1、Chapter EighteenConsumer Loans,Credit Cards,and Real Estate LendingCopyright 2010 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/IrwinMcGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Key Topics Types of Loans for In
2、dividuals and Families Unique Characteristics of Consumer Loans Evaluating a Consumer Loan Request Credit Cards and Credit Scoring Disclosure Rules and Discrimination Loan Pricing and Refinancing18-2McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All R
3、ights Reserved.Consumer Lending Has been among the most popular financial services offered in recent years One of the most important sources of revenues and deposits for banks and their competitors(credit unions,savings associations,and finance and insurance companies);a source of supplemental incom
4、e On the other hand,presents a special challenge due to higher-than-average default rates.18-3McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.0.91%0.21%4.67%0.30%0.12%1.57%0.59%0.31%0.25%0.0%1.0%2.0%3.0%4.0%5.0%InternationalBanksAgr
5、iculturalBanksCredit CardLendersCommercialLendersMortgageLendersConsumerLendersOtherSpecialized$1 BillionAll Other$1 BillionPerformance and Chargeoffs by Bank Category,12/2004Performance and Chargeoffs by Bank Category,12/20040.76%1.23%4.01%1.30%1.18%1.66%1.66%1.10%1.35%0.0%0.5%1.0%1.5%2.0%2.5%3.0%3
6、.5%4.0%4.5%5.0%InternationalBanksAgriculturalBanksCredit CardLendersCommercialLendersMortgageLendersConsumerLendersOtherSpecialized$1 BillionAll Other$1 Billion18-4McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Types of Consumer Lo
7、ans Classify Consumer Loans by Purpose What the Borrowed Funds are Used For,or by Type Whether the Borrower Must Repay in Installments or in One Lump Sum Residential Mortgage Loans Nonresidential Loans Installment Loans Noninstallment Loans Credit Card Loans and Revolving Credit18-5McGraw-Hill/Irwin
8、Bank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Residential Mortgage LoansCredit to Finance the Purchase of Residential Property in the Form of Houses and Multifamily Dwellings.This is Usually a Long-Term Loan(15-30 years)Which is Secured By the Pro
9、perty Itself.Fixed or Variable Rate of Interest18-6McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Nonresidential Loans:Installment LoansShort-Term to Medium-Term Loans Repayable in Two or More Consecutive Payments,Usually Monthly o
10、r Quarterly.These Are Often Used to Finance Big Ticket Purchases or Consolidate Existing Debt(automobile,furniture,appliances).18-7McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Noninstallment LoansShort-Term Loans By Individuals f
11、or Immediate Cash Needs and Repayable in One Lump Sum When the Borrowers Note Matures(charge accounts,medical care,auto and home repairs)18-8McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Credit Card Loans Credit Cards Offer Holder
12、s Access to Either Installment or Noninstallment Credit.Banks Find That the Installment Users of Credit Cards are the Most Profitable Provide Higher Risk-Adjusted Returns Than Other Types of Loans.Card issuers earn income from:Cardholders annual fees Interest on outstanding loan balances Discounting
13、 the charges that merchants accept on purchases.18-9McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Credit Card Regulations U.S.Regulators of Depository Institutions-OCC,Fed,FDIC,and OTS-in 2003,Moved to Slow the Expansion of Card O
14、ffers to Customers with Low Credit Ratings More recently,May 2009:Strict limits on marketing to college students and other prospective cardholders under the age of 21 Preventing cardholder accounts from being charged beyond their limits Clearer disclosure of credit card interest rates and repayment
15、estimates,using standard text sizes and styles Tougher rules related to raising interest rates on delinquent cardholders,with clear paths to rehabilitate credit card accounts.18-10McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Debi
16、t CardsDebit Cards Can Be Used To Pay For Goods And Services,But Not To Extend Credit.They Are A Convenient Vehicle For Making Deposits Into And Withdrawals From ATMs And They Facilitate Check Cashing.18-11McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc
17、.,All Rights Reserved.Outstanding Consumer Debt as a Percent of Disposable Income18-12McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Consumer Debt Service Ratio18-13McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 T
18、he McGraw-Hill Companies,Inc.,All Rights Reserved.Characteristics of Consumer Loans Most Costly and Most Risky to Make Per Dollar Cyclically Sensitive Interest Inelastic18-14McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Evaluating
19、 a Consumer Loan Application Character and Purpose Income Levels Deposit Balances Employment and Residential Stability Pyramiding of Debt18-15McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Credit Bureaus Credit Reporting Agencies o
20、r Credit Bureaus Assemble and Distribute to Lenders the Credit History of Millions of Borrowers Information Personal Identifying Data Personal Credit Histories Public Information That May Have Bearing on Loan18-16McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Compan
21、ies,Inc.,All Rights Reserved.Credit ScoringCredit Scoring Systems are Based on Sophisticated Statistical Models in Which Several Variables are Joined to Establish a Numerical Score to Separate Good Loans From Bad Loans.The Most Famous of These is the FICO Scoring System Developed by Fair Isaac.18-17
22、McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.18-18McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Laws and Regulations Applying to Consumer LoansDisclosure Rules
23、 Truth in Lending Act,passed in 1968,simplified in 1981 Fair Credit Reporting Act,1974 Fair Credit Billing Act Fair Debt Collection Practices ActAntidiscrimination Laws Equal Credit Opportunity Act Community Reinvestment Act Home Ownership and Equity Protection Act18-19McGraw-Hill/IrwinBank Manageme
