Banking06

© South-Western Publishing Slide 1

BANK LOANSBANK LOANS

6.1 Consumer Loans6.2 Granting and Analyzing Credit6.3 Cost of Credit6.4 Credit and the Law

6


Lesson 6.1

CONSUMER LOANSLesson 6.1

CONSUMER LOANS

Define major terms associated with consumer lendingExplain the difference between installment loans and open-end loans

GOALS


INSTALLMENT LOANSINSTALLMENT LOANS

Personal loansAutomobile loansHome equity loansEducation loans


SECURED AND UNSECURED LOANSSECURED AND UNSECURED LOANS

A secured loan is one in which some item of value backs the loan in case the borrower defaults on the loan.The item that secures the loan is called collateral.A lien is a legal claim to property to secure a debt.

An unsecured loan is a loan backed only by the reputation and creditworthiness of the borrower.Unsecured loans are sometimes called signature

loans.


LENDING TERMINOLOGYLENDING TERMINOLOGY

Principal is the amount borrowed.Interest is the amount you pay to use the

principal.Fees are other charges for the loan.The finance charge is the total dollar amount to be

paid for the loan.Total payments is the total amount a consumer

must repay.Payment is the amount the borrower repays each

specified period.


OPEN-END LOANSOPEN-END LOANS

Credit cardsLines of credit


Lesson 6.2

GRANTING AND ANALYZING CREDIT

Lesson 6.2

GRANTING AND ANALYZING CREDIT

List steps in the credit-approval processIdentify major criteria in a person’s credit rating

GOALS


RISK MANAGEMENTRISK MANAGEMENT

Risk management for bankers is the practice of minimizing financial loss through effective policies.

Banks face risks in operations, credit, liquidity, legal and regulatory compliance, and even marketing matters.

Risk management policies include consideration of the bank’s overall financial position, reserve requirements, cash flow, and ratio analyses of liabilities and assets.


CREDIT-APPROVAL PROCESSCREDIT-APPROVAL PROCESS

ApplicationDocumentationProcessingUnderwriting

CollateralCapacityCredit reputation

ClosingFunding


ANALYZING CREDITANALYZING CREDIT

Consumer reporting agenciesCredit-scoring systems


CONSUMER REPORTING AGENCIESCONSUMER REPORTING AGENCIES

A consumer reporting agency (CRA) is a company that compiles and keeps records on consumer payment habits and sells these reports to banks and other companies to use for evaluation creditworthiness.

Consumer reporting agencies are sometimes called credit bureaus.

The three largest CRAsEquifaxExperian (formerly TRW)TransUnion


CREDIT REPORTS INCLUDECREDIT REPORTS INCLUDE

Personal dataAccounts historyDelinquent accountsPublic recordsInquiries


CREDIT-SCORING SYSTEMSCREDIT-SCORING SYSTEMS

A credit-scoring system can provide an efficient and unbiased method of evaluating credit.

These scores place a numerical value on the performance or status of an applicant in various categories.


FICOFICO

The FICO credit-scoring system developed by Fair, Isaac and Company, Inc. has become the dominant credit-scoring system.

The FICO score is a three-digit number that credit granters can use in making a loan approval decision.


FICO CRITERIAFICO CRITERIA

Payment history (approximately 35 percent)Amounts owed (approximately 30 percent)Length of credit history (approximately 15 percent)New credit (approximately 10 percent)Types of credit (approximately 10 percent)


Lesson 6.3

COST OF CREDITLesson 6.3

COST OF CREDIT

Identify key factors in the cost of creditExplain the impact of negative credit ratings on consumers

GOALS


WHAT CREDIT COSTSWHAT CREDIT COSTS

Annual percentage rateMinimum paymentsTerm


REVIEWING APR AND FINANCE CHARGEREVIEWING APR AND FINANCE CHARGE

The APR is a key aspect of comparing credit costs.Sum-of-digits methodPrevious balance methodAdjusted balance methodAverage daily balance method


MINIMUM PAYMENTSMINIMUM PAYMENTS

Most credit cards require a minimum payment every month.

