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BANK LOANS

BANK LOANS. 6. 6.1 Consumer Loans 6.2 Granting and Analyzing Credit 6.3 Cost of Credit 6.4 Credit and the Law. Lesson 6.1 CONSUMER LOANS. GOALS. Define major terms associated with consumer lending Explain the difference between installment loans and open-end loans.

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BANK LOANS

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  1. BANK LOANS 6 6.1 Consumer Loans 6.2 Granting and Analyzing Credit 6.3 Cost of Credit 6.4 Credit and the Law

  2. Lesson 6.1CONSUMER LOANS GOALS Define major terms associated with consumer lending Explain the difference between installment loans and open-end loans

  3. INSTALLMENT LOANS • Personal loans • Automobile loans • Home equity loans • Education loans

  4. SECURED 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.

  5. LENDING 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.

  6. OPEN-END LOANS • Credit cards • Lines of credit

  7. Lesson 6.2GRANTING AND ANALYZING CREDIT GOALS List steps in the credit-approval process Identify major criteria in a person’s credit rating

  8. RISK 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.

  9. CREDIT-APPROVAL PROCESS • Application • Documentation • Processing • Underwriting • Collateral • Capacity • Credit reputation • Closing • Funding

  10. ANALYZING CREDIT • Consumer reporting agencies • Credit-scoring systems

  11. CONSUMER 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 CRAs • Equifax • Experian (formerly TRW) • TransUnion

  12. CREDIT REPORTS INCLUDE • Personal data • Accounts history • Delinquent accounts • Public records • Inquiries

  13. CREDIT-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.

  14. FICO • 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.

  15. FICO 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)

  16. Lesson 6.3COST OF CREDIT GOALS Identify key factors in the cost of credit Explain the impact of negative credit ratings on consumers

  17. WHAT CREDIT COSTS • Annual percentage rate • Minimum payments • Term

  18. REVIEWING APR AND FINANCE CHARGE The APR is a key aspect of comparing credit costs. • Sum-of-digits method • Previous balance method • Adjusted balance method • Average daily balance method

  19. MINIMUM 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.

  20. TREND TOWARD LOWER MINIMUM PAYMENTS • Increases bank profits • Contributes to greater consumer debt

  21. TERM • For installment loans, length of term also affects the total finance charge. • Repaying the loan over a longer period • reduces the monthly payment • increases the total payment for the loan

  22. 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 COMPARING LOANS

  23. THE IMPACT OF CREDIT • Overextension • The role of banks • Credit counseling

  24. Lesson 6.4CREDIT AND THE LAW GOALS Explain the purpose of consumer protection laws in lending Identify important laws associated with consumer loans

  25. TRUTH 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 price • Amount financed • Annual percentage rate • Variable rate information • Total payments • Schedule of payments • Prepayment policies • Late payment policies • Security interest

  26. EQUAL 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.

  27. FAIR 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.

  28. FAIR DEBT COLLECTION PRACTICES ACT The Fair Debt Collection Practices Act (FDCPA) protects consumers form unfair collection techniques.

  29. FAIR CREDIT BILLING ACT • Is an amendment of TILA • Specifies fair procedures for resolving billing disputes • Prevents creditors from taking adverse action until the dispute is resolved

  30. FAIR CREDIT AND CHARGE CARD DISCLOSURE ACT • Is an amendment of TILA • Requires credit and charge card issuers to provide information about open-end credit in direct mail or telephone solicitations

  31. HOME EQUITY LOAN CONSUMER PROTECTION ACT • Is an amendment of TILA • Requires lenders to make appropriate disclosures about open-end loans that are secured by homes • Places limitations on such plans

  32. CREDIT REPAIR ORGANIZATION ACT • Prohibits credit repair companies from misleading consumers about their services and costs • Requires agreements to be in writing

  33. GRAMM-LEACH-BLILEY ACT Compels banks and other financial institutions to protect the privacy of consumers

  34. COMPLIANCE • Authority for enforcing consumer protection acts varies with the individual laws and the government agency associated with it. • Federal statutes are enforced by • Federal Reserve • Federal Deposit Insurance Corporation (FDIC) • Federal Trade Commission (FTC) • Courts • Examiners conduct audits to test compliance.

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