Slide 11

BANK LOANS

6.16.1 Consumer Loans6.2 Granting and Analyzing Credit6.3 Cost of Credit6.4 Credit and the Law

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Slide 22

Lesson 6.1

CONSUMER LOANS

Define major terms associated with consumer lendingExplain the difference between installment loans and open-end loans

GOALSGOALS

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INSTALLMENT LOANSINSTALLMENT LOANSINSTALLMENT LOANSINSTALLMENT LOANS

Personal loansAutomobile loansHome equity loansEducation loans

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SECURED AND UNSECURED LOANSSECURED AND UNSECURED LOANSSECURED AND UNSECURED LOANSSECURED 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.

Slide 55

LENDING TERMINOLOGYLENDING TERMINOLOGYLENDING TERMINOLOGYLENDING 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.

Slide 66

OPEN-END LOANSOPEN-END LOANSOPEN-END LOANSOPEN-END LOANS

Credit cardsLines of credit

Slide 77

Lesson 6.2

GRANTING AND ANALYZING CREDIT

List steps in the credit-approval processIdentify major criteria in a person’s credit rating

GOALSGOALS

Slide 88

RISK MANAGEMENTRISK MANAGEMENTRISK MANAGEMENTRISK 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.

Slide 99

CREDIT-APPROVAL PROCESSCREDIT-APPROVAL PROCESSCREDIT-APPROVAL PROCESSCREDIT-APPROVAL PROCESS

ApplicationDocumentationProcessingUnderwriting

CollateralCapacityCredit reputation

ClosingFunding

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ANALYZING CREDITANALYZING CREDITANALYZING CREDITANALYZING CREDIT

Consumer reporting agenciesCredit-scoring systems

Slide 1111

CONSUMER REPORTING AGENCIESCONSUMER REPORTING AGENCIESCONSUMER REPORTING AGENCIESCONSUMER 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 CRAsEquifaxExperian (formerly TRW)TransUnion

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CREDIT REPORTS INCLUDECREDIT REPORTS INCLUDECREDIT REPORTS INCLUDECREDIT REPORTS INCLUDE

Personal dataAccounts historyDelinquent accountsPublic recordsInquiries

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CREDIT-SCORING SYSTEMSCREDIT-SCORING SYSTEMSCREDIT-SCORING SYSTEMSCREDIT-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.

Slide 1414

FICOFICOFICOFICO

The FICO (Fair, Isaac, and Company) 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.

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FICO CRITERIAFICO CRITERIAFICO CRITERIAFICO 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)

Slide 1616

Lesson 6.3

COST OF CREDIT

Identify key factors in the cost of creditExplain the impact of negative credit ratings on consumers

GOALSGOALS

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WHAT CREDIT COSTSWHAT CREDIT COSTSWHAT CREDIT COSTSWHAT CREDIT COSTS

Annual percentage rateMinimum paymentsTerm

Slide 1818

REVIEWING APR AND FINANCE CHARGEREVIEWING APR AND FINANCE CHARGEREVIEWING APR AND FINANCE CHARGEREVIEWING APR AND FINANCE CHARGE

The APR is a key aspect of comparing credit costs.Sum-of-digits method: Interest gets paid firstPrevious balance method:Adjusted balance method: Average daily balance method: Rate / 360 X 30

X Balance = Interest 0.18 / 360 X 30 X 1,500 = 22.50

Rate x Balance

Slide 1919

MINIMUM PAYMENTSMINIMUM PAYMENTSMINIMUM PAYMENTSMINIMUM 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.

Slide 2020

TREND TOWARD LOWER MINIMUM PAYMENTSTREND TOWARD LOWER MINIMUM PAYMENTSTREND TOWARD LOWER MINIMUM PAYMENTSTREND TOWARD LOWER MINIMUM PAYMENTS

Increases bank profitsContributes to greater consumer debt

Slide 2121

TERMTERMTERMTERM

For installment loans, length of term also affects the total finance charge.

Repaying the loan over a longer periodreduces the monthly paymentincreases the total payment for the loan

Slide 2222

COMPARING LOANS COMPARING LOANS COMPARING LOANS COMPARING LOANS

Loan amount: $6,000

Creditor ACreditor A Creditor B Creditor B Creditor CCreditor 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

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THE IMPACT OF CREDITTHE IMPACT OF CREDITTHE IMPACT OF CREDITTHE IMPACT OF CREDIT

Overextension: More debt than a person can afford

The role of banks: Collecting debt, seeking responsible lenders

Credit counseling: Out there to help people in trouble with credit.

Slide 2424

Lesson 6.4

CREDIT AND THE LAW

Explain the purpose of consumer protection laws in lendingIdentify important laws associated with consumer loans

GOALSGOALS

Slide 2525

TRUTH IN LENDINGTRUTH IN LENDINGTRUTH IN LENDINGTRUTH 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 priceAmount financedAnnual percentage rateVariable rate informationTotal payments

Schedule of paymentsPrepayment policiesLate payment policiesSecurity interest

Slide 2626

EQUAL CREDIT OPPORTUNITY ACTEQUAL CREDIT OPPORTUNITY ACTEQUAL CREDIT OPPORTUNITY ACTEQUAL 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.

Slide 2727

FAIR CREDIT REPORTING ACTFAIR CREDIT REPORTING ACTFAIR CREDIT REPORTING ACTFAIR 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.

Slide 2828

FAIR DEBT COLLECTION PRACTICES ACTFAIR DEBT COLLECTION PRACTICES ACTFAIR DEBT COLLECTION PRACTICES ACTFAIR DEBT COLLECTION PRACTICES ACT

The Fair Debt Collection Practices Act (FDCPA) protects consumers form unfair collection techniques.

Slide 2929

FAIR CREDIT BILLING ACTFAIR CREDIT BILLING ACTFAIR CREDIT BILLING ACTFAIR CREDