1. 6 BANK LOANS 6.1 Consumer Loans 6.2 Granting and Analyzing Credit
Banking
10/23/2017
BANK LOANS 6
6.1 Consumer Loans
6.2 Granting and Analyzing Credit
6.3 Cost of Credit
6.4 Credit and the Law
Chapter 6

2. GOALS Define major terms associated with consumer lending
Banking
10/23/2017
Lesson 6.1 CONSUMER LOANS
GOALS
Define major terms associated with consumer lending
Explain the difference between installment loans and open-end loans
Chapter 6

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 6.2 GRANTING 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. GOALS Identify key factors in the cost of credit
Lesson 6.3 COST 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. Repaying the loan over a longer period
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. 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 $ $ $166.98
Total Finance Charge $1, $1, $2,015.04
Total Payments $7, $7, $8,015.04

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

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

25. Items that must be disclosed include the following:
TRUTH IN LENDING
The Truth in Lending Act (TILA), Title I of the Consumer Credit Protection Act of 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. Federal statutes are enforced by
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.