors such intermediaries. For the most part they use their own capital funds as distance, differing laws in each country, and difficulty in for lending: knowing each party personally, the use of letters of credit has a. Appliance companies/car dealers become a very important aspect of international trade. b. Employers c. Department stores Supplier’s Credit: In the “buy-and-sell” business (or trading), suppliers are the biggest source of credit. The terms are 30, 60, 90 or even 120 days, all of which are non-cash credits, or in the form of raw materials or finished goods or merchandise. Line of credit: This is an agreement between a bank and a business specifying the amount of short-term credit the bank will make available on a non-guaranteed basis, or subject to availability of funds. Example: In a P1.0M time or term loan, the borrower files an Packing credit advances: This is credit granted by a bank to an application and puts up a property as security; after approval, exporter to finance the manufacturing of export goods. It is a processing and documentation, the bank releases the entire financial arrangement between an exporter and financial P1.0M which the borrower will pay in, say a year. After the time institution which involves financial assistance for procurement of or term loan is paid, and the borrower wants to get another loan, raw materials, their processing into finished goods and packing he has to re-apply again: fill out another application, bring back thereof to make them fit for export. his property titles and documents for processing. A line of credit differs from a time or term loan in 3 ways: Treasury bills: In the Philippines, Treasury bills (also known as T-Bills) are peso- denominated unsecured short-term debt First, release of the loan proceeds: In a time-loan, the full amount securities issued by the government to raise funds for various is released; in a line of credit, the borrower may withdraw part or activities. These fixed-income instruments have predetermined all of the approved amount. profits, meaning that the return on investment is already set. T- Second, the interest on the time loan is calculated for the entire bills typically have a maturity of one year or less and are issued at term (because the borrower got the loan at the beginning of the a discounted price. Investors pay less than the face value upon term), while in a line of credit, interest is calculated on the basis of settlement and received the full principal amount upon maturity. availed proceeds, if there is no withdrawal from the line, no interest The common maturities are 91 and 182 days. It is fully guaranteed is charged. by the government which gets its authority to borrow from R.A. Third, in a time loan, the borrower must re-apply the 2nd time Nos. 245 and 265, which states in Section 95 (RA No. 265-also around, in a line of credit, there is no need to fill out a new known as the Charter of the Central Bank of the Philippines): The application and for re-documentation or re-processing, for as long central bank may make direct provisional advances to the as the borrower’s financial condition remains basically the same government or to any of its political subdivisions to finance (his financial statements are periodically reviewed on a quarterly expenditures authorized in the annual appropriations act of the or an annual basis). borrowing entity”. It is issued in large denomination, some in P100,000 or more per certificate and they are issued in “bearer Open-book-credit: There are still many wholesalers who provide what is popularly known as open-book credit to their customers, usually form”. The word bearer means the holder of the certificate is the retailers. In the open-book arrangements (which is supplier’s credit too) owner: it would be similar to holding cash. the buyers (debtors) get the goods they want to purchase and the wholesaler simply records the total amount in their books, or ledger, Pledging of A/R: This is a loan collateralized by accounts without requiring the buyer to sign any document. The controlling receivables. The promissory notes are assigned by way of pledge. document, as far as the amount of the indebtedness is concerned is the The receivables are assigned a loan value. For example, the value wholesaler’s ledger. Another example is sari-sari store credit. assigned might be 50% – meaning if the receivables are worth, in Revolving Credit agreement: The only difference between a line of terms of their face value, P1.0M, the loan amount will be 50% or credit and a revolving credit agreement or RCA, is that the RCA is P500,000. In a pledge of receivables, the original (pronotes, guaranteed by the bank. When a bank guarantee credit, such in RCA, it mortgage documents) are actually left with the lender. There is a will charge a one-time commitment fee, whether the loan is used temporary transfer of possession but not the ownership. Collection partially, totally or not at all. of the accounts is still the responsibility of the owner of the Letters of Credit: A letter of credit (L/C) is a letter from a bank receivables (the borrower); the lender may sometimes require guaranteeing that a buyer’s payment to a seller will be received on the borrower to sign an agreement that all collections on the time and for the correct amount. In the event that the buyer is accounts pledged will be held in trust by the owner of the unable to make a payment on the purchase, the bank will be receivables in behalf of the lender. This arrangement protects the required to cover the full or remaining amount of the purchase. lender from an unscrupulous borrower. The accounts pledged are, of course, subject to verification, first, if they really exist, and second, if the accounts are of excellent quality (that is, whether they are good credit risks). The result of 3. T-bonds have nominal or stated interest rates: Bonds are this evaluation will reflect the loan-to-value percentage. If the bought and sold in the open market at the premium price accounts are good credit risks, the loan value will be higher. 