Data processing: financial – business practice – management – or co – Automated electrical financial or business practice or... – Finance
Reexamination Certificate
1999-09-29
2004-05-18
Chilcot, Richard (Department: 3627)
Data processing: financial, business practice, management, or co
Automated electrical financial or business practice or...
Finance
C705S033000, C705S040000
Reexamination Certificate
active
06738751
ABSTRACT:
BACKGROUND OF THE INVENTION
The use of credit cards for payment of the costs of retail goods and services is a well known and well entrenched commercial practice in U.S. and global economies.
Today's credit card industry is highly competitive. Financial institutions are attempting to attract new consumers with new card offerings bundled with various incentives. It is believed that the credit card industry, despite signs of saturation, is still profitable, and that instant and mobile credit provided by credit cards is a service that consumers are demanding, and will continue to demand.
A credit card is an instrument for fluid and versatile lending and borrowing. The maximum amount that can be borrowed on a credit card is generally set at the time the card is issued, and thereafter the purposes and the increments of the loans are limited only as to the retailers or merchants who are willing and authorized to accept the card. There is generally no other lender's oversight as to the use made of the funds borrowed through the use of a credit card. Neither the credit card issuer nor the merchant adjudges the value or wisdom of the consumers' purchases.
The freedom of borrowing drives consumer demand for credit card usage. In addition, many other factors drive that consumer demand, including without limitation the freedom from carrying cash for purchases and the freedom from maintaining high balances in accounts accessible by checks or the like, for instance checking accounts, which often pay no interest on balances maintained. Further, using a credit card is now routinely more convenient than paying with a personal check because check-approval delays are routinely encountered in many stores.
Any merchant with an appropriate merchant's account for a certain type of card can process sales by accepting the card. The merchant is essentially assured of collecting his funds in a credit card transaction when required approval measures are followed. Nowadays credit-card purchases are the typically the preferred non-cash method for retail goods and services. In earlier days, however, the drawbacks of credit card purchases, such as charges paid by the merchant for credit-card transactions and the need to maintain credit-card processing equipment, met with merchants' resistance to credit-card sales. A significant number of merchants did not accept credit cards at all, or did not accept credit cards for small purchases, or added a credit-card processing fee to the costs of the purchases. As consumer demand for widespread use of credit cards grew, however, merchants more and more accepted credit-card transactions as a cost of doing business, and even an essential cost of doing business. Adding on a fee for the convenience of using a credit card is an almost extinct merchant practice. The costs of credit-card transactions are now built into the merchants' pricing, as are other costs of doing business.
The efforts and risks involved in the actual collection of funds is borne by the financial institutions that issue the credit cards or any intermediary agencies. The costs of those efforts and risks are offset not only by the charges paid by the merchants but also by the interest paid by consumers on the amounts borrowed, and at times by annual fees paid by consumers.
The real estate rental field, particularly the residential rental field, is burdened with credit-risk issues. A landlord (lessor) is taking on a risk with every tenant. Traditionally rent is paid in monthly installments, with only funds covering one month's rental payment being held as a security deposit against the possibility of a rent-payment default. If a tenant fails to timely pay rent, the landlord's primary recourse is to seek eviction of the tenant, so as to free the premises for rental to a new tenant. Eviction proceedings are generally cumbersome, state law s routinely requiring various pre-eviction notices to the tenant and court hearings, and then reliance on action through the sheriffs office or the like. An eviction proceedings normally is not commenced the day after a rent payment is due, and routinely will take more than one month's time to complete after it is commenced—therefore a one-month's security deposit will not be full compensation to the landlord. Actual collection of the unpaid rent typically requires a separate, additional court proceeding, with its own monetary and time-consumption costs, with no guarantee that any judgment awarded will be collectable. Unlike a typical merchant who exchanges goods or services for on-the-spot payments, a landlord is contracting to exchange the use and possession of his property for a significant time period in exchange for the tenant's promise to make periodic future rent payments.
There are no sufficient means for determining a potential tenant's rental-payment histories. Standard credit checks are an expense many landlords prefer to avoid if possible, and they generally do not reveal rental-payment defaults. Contacting prior landlords is time consuming, and there is no certainty that the person identified by a potential tenant is in fact a prior landlord. Attempting to track a rent-payment history through court records of eviction and collections proceedings is even more burdensome, and the absence of court proceedings in a given jurisdiction is no guarantee that a potential tenant has not walked away from one or more prior tenancies without full rent payment. Moreover, even if a potential tenant does have a perfect rent-payment record, there is no guarantee against such tenant suffering financial problems during the year or so of the lease term.
Individual landlords and small businesses in the rental field are particularly sensitive to these credit-risk issues. A single defaulting tenant can cause serious cash-flow and other financial problems to a landlord who owns just a few rental units. Since such landlords are typically managing the properties single-handedly, or with minimal assistance, they are often poorly situated for handling time-consuming tasks, such as any initial attempts to track rent-payment histories of potential tenants and attempts to evict defaulting tenants and/or to collect unpaid rent.
Many, if not most, rental units in small buildings, for instance buildings holding twenty or fewer rental units, are owned and managed by individual landlords and small businesses. These small landlords typically cannot afford to purchase larger buildings, and large businesses in the rental field often do not find small buildings convenient or profitable to operate. Many renters expect small rental buildings to provide more affordable housing than large developments or high rise buildings, but that expectation is in some degree frustrated by the landlords' needs to maintain sufficient profit margins to cover not only capital and upkeep expenses but also defaults in rent payments. In many instances the actuality is mid-point—the rental units are not as affordable as desired, and are the landlord's profit margins are not as wide as desired.
It is believed that the credit-risk issues are keeping many people out of the small landlord field. They cannot afford the financial risks, and/or they do not have the time to spend tracing rent-payment histories, evictions and/or collections, and/or they question whether the capital investment is justified by the potential profit because rent-payment defaults can destroy profits.
The reluctance of investors and entrepreneurs to enter into the small landlord field in turn depresses the value of small rental buildings. That situation in turn is a factor driving the condominium conversion of many small rental buildings. Even two-flat and three-flat buildings are being converted to condominiums in some cities. The costs of a condominium conversion are often well offset by the higher combined selling prices of the condominium units in comparison the potential selling price of a given building as a small rental building. The
The credit-risk issues faced by individual l
Chilcot Richard
Cook Alex McFarron Manzo Cummings & Mehler, Ltd.
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