1 / 27

CHAPTER 12

CHAPTER 12. CONSUMER AND SMALL BUSINESS LENDING. LEARNING OBJECTIVES. TO UNDERSTAND…. The markets for and importance of small-business lending, consumer installment lending, residential mortgages, and home-equity lines of credit

pravat
Download Presentation

CHAPTER 12

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. CHAPTER 12 CONSUMER AND SMALL BUSINESS LENDING Chapter 12

  2. LEARNING OBJECTIVES TO UNDERSTAND… • The markets for and importance of small-business lending, consumer installment lending, residential mortgages, and home-equity lines of credit • The credit analysis, pricing, and risks of small-business, consumer, and residential-mortgage lending • Credit scoring for consumers and small businesses and how it can be misused • The importance and growth of subprime lending and the outcry about “predatory practices” and attempts to regulate them • The future of consumer and small-business lending Chapter 12

  3. Overview of Consumer Lending • At year-end 1985, commercial banks held total consumer loans of $284b, at the beginning of 2000, the figure was $558b (compound annual growth of 5%). • Credit-card loans grew from $68b year-end 1985 to $212b at the beginning of 2000 (compound annual growth of 8.5%). • Since year-end 1988, home-equity loans held by all commercial banks have grown from $35b to $98b at the beginning of 2000 (compound annual growth of 9.8%). Chapter 12

  4. The Role of TRICK • Transparency/disclosure/predatory practices have become major issues in subprime lending • Risk exposure of subprime lending has got the attention of the market and regulators • Information technology (credit scoring) plays a major in retail lending Chapter 12

  5. The Role of TRICK (continued) • Competition for customers has intensified especially for consumers and small businesses • Capital adequacy always is an issue in banking and has surfaced with respect to subprime lending Chapter 12

  6. Securitization • Started with government-sponsored enterprises (GSEs such as Ginnie Mae, Fannie Mae, and Freddie Mac) and the residential-mortgage market • Trickled down to credit cards and auto loans Chapter 12

  7. The Characteristics of Small Businesses • 500 employees of less => “small”, however, two-thirds of small businesses have fewer than five employees • Location: 80% in urban areas • SIC descriptionPercent Retail trade 21.7 Business services 21.2 Professional services 16.6 Construction/mining 14.2 All others 26.3 Chapter 12

  8. Financial Services Usedby Small Businesses • Three broad categories of services • Liquid-asset accounts • Checking and savings • Credit lines, loans, and capital leases • Financial-management services • Cash management, brokerage, trust, pension Chapter 12

  9. The Suppliers • Depository institutions • Table 12-3 (p. 397) shows that commercial banks dominate as suppliers of financial services to small businesses • Nondepository institutions • Finance company, brokerage, leasing • Nonfinancial • Family, individual, other businesses, government (SBA) Chapter 12

  10. Credit Analysis and Credit Scoring • Evolution from the 5Cs to credit scoring for consumers • Small businesses stand on the far left-hand side of the borrower-information continuum (Ch. 10) – scare information that is costly to obtain • Fewer than five employees => 5Cs approach might be best, especially character Chapter 12

  11. Credit Scoring: Understanding FICO (Box 12-1, p. 400) • Fair, Isaac & Co. is a risk-management company that have developed a credit-scoring system referred to as FICO. • A FICO score is based on information found within your credit report. The 5 basic categories of importance: • Payment History • Outstanding Debt • Credit History • Pursuit of New Credit • Types of Credit in Use Chapter 12

  12. Credit Scoring and Decision-Making • Figure 12-1 (p. 401) illustrates the trade-off at origination between credit score and the loan-to-value (LTV) ratio • Don’t short change the importance of human judgment Chapter 12

  13. Consumer Lending • Loan category2000 (growth)* Residential mortgages $ 839B (12.2%) Installment loans $ 346B ( 3.0%) Credit-card loans $ 212B (10.2%) Home-equity loans $ 98B (13.4%) Total $1,495B ( 9.8%) *Amount at the beginning of 2000 and growth rates since 1985 (1988 for home equity) Chapter 12