4. or a discount. Factoring: In factoring, the accounts receivable is actually sold Corporate bonds: This is a certificate indicating that a or “factored” by owners of the finance company. Both the corporation has borrowed a certain amount of money and ownership and the possession of these promissory notes are promises to pay it in the future under clear terms and conditions. transferred to the purchaser. The receivable accounts are purchased They are unsecured and only very large corporations with long at a discount, for example at 30%. This 30% discount represent the track records of financial success could actually sell bonds. gross profit of the buyer of the receivables. No interest is charged, A bond is really a loan – the cash proceed are provided by those because it is a sale, not a loan. The collection of the accounts is who buy them and are used by those who issue them. By issuing theoretically, and in many cases, transferred to the finance bonds, a company is actually borrowing with interest on a long- company (on what is called “on a notification” basis). This simply term basis. means that the borrowers on these receivables will be notified so that they will, after a certain cut-off date, start making their A corporate bond operates under the same scheme as treasury payments to the owners of the notes (the factoring company). bonds. Bonds are issued and sold in very large denomination. They are also indivisible; you cannot negotiate or sell part of it. The sale of these accounts is either on with or without recourse basis. In a “with recourse” transaction, if the account turns out to Investment credit: These are long-term loans or bonds that be a bad debt, the factoring company will charge it back to the finance the construction of factory buildings, commercial seller of the account. In other words, non-payment is the seller’s warehouse, hotels, or the acquisition of machinery and responsibility. The opposite is true for “without recourse” sale. equipment. Equipment leaseback: In this transaction, the owner of the Commercial paper: This is similar to a treasury bill. It is an equipment, to generate cash, usually sells it to the finance unsecured short-term certificate of debt. It is also issued in company (for cash, of course) and the owner would simply lease it large denominations with specific due dates. While T-bills are back. issued by the government, commercial paper is issued by large private corporations of finance companies. Both T-bills and II. Credit Documents and Instruments commercial paper do not pay interest: they are sold at discount Document that are used in credit transactions could be which will represent the income of the buyer of these securities. classified into 2 major types: Here is an example of how a buyer of commercial paper or T- bill makes profit. MSB, Inc. issued a P100,000 commercial paper 1. Those used for credit evaluation to eventually approve or with a maturity of 90 days and sells it a discount of 5%. The buyer disapprove an applicant GSB Corp (actually the lender) will pay (P95,000) which will then 2. Those used to document an approved credit transaction. be used by MSB, Inc for its operations. When the commercial A. DOCUMENTS REQUIRED FOR CREDIT EVALUATION paper matures in 90 days, MSB Inc, will redeem or pay for its commercial paper the face amount of P100,000. GSB Corp’s 1. ITR: Income Tax Return: Used to establish borrower’s income is P5,000 in 90 days on a P95,000 net investment. The source of income (capacity) effective yield, or income, on their investment is calculated: 2. B/S: Bank Statement: Used to establish borrower’s P5,000/95,000 = 5% X 360 sources of income (capacity) and financial standing/position (Capital/Cash Flow) days/90 days = 20% annualized. A bank statement is a document that is issued by a bank once a Most commercial papers mature month to its customers, listing the transactions impacting a bank in 30 to 270 days. account. The statement provides the following information: The beginning cash balance in the account Treasury Bonds: These are unsecured long-term debts of the + The total amount of each deposited batch of checks government and cash There are 3 significances between T-bill and a T-bond. - Funds withdrawn from the account - Individual checks paid 1. Maturity: T-bills mature or are payable in one year or + Interest earned on the account less: Treasury bond in over one year. - Service fees and penalties charged against the account 2. Usage: The cash proceeds from the sale of T-bills = Ending cash balance in the account support the day-to-day operations of the government: treasury bonds are used for long term government The bank statement shows the cumulative balance of cash in disbursements. the account, net of all the preceding transactions, as of the end How buyers make money: T-bills have no interest and buyers or of each day in the reporting period. Some banks still print investors thereof make money on the discount: T-bonds have these statements along with an accompanying set of images of stated interest rates. Purchasers or investors in T-bonds make all cleared checks. money in two ways- the interest income and the premium (if any) NOTE: In reference to Bank Secrecy Law, images or sample that it gets on selling the bonds. of Bank Statement are prohibited unless there is a written consent/authorization from the Depositor.  “Owner’s Duplicate Certificate” on the left side margin of title. 3. BOD: Board of Directors (Composition/Resolution or On the lower left corner of the form is affixed a red seal. The Undertakings) seal should not blot or stain when wet; 4. OCT: Original Certificate of Title: For authenticity of The last two digits of the title number (usually preceded by either Ownership the words Original Certificate of Title or Transfer Certificate of Title) should correspond with the page number of the registration 5. TCT; Transfer Certificate of Title: For authenticity of book indicated on the upper right-hand corner of the title. Any Ownership variance should be investigated; Land Title Issues in The Philippines 5. The title is printed on security paper which contains security Do You Have a Clean Land Title? features. The paper is 50% cotton and 50% chemical wood pulp with artificially colored silk fibers. It has a NALTDRA or LRA With the proliferation of fake land titles and fraudulent sales of watermark which can be seen if held against the light. Patently lands in the Philippines, nothing is more important in buying real fake titles are usually printed on materials of inferior quality. estate properties there than verifying the authenticity of the title or 6. Check if the Registrar of Deeds who signed the title was the making sure there are no limitations or legal claims on the land. incumbent Registrar of Deeds at the time the title was issued; In short, you want to buy a land with a clean title. 7. If necessary, trace the history of the title to determine the The best way to verify the authenticity of a title is by checking its genuineness of its source. This may entail going back to the existence with the Registry of Deeds (RD) where the land is mother title, the derivative titles and relevant documents, such situated. Every city or province in the Philippines has its own RD, as deeds of sale, donation, etc. which is the repository of original titles to all registered lands within its limits. Owners of registered lands, on the other hand, are Lastly, even if the title is genuine, you would want to make sure that given Owner’s Duplicate Certificate which corresponds to the there are no claims on the land by other parties. For example, there original title on file with the RD. Thus, a buyer can easily verify may be an existing mortgage on the land or it is the subject of a the title’s authenticity by comparing it with the one original title litigation. To determine this, look at the back or subsequent pages of on file with the RD. the title and make sure that there are no entries below the words “Memorandum of Encumbrances” or even if there are, make sure the By way of a background, the Owner’s Duplicate Certificate is encumbrances have been canceled already. either an Original Certificate of Title (OCT), if it is the first title issued on the land, or a Transfer Certificate of Title (TCT), if it was To be sure that the land you’re buying is problem-free, the best way issued subsequent to the first title. A TCT is usually issued after the is still consulting with a competent attorney and hiring him or her to title is transferred to someone from the first registered owner, with conduct a due diligence investigation before closing the deal. Buying the OCT being canceled. All subsequent transfers (whether by a land is an expensive investment and you don’t want those money sale, donation or any other legal means) will also result in the going down the drain by dealing with a fake land title or buying a land issuance of a TCT. Another government office where you can that could expose you to a lawsuit. check a title’s authenticity is the Land Registration Authority (LRA). The LRA is a national government agency that issues decrees of registration and certificates of land titles. But most of 6. SEC: Securities & Exchange Commission (Company the work of the LRA, however, is carried out by the 168 RDs Registration): For authenticity and legality of the located nationwide, so the RD of each province or city would be business enterprise/organization. the best place to determine a title’s authenticity or existence. SEC Registration in the Philippines According to the LRA, below are some guidelines to spot Local and foreign investors that intend to establish corporations, fake titles: partnerships or associations in the Philippines are required to 1. Check if the initials, signatures, technical description, register their business entities with the Securities and Exchange annotation and other component elements appearing on the Commission (SEC) before they can conduct business activities front and at the back of the original title are exactly the same as that appearing on the owner’s duplicate certificate of title. Any and participate in the country’s securities market to buy or trade variance is a ground for suspicion; shares of stock, bonds, interests in a company, and other types of 2. Every title has a serial number assigned to it. The serial financial assets. number for the original title is printed in red and the serial SEC is the national government regulatory agency tasked with number for the owner’s duplicate certificate is in black. The supervising the corporate sector in the Philippines. It is also LRA distributes the title forms with serial number in mandated to formulate policies and recommendations on issues consecutive order to the various RDS. Any certificate of title concerning the securities market as well as advise Congress and bearing a serial number which is not among the ones delivered other government agencies on all aspects of the securities to a particular RD is of doubtful authenticity; market. 