24、nt and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Ethics in Banking Box:Identity Theft Fastest Growing Crime Against Individuals Today It Can be Difficult to Detect and Costly to Recover From Fair Credit and Accurate Credit Transactions(FACT)Act was Passed in 2003
25、 to Counter this Growing Problem Consumers Entitled to One Free Credit Report Annually from Each of the Three Major Credit Bureaus18-20McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Predatory Lending and Subprime LoansAn Abusive Pr
26、actice Among Some Lenders That Consists of Granting Loans to Subprime Borrowers and Charging Them Excessive Interest Rates and Fees,Increasing the Risk of Default.Subprime Lending Played Important Role in the 2007 Credit Crisis.18-21McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 Th
27、e McGraw-Hill Companies,Inc.,All Rights Reserved.Real Estate Loans Among the Riskiest Loans Banks Can Make Average Size is Larger Than the Average Size of Other Loans Tend to Have Longer Maturities Than Other Loans18-22McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill
28、Companies,Inc.,All Rights Reserved.Factors Used in Evaluating Real Estate Loans Size of Down Payment Relative to Purchase Price of Property Should Be Evaluated in Terms of Total Relationship Need to Pay Attention to Particular Aspects of Credit Application:Amount and Stability of Income(Gross Debt S
29、ervice)Available Savings and Source of Down Payment Track Record in Maintaining Property Outlook for Real Estate Market in Local Area Outlook for Interest Rates If Variable Rate Loan18-23McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserv
30、ed.Home Equity Lending Home Owners Can Use the Difference in Homes Estimated Value and Remaining Mortgages as a Borrowing Base Two Types of Credit Closed End Credit Lines of Credit Can Be Used for Any Legitimate Purpose The 1986 Tax Reform Act Has Helped This Type of Loan Grow in Popularity18-24McGr
31、aw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Interest Only Mortgages:The Most Controversial of Home Mortgage Loans Many of these are Adjustable Rate Mortgages Home Owner Can Pay the Interest Only for an Initial Period Mortgage Paymen
32、ts Can be Much Higher When Principal Payments are Due Because of the Shorter Period to Repay the Loan Especially Problematic When House Prices Stop Climbing Upward During the Recent Crisis,the Fed Moved to Tighten the Rules on Mortgage Lending to Promote Greater Transparency in Loan Terms 18-25McGra
33、w-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Quick Quiz How do credit-scoring systems work?What are the principal advantages to a lending institution of using a credit-scoring system?In what ways is a real estate loan unique compared
34、to other kinds of bank loans?What factors should a lender consider in evaluating real estate loan applications?What legal protections are available today to protect borrowers against discrimination?Against predatory lending?What forces are reshaping household lending today?18-26McGraw-Hill/IrwinBank
35、 Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Cost-Plus Model of Pricing Loans18-27McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Annual Percentage Rate(APR)The APR is the Internal R
36、ate of Return that Equates Total Payments With the Amount of the Loan.The Truth in Lending Act Requires That This Rate Be Disclosed to Consumers On All Loans 18-28McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Simple InterestIn Sim
37、ple Interest the Customer Only Pays Interest On the Amount of the Principal Left.First the Declining Loan Balance is Calculated and That Reduced Balance is Used to Calculate the Amount of Interest Owed$3,000 loan at 12%simple interest per year produces$360 in interest,or a 12 percent effective rate
38、interest(is):=$3,000(0.12)(1)=$36012%i)i+(1$3,360=$3,000ss18-29McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Discount Rate MethodThe Discount Rate Method Requires the Customer to Pay the Interest in Advance.Interest is Deducted Fi
39、rst and the Customer Receives the Loan Amount Less Any Interest Owed Consider a 1-year loan with a single$3,000 payment at maturity.The borrower receives only$2,640,or the total loan minus 12%discount rate interest.The effective annual percentage rate,or APR,equals 13.64%Interest charge=0.12($3,000)
40、=$36013.64%i)i+(1$3,000=$2,640)(i Rate Percentage Annualnn18-30McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Add-On Loan Rate MethodInterest Owed is Added to the Principal Amount,Then the Loan Payments are Calculated By Dividing T
41、his Sum By the Number of Loan Payments18-31McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Rule of 78sA Rule of Thumb to Determine Exactly How Much Interest Income a Bank is Entitled to Accrue at Any Point in Time From an Installmen
42、t Loan Being Paid in Monthly 18-32McGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Interest Rates on Home Mortgages Fixed Rate Mortgage(FRM)1930s to 1970s Most Mortgages Were Fixed-Rate Mortgages.They Had a Fixed Interest Rate That D
43、id Not Change Over the Life of the Loan Adjustable Rate Mortgage(ARM)in the Early 1970s Adjustable Rate Mortgages Were Allowed.These Mortgages Have an Interest Rate That Changes Over the Life of the Mortgage.The Yields are More Responsive to Interest Rate Movements an Advantage for the Lender.18-33M
44、cGraw-Hill/IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Mortgage PointsThis is an Additional Up Front Charge Often Required on Home Mortgages.It is a Percentage of the Loan Amount and Reduces the Amount of the Loan Available18-34McGraw-Hill/
45、IrwinBank Management and Financial Services,7/e 2008 The McGraw-Hill Companies,Inc.,All Rights Reserved.Quick Quiz What options does a loan officer have in pricing consumer loans?Suppose a customer is offered a loan at a discount rate of 8%and pays$75 n interest at the beginning of the term of the loan.What net amount of credit did this customer receive?Suppose you are told that the effective rate on this loan is 12%.What is the average loan amount the customer has available during this year?18-35