Minimum payments are usually 2 to 5 percent of the unpaid balance.

Paying the minimum payment keeps the account in good standing, but it does not reduce the principal much.


TREND TOWARD LOWER MINIMUM PAYMENTSTREND TOWARD LOWER MINIMUM PAYMENTS

Increases bank profitsContributes to greater consumer debt


TERMTERM

For installment loans, length of term also affects the total finance charge.

Repaying the loan over a longer periodreduces the monthly paymentincreases the total payment for the loan


COMPARING LOANS COMPARING LOANS

Loan amount: $6,000

Creditor A Creditor B Creditor C

APR 14% 14% 15%

Length of Loan 3 years 4 years 4 years

Monthly Payment $205.07 $163.96 $166.98

Total Finance Charge $1,382.52 $1,870.08$2,015.04

Total Payments $7,382.52 $7,870.08 $8,015.04


THE IMPACT OF CREDITTHE IMPACT OF CREDIT

OverextensionThe role of banksCredit counseling


Lesson 6.4

CREDIT AND THE LAWLesson 6.4

CREDIT AND THE LAW

Explain the purpose of consumer protection laws in lendingIdentify important laws associated with consumer loans

GOALS


TRUTH IN LENDINGTRUTH IN LENDING

The Truth in Lending Act (TILA), Title I of the Consumer Credit Protection Act of 1968 guarantees that all information about costs of a loan is provided in writing to consumers.

Items that must be disclosed include the following:Total sales priceAmount financedAnnual percentage rateVariable rate informationTotal payments

Schedule of paymentsPrepayment policiesLate payment policiesSecurity interest


EQUAL CREDIT OPPORTUNITY ACTEQUAL CREDIT OPPORTUNITY ACT

The Equal Credit Opportunity Act (ECOA) prohibits the use of race, color, religion, national origin, marital status, age, receipt of public assistance, or exercise of any consumer right against a lender as a factor in determining creditworthiness.


FAIR CREDIT REPORTING ACTFAIR CREDIT REPORTING ACT

The Fair Credit Reporting Act (FCRA) aims to protect the information that credit bureaus, medical information companies, and tenant screening services may collect.


FAIR DEBT COLLECTION PRACTICES ACTFAIR DEBT COLLECTION PRACTICES ACT

The Fair Debt Collection Practices Act (FDCPA) protects consumers form unfair collection techniques.


FAIR CREDIT BILLING ACTFAIR CREDIT BILLING ACT

Is an amendment of TILASpecifies fair procedures for resolving billing

disputesPrevents creditors from taking adverse action

until the dispute is resolved


FAIR CREDIT AND CHARGE CARD DISCLOSURE ACTFAIR CREDIT AND CHARGE CARD DISCLOSURE ACT

Is an amendment of TILARequires credit and charge card issuers to

provide information about open-end credit in direct mail or telephone solicitations


HOME EQUITY LOAN CONSUMER PROTECTION ACTHOME EQUITY LOAN CONSUMER PROTECTION ACT

Is an amendment of TILARequires lenders to make appropriate

disclosures about open-end loans that are secured by homes

Places limitations on such plans


CREDIT REPAIR ORGANIZATION ACTCREDIT REPAIR ORGANIZATION ACT

Prohibits credit repair companies from misleading consumers about their services and costs

Requires agreements to be in writing


GRAMM-LEACH-BLILEY ACTGRAMM-LEACH-BLILEY ACT

Compels banks and other financial institutions to protect the privacy of consumers


COMPLIANCECOMPLIANCE

Authority for enforcing consumer protection acts varies with the individual laws and the government agency associated with it.

Federal statutes are enforced byFederal ReserveFederal Deposit Insurance Corporation (FDIC) Federal Trade Commission (FTC)Courts

Examiners conduct audits to test compliance.

Banking06

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