3. The words Judicial Form appear on the upper left-hand corner of each title. If it is an OCT it shows Judicial Form 108-D and Registering your business with SEC is mandatory not only to if it is a TCT it shows Judicial Form 109-D. Immediately below legitimize its juridical entity but also to enable it to legally the Judicial Form number is the year the form was printed or engage in business, issue receipts, trade financial assets, and be revised. If, for instance, below the words Judicial Form 109-D, entitled to certain rights under the country’s corporate and the phrase “(Revised January 1985)” appears, and on the investment laws. bottom right portion of the title besides the seal it indicates that it was entered on a date in 1980, then this is a ground for Provided under Section 3 of Presidential Decree No. 902-A, the suspicion; SEC has absolute jurisdiction, supervision, and control over all 4. The owner’s duplicate copy of the title contains the words corporations, partnerships, and associations that are grantees of primary franchises and licenses or permits issued by the most solid evidence of debt. This is the document that is government. sold, assigned, transferred, pledged or bought. 7. F/S: Financial Statements: For capacity, capital and cash A promissory note is either negotiable or non-negotiable. flow A non-negotiable pronote cannot be transferred from one hand to Financial statements offer creditors a comprehensive look at the another. It cannot be assigned or negotiated. By contrast, a financial health of a business. Details such as income, existing negotiable promissory note can be purchased, sold, or used as a debt obligations, expenses, salaries, profit and cash flow all collateral for a loan. For a pronote to be negotiable, it must factor into the overall business financial profile. Creditors use comply with the requirements of the negotiable instruments law: financial statements to determine if the business represents a sound credit risk, as well as its ability to repay debt as agreed. a. It must be complete and regular in its face a. Statement of Financial Position (Balance Sheet) b. It must be signed by the maker b. Statement of Financial Performance (Income Statement) c. It must contain an unconditional promise to pay a definite sum of money c. Statement of Cash flows d. It must be payable on demand or a fixed future date. d. Statement of Changes in Owner’s Equity e. It must be payable to a specific person or bearer. 8. DTI: Department of trade & Industry (Company Name Most companies who regularly use their customers’ promissory Registration for Sole Proprietorship) For Business notes to borrow from banks have probably perfected the forms legality and authenticity. and procedures in the handling of the promissory notes. It is to 9. SN: Serial Numbers (This refers to Serial Numbers of their best interest to make sure that they are free from defects. A Securities with Incorporeal Rights) A serial number is a defective promissory note cannot be negotiated and will, thus, unique identifier assigned incrementally or sequentially be rejected, causing a delay in the processing of a loan to an item, to uniquely identify it. Serial numbers need not application. One defective promissory note in one batch will cause the rejection of the entire batch. be strictly numerical. They may contain letters and other typographical symbols, or may consist entirely of a IOU and promissory Note distinguished: An IOU which means character string. “I Owe You” with the letter U substituting for the word you, The initial loan or credit document is the credit application, simply an acknowledgment or admission of a credit obligation. which must be fully accomplished. In this credit application, the It can be enforced (the debt could be collected between the 2 applicant will indicate at the back that he is authorizing the parties – debtor and creditor) – but it cannot be negotiated. lender to conduct a credit investigation. This is a very essential Simple and complicated Promises Notes. document. Unauthorized credit inquiries are prohibited by law. Because of the law on the secrecy of bank Jan 15, 2021 B. DOCUMENTATION AND INSTRUMENTS USED FOR I promise to pay Mr. Renato S. Agustin, the sum of TEN APPROVED CREDIT APPLICATION THOUSAND PESOS (PHP10,000.00) on or before June 30, There is a need to distinguish between a document and an 2021. instrument. A document, in this book, is defined as just any piece of paper on which is written words or transactions; a document Salvador B. Alcantara becomes an instrument when it confers the power to transfer, Date of Issue: Jan 15, 2021 assign, negotiate, alienate, buy or sell real or personal rights. An Payee (Creditor); Renato S. Agustin example of real right is one’s ownership of a property. In a sale Amount Due: (PHP10,000.00) of a real property, for example, a certification that the property Due Date: June 30, 2021 has no pending 3rd party claims, or