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

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

INSTALLMENT LOANS Personal loans Automobile loans Home equity loans Education loans

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.

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.

OPEN-END LOANS Credit cards Lines of credit

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

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.

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

ANALYZING CREDIT Consumer reporting agencies Credit-scoring systems

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

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

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.

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.

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)

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

WHAT CREDIT COSTS Annual percentage rate Minimum payments Term

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

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.

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

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

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 CREDIT Overextension The role of banks Credit counseling

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

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 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

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.

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.

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

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

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

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

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

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

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.