1. Consumer Lending and Borrowing23
C h a p t e r
Consumer Lending and Borrowing
Money and Capital Markets
Financial Institutions and Instruments in a Global Marketplace
Eighth Edition
Peter S. Rose
McGraw Hill / Irwin
Slides by Yee-Tien (Ted) Fu

2.  Learning Objectives 
To see the vital role played by consumers in supplying loanable funds through savings to the money and capital markets.
To learn about the important role consumers play as major borrowers of funds.
To explore the characteristics of consumer lending institutions.
To understand the rights that consumers have with respect to financial services.

3. Consumers as Lenders of Funds
Consumers as a group are among the most important lenders of funds in the economy.
Loanable funds are supplied by consumers – individuals and families (households) – when they purchase financial assets from other units in the economy.

4. Financial Assets Purchased by Consumers
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Financial Assets Purchased by Consumers
Source: Board of Governors of the Federal Reserve System

5. The Growing Menu of Savings Instruments Available to Consumers Today
One of the most important trends affecting consumer savings and lending today is the explosion of new financial instruments.
Many of these new instruments offer the consumer greater financial flexibility, as well as the potential for higher rates of return.

6. The Growing Menu of Savings Instruments Available to Consumers Today
Examples:
NOW accounts / share drafts
automatic transfer services (ATS)
share accounts at money market mutual funds
consumer cash management services
universal life insurance
individual and Keogh Plan retirement accounts
Roth and Education IRAs
money market and market-index CDs
variable-rate annuities and insurance plans

7. Consumers as Borrowers of Funds
Source: Board of Governors of the Federal Reserve System

8. Is Consumer Borrowing Excessive?
Households and Nonprofit Organizations
Amounts outstanding at year-end ($ billions)
Total financial 2, , , , ,097.5
assets
Total debts , , , ,083.1
(liabilities)
Difference: 2, , , , ,014.4
assets -liabilities
Ratio of 18.6% 21.9% 25.2% 22.3% 25.2%
liabilities to assets
Data Source: Board of Governors of the Federal Reserve System

9. Categories of Consumer Borrowing
Financial analysts frequently divide the credit extended to consumers into three broad categories.
Residential mortgage credit – used to support the purchase of homes
Installment credit – used primarily for long-term nonresidential purposes
Noninstallment credit – used for short-term cash needs

10. Home Equity Loans
Like traditional home mortgages, a home equity loan is secured by a borrower’s home.
Unlike traditional home mortgages however, many home equity loans consist of a revolving credit line that the borrower can draw on for purchases of any goods or services.

11. Credit and Debit Cards
A credit card permits the consumer to buy now and pay later, while a debit card provides a convenient way of paying now.
Convenience users substitute credit cards for cash, while installment users maintain large outstanding credit card balances.
A smart card is closely related to the debit card.

12. The Determinants of Consumer Borrowing
The consumer’s decision about when and how much to borrow is influenced by:
the size of the individual or family income and accumulated household wealth
the stage in life
the business cycle
price expectations
interest rates

13. Consumer Lending Institutions
Financial intermediaries – banks, savings and loan associations, credit unions, and finance companies – account for most of the loans made to consumers in the U.S. economy.
However, a growing share of consumer loans are being sold off the balance sheets and placed in loan pools (securitization).
In recent years, institutions also tend to diversify their lending operations.

14. Consumer Lending Institutions
Source: Board of Governors of the Federal Reserve System

15. Consumer Lending Institutions
Commercial banks approach the consumer
by direct lending,
through purchases of installment paper from merchants, and
by making loans to other consumer lending institutions.
Finance companies have a long history of active lending in the consumer installment field, both directly and indirectly.

16. Consumer Lending Institutions
Savings and loans and savings banks have long been dominant in residential mortgage lending, though they are also aggressively expanding their portfolios.
“Check cashing” companies, “title loan” companies, and “pawn shops” lend primarily to distressed borrowers.

17. Factors Considered in Making Consumer Loans
Consumer loans usually carry greater risk than most other kinds of loans, although they also tend to be more profitable.
Hence, most loan officers carefully consider
the ratio of household debt to gross income
the duration of employment of the borrower
the past payment record (credit integrity)
ownership of valuable properties
the number of breadwinners in the family

18. Financial Disclosure and Consumer Credit
Important new laws have been designed in recent years to protect consumers in their dealings with lending institutions, especially with respect to financial disclosure.
Consumer Credit Protection Act (1968) (Truth in Lending)
Fair Credit Reporting Act (1970)
Fair Credit Billing Act (1974)
Consumer Leasing Act (1976)

19. Financial Disclosure and Consumer Credit
Competitive Banking Equality Act (1987)
Fair Credit and Charge Card Disclosure Act (1988)
Truth in Savings Act (1991)
Financial Services Modernization (Gramm-Leach-Bliley) Act (1999)

20. Credit Discrimination Laws
The civil rights movement has had an impact on the granting of consumer loans.
Equal Credit Opportunity Act (1974, amended 1976)
Fair Housing Act (1968)
Home Mortgage Disclosure Act (1975)
Community Reinvestment Act (1977)
Financial Institutions Reform, Recovery, and Enforcement Act (1989)

21. Consumer Bankruptcy Laws
The right to declare bankruptcy is designed to give individuals and businesses a fresh start, helping them to work themselves out from under a crippling burden of debt.

22. Consumer Bankruptcy Laws
Consumers filing for bankruptcy primarily use one of two methods.
Filing for bankruptcy under Chapter 7 normally completely discharges all of a household’s unsecured debts.
A Chapter 13 bankruptcy filing usually sets in motion a new debt repayment plan to work gradually out of the debts owed.

23. Consumer Bankruptcy Laws
In view of the soaring number of bankruptcy filings and in an effort to lower the cost of consumer credit for most borrowers, proposals have been made to make bankruptcy a more costly process and to encourage the development of more financial education courses for consumers.

24. Money and Capital Markets in Cyberspace
Learn more about the various aspects of consumer lending and borrowing by visiting:

25. Chapter Review Consumers as Lenders of Funds
Financial Assets Purchased by Consumers
The Growing Menu of Savings Instruments Available to Consumers Today
Consumers as Borrowers of Funds
Is Consumer Borrowing Excessive?
Categories of Consumer Borrowing
Home Equity Loans

26. Chapter Review Credit and Debit Cards
The Determinants of Consumer Borrowing
Consumer Lending Institutions
Commercial Banks
Finance Companies
Other Consumer Lending Institutions
Factors Considered in Making Consumer Loans

27. Chapter Review Financial Disclosure and Consumer Credit
Credit Discrimination Laws
Consumer Bankruptcy Laws