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Infolawyer, Lawyer
Category: Consumer Protection Law
Satisfied Customers: 57753
Experience:  Licensed attorney helping individuals and businesses.
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In several years of research I have found it is well established

Customer Question

In several years of research I have found it is well established that a bank, by law, cannot lend its credit, or its depositors money. that being the case, upon what is the validity of a credit card offer based on? From where does the "money lent" spring?
Submitted: 2 years ago.
Category: Consumer Protection Law
Expert:  Infolawyer replied 2 years ago.
Banks do in fact lend beyond their holdings. They go on to lend and operate on presumption that depositors for the most part will leave funds in the bank. For this reason you now see bank holidays in greece to prevent bank runs which banks cannot cover. The terms and conditions of accounts are further contractual grounds for their doing so. The fdic insurance provides some security to depositors.
Customer: replied 2 years ago.

Afraid that does not address the issue raised. While I appreciate your responding to the question, your answer refers to an issue not raised. Question is not how depositors money is insured and by whom or what mechanism, rather that banks are prohibited from lending depositors money or the banks credit. That question might be side stepped by bringing up the point that a credit line is created as a book keeping entry into a transaction account which is considered an "asset" of the bank. i.e. money deposited becomes the banks "property" with the hapless depositor accepting in exchange, a possibly enforceable IOU. However, such transaction accounts must be offset by a matching liability to the demand deposit account. The basic question, remains, unless the IOU answer is used as a defense, how is it legal for a bank to lend "credit", when there are dozens of cases which clearly state they may not do so, nor lend depositors money. Credit unions can lend depositors money, but National Banks cannot. These prohibitions are not assumptions or opinions, they are clearly laid out in several publications of the Federal Reserve. Court cases have also revealed that bank records show there never was any "money lent", and no contract exists where a bank ever claims money was lent. Cases brought by banks always merely state "a credit line was issued, from which card holders benefited from under the terms of the original agreement, which was to pay the sums paid through the use of the card to the bank." However, there is never a mention, nor is it ever decided as to whose funds were used to pay the merchants the amounts signed for at point of purchase. They will claim "unjust enrichment" under the presumption that it is assumed the transfer of book keeping entries from the transaction account to the merchant account, which is a bank "asset" is where the loss may be claimed. However, if the transaction account is in reality merely a reflection and proof of a bank liability to its creditor, the depositor, than that "unjust enrichment" fails as it cannot be proven the bank had any actual "skin in the game". In fact the bank is the debtor to the depositor, and the entries of this arrangement clearly show who is the creditor. Therefore, the bank is apparently operating illegally by failing to disclose the true nature of the "offer to lend money, or credit", when it is never disclosed that applicant for "credit" is actually offering to exchange the use of his cash deposit as the basis upon which a convenient method of using the card instead of cash at point of sale, accepted by merchants in a separate agreement with card enablers, e.g. Visa, Mastercharge etc. and the banks to credit merchants with the amounts signed for at point of purchase. Regarding the bank runs in Greece, I can only comment that most countries in Europe do not print their own money, only central banks do. The USA is only obligated to pay back loans with FRN's, which it can print as many as needed to repay "loans". But countries without a central bank which can print acceptable "money", have to pay with funds earned and created from outside the printing system. That is why Greece, Italy, Portugal, Spain etc. are doomed to default in the end, as they have no way of creating enough wealth to pay in real money that which was created for their benefit using book keeping "money of account", unless they have access to some method of offset.

Expert:  Infolawyer replied 2 years ago.
You are raising an issue that could generate liability should the loan be called without matching funds or where banks are further pursued. You have a few options. Let me outline them. You can pursue a complaint in civil court. You may sue for losses suffered plus costs and interest. You can also file a complaint with the attorney general office. You can threaten these options before pursuing and use for leverage. local counsel can also get involved!
Customer: replied 2 years ago.

Please understand, I'm not particularly looking to pursue defense against credit card suits, rather of having a court answer the question as to the validity of all complaints involving claims based on "loans", whereby the basis of suit is an existing valid contract. The original question of what makes any of this 'valid" as a rather rhetorical question. Might this question be pursued in asking for a "declaratory judgment"? The main issue is whether banks can loan credit, and that has already been decided, for they never say they loaned money. How can the banks not be guilty of multiple ultra vires from first instance, thus automatically suspending license to do further business at the moment of commission? I certainly realize the gravity of these questions. I hope you find the subject of academic interest.

Expert:  Infolawyer replied 2 years ago.
A declaratory judgment could next be pursued by application for injunctive relief. It is an interesting issue.