that the property’s real estate Debtor (Maker): Salvador B. Alcantara taxes have been fully paid, is just a document, while a deed of The above diagram illustrates a very simple promissory note. This sale is an instrument. promissory note could be made a little bit complicated by adding Documents used in the world of business could be broadly the rate of interest, say 5% monthly. classified as commercial documents. They encompass all types A very complicated promissory note from a bank would of transactions, financial or non-financial. include more details: Credit documents and instruments: are those specifically used in 1. Surcharges and penalties. credit transactions. An example of a credit document is a credit application (it does not confer any right), or a credit 2. Where to file for collection in case of non-payment investigator’s report. Examples of credit instruments are 3. Place where payment is to be made promissory notes, real estate and chattel mortgages, pledge, 4. Provision as to extraordinary inflation assignment. These are instruments because they convey rights; a 5. Party responsible for goods in transit (merchandise mortgage for example gives the right to the creditor to foreclose credit) on the property in case of non-payment. 6. Successors-in-interest and holder in due course provisions 1. Promissory Note: The promissory note, also called P/N or pronote, is the most important credit instrument. It is the Provision that should the government increase the interest structure, the rate in the “pronote” will change accordingly. 3. Trust receipt: A trust receipt, by itself, is not a credit Many pronotes are meticulously prepared and contain many instrument. If it is used in a credit transaction, then it unnecessary provisions, even provisions already clearly covered becomes a credit instrument. by case law or jurisprudence (previously decided cases, usually It is essentially a receipt of goods for the receiver to hold in trust by the Supreme Court). The purpose, obviously is to avoid (as the name “trust” connotes). In a trust receipt, the possession of nuisance complaints on points that are very clearly provided in good is transferred by the seller to the potential buyer. the contract, thus avoiding expensive legal disputes. A promissory note need not be a separate document. In many charge invoices, the invoice serves as the sales invoice, the This type of transaction is governed by P.D. 115 or the Trust delivery receipt, and the promissory note. In a pawnshop, the Receipts Law. The seller is called the “entruster” and the holder pledge document contains a promissory note. of the goods the “entrustee”. Deed of conditional sale: In selling appliances on credit, Trust receipts are used by a popular cosmetic company. Instead of appliance companies use a deed of conditional sale. The seller invoicing the goods to their dealers, which effectively transfers transfers the possession of the appliance but not its ownership. A both possession and ownership to them, only the possession of the similar document used is the “sale with reservation of title” cosmetic products but not the ownership, is transferred to its essentially synonymous to a deed of conditional sale. dealers by the use of trust receipt. The dealer holds the goods in trust. There is no sale yet. By withholding, or reserving ownership, 2 issues will arrive: When the dealer sells some of the cosmetic products, the dealer 1. The right of repossession; and takes out goods from the goods held in trust, and a sale transaction 2. “Who bears the loss” in a fortuitous event? result. The proceeds of the sale must be immediately remitted to the cosmetic company, otherwise there is a violation of the trust Right of repossession: The appliance company, or the seller, and the dealer is criminally liable. This procedure ensures that the having withheld ownership, can retake the merchandise in case cosmetic company’s goods are not squandered by its dealers. of non-payment (which should at least be 2 unpaid monthly installments). This is technically called a repossession. Which is 4. Warehouse receipt: A warehouse receipt, obviously issued an appropriate term. The appliance company takes back the by a warehouse (usually a government-registered and possession of an appliance that it still owns. bonded warehouse) is not a credit instrument. It is a document used in a deposit transaction (as in the deposit by Who bears the loss in a fortuitous event? If the property is lost a farmer of his 100 bags of palay). By depositing the due to a fortuitous event- fortuitous means occurring by chance, farmer’s palay, there is no sale and no credit: It is strictly a will the buyer still continue paying for the unpaid installments? deposit, covered by other major bodies of law. In chapter one, it was stated that the owner bears the loss per article 1480. Since the ownership of the appliance is the However, when the farmer uses his warehouse receipt to obtain appliance company, it follows that the seller, as owner, must bear a loan, then a credit transaction arises, and the warehouse receipt the loss and the buyer should no longer pay the unpaid becomes a credit instrument. The warehouse receipt represents installments. Is this correct? NO. Installment buyer must still pay the farmer’s collateral, which is his 100 bags of palay. If, instead, the unpaid instalments. The legal justification is in Art. 1504. he sells his warehouse receipt for cash, there is no credit transaction. Art 1504. Where delivery of goods has been made to the buyer and the ownership of the goods had been retained by the seller 5. Pledge: In a contract of pledge, used in pawnshops, it is merely to secure performance by the buyer of his obligation, the essential that the thing pledged is in the possession of the goods are at the buyer’s risk from the time of delivery” pledgee (or with a 3rd party) by mutual agreement. The borrower is called the pledger, who puts up his personal 2. Deed of absolute sale: A deed of absolute sale transfers the property (the thing called pledged) and the lender who takes ownership and possession of the thing bought to the buyer. In the possession of the thing pledged, is called the pledgee the sale of a car or a motorcycle, the ownership must be (the pawnshop). Every movable property or incorporeal transferred to the buyer so that the vehicle can be registered with right could be the object of a pledge provided that it is the LTO. capable of possession. The transfer of ownership is necessary because one of the Examples of incorporeal rights are certificate of stocks, bonds, requisites of a mortgage (whether chattel or real estate) is that warehouse receipts. the mortgagor must be the absolute owner of the thing being mortgaged. Thus, the ownership of the vehicle must first be 6. Real Estate or Chattel Mortgage: Article 2085: “the transferred to the buyer, thru an absolute deed of sale, so that he following requisites are essential to the contracts of can mortgage it back to the seller. pledge and mortgage: 1. That they be constituted to secure the fulfillment of an Because ownership has been transferred, repossession is no obligation longer a feasible or legal option. To secure the obligation, the buyer is required to sign a chattel mortgage, using the vehicle as 2. That the pledger or mortgagor (borrower and owner of the property) be the absolute owner of thing pledged or collateral for the credit sale. In a chattel or real estate mortgage, mortgaged: recovery by the unpaid seller could only be made through foreclosure. A mortgage is a contract whereby the debtor secures to the creditor the fulfillment of a principal obligation, especially Credits oversees letters of credit used in international subjecting to such security immovable property (for real estate transactions. There are several types of letters of credit available. mortgage) or movable or personal property (chattel mortgage) in case the principal obligation is not complied with at the time stipulated. NOTE: POSSIBLE QUESTIONS FOR ENUMERATION A mortgage is registered in the Registry of Deeds. A mortgage is 9 documents for credit evaluation (9 points) annotated (written or typed) at the back of the borrower’s title or the registry papers of a vehicle. This annotation prevents the same A very complicated promissory note from a bank would include more details: (6 points) title or vehicle from being mortgaged again without the consent of the mortgagee (the lender) – a second mortgage, rare in the Requirements of the negotiable instruments law (5 points) Philippines, could be obtained with the permission of the first mortgagee) In a chattel mortgage, the chattel is registered first with the Registry of deeds and then with the LTO’s vehicle registration records. A mortgage does not confer a real right on the property. The ownership is not changed. It confers the right to the mortgagee (lender) to foreclose the property. 7. Foreclosure means that the mortgaged property securing the unpaid and past due obligation will be sold at public auction (or bidding), with the information on the auction sale published beforehand in a community newspaper of general circulation, to the highest bidder. The lender- mortgagee will, upon payment of the bid price in cash or certified check, or any acceptable mode of payment, issue a certificate of sale. This is not an absolute sale. The highest bidder will be the temporary owner of the property and the possession remains with the borrower. It is temporary because the borrower has the right to redeem, or buy back, the property within one year. The name on the title within his one-year redemption period will still be the borrower’s, after one year, the ownership is transferred to the highest bidder. It is not unusual for the bank itself to bid for the property. It becomes the temporary owner and transfers the loan account to another ledger account called “acquired assets.” 8. DISCLOSURE STATEMENT: This form is required in all credit transactions that charge interest. Provided for in RA No. 3765 or the Truth in Lending Act, this is a document where the lender must show the true cost of the credit it is providing to the borrower, who, in turn, will read and sign it. By signing the disclosure statement, the borrower acknowledges that the true cost of the credit he is getting has been explained to him. It has for its sole purpose the protection of borrowers from unscrupulous lenders. 9. Letter of Credit? Because a letter of credit is typically a negotiable instrument, the issuing bank pays the beneficiary or any bank nominated by the beneficiary. If a letter of credit is transferable, the beneficiary may assign another entity, such as a corporate parent or a third party, the right to draw. [Important: Banks typically require a pledge of securities or cash as collateral for issuing a letter of credit.] Banks also collect a fee for service, typically a percentage of the size of the letter of credit. The International Chamber of Commerce Uniform Customs and Practice for Documentary