  14. Consumer Installment Credit: Market Share and Types of Loans • Types: Revolving (credit cards) and nonrevolving • Holders/Suppliers • Commercial banks • Finance companies • Credit unions • Savings institutions • Nonfinancial business (GE, GMAC) • Pools of securitized assets Chapter 12

  15. The Cost of Making Consumer Loans (functional cost analysis) • Cost categories • Office space • Supplies • Services • Labor • Tables 12-9, 12-10, 12-11 (pp. 408-410) present FCA data Chapter 12

  16. Credit Analysis ForConsumer Lending Five stages in the analysis of new customers: • Initial contact or introduction, • Credit application, • Review of the application, • Credit analysis or evaluation, and • Monitoring and control Chapter 12

  17. CAMPARI • An alternative to the five Cs of credit analysis is CAMPARI. In contrast to the five Cs, the CAMPARI framework is more specific with respect to the purpose and terms: • Character – the first of the five Cs • Ability – in managing financial affairs • Margin – interest rate, commission, and fees • Purpose – of the loan • Amount – of the loan • Repayment – probability of • Insurance – the collateral component of the five Cs Chapter 12

  18. A System Approach Versus Individual Appraisal • Credit-scoring systems have been in use for years • Examples of variables • Years on job • Home phone • Years at address • Major credit card • Credit bureau information Chapter 12

  19. Predicting Personal Bankruptcy • Research frameworks similar to those used in predicting corporate bankruptcy (classification models, Ch. 11) • Three national credit bureaus predict personal bankruptcies • Equifax • Trans Union • TRW Chapter 12

  20. Residential Real-Estate Lending: Mortgages and Home-Equity Lines of Credit • One of the biggest changes in bank consumer lending has resulted from the restructuring of the savings-and-loan industry. • At the end of 1985, all commercial banks held $188b in loans backed by one-to-four family residential property. In 1999, it was $767b or annual growth of 10.6%. Chapter 12

  21. Residential mtgs Bank sizeGrowth* Small 4.9% Medium 11.5% Large 14.4% Top ten 12.9% All banks 10.4% *1985-1999 Home-equity loans Bank sizeGrowth* Small -1.5% Medium -4.3% Large 6.8% Top ten 17.5% All banks 5.4% *1994-1999 Growth Chapter 12

  22. The Restructuring of Residential Lending • Fragmentation of the mortgage-lending process (securitization steps) • Origination • Funding/underwriting • Selling • Servicing • Investor Chapter 12

  23. Subprime Lending • Subprime portfolios are those made up of loans to borrowers with higher-risk characteristics defined to include: • A FICO score of 660 or lower • Two or more 30-day delinquencies in the past year • Bankruptcy in the last five years • A debt-to-income ratio of 50% or higher • A foreclosure, repossession, or charge-off in the preceding 24 months Chapter 12

  24. Myths AboutSubprime Lending • Myth #1: Subprime lending has been responsible for record homeownership rates among minorities and lower-income groups • Myth #2: By and large, subprime lending is priced efficiently • Myth #3: Proposed legislation is counterproductive Chapter 12

  25. The Future of Consumer and Small-Business Lending • Forces shaping the future • Regulation (Table 12-17, p. 423) • Interest-rate controls cause distortions (Figure 12-3, p. 422) • New sources of fee and choice • Automation and securitization Chapter 12

  26. Consumer Banking Innovations • Credit and debit cards • ATMs that permit cash advances (loans) • Systems approaches to lending • Home-equity loans • On-line banking Chapter 12

  27. CHAPTER SUMMARY • Consumer and small-business lending • Installment loans (credit cards) • Residential mortgages • Home-equity lines of credit • Loans and financial services for small businesses • Credit scoring and securitization • Subprime lending Chapter 12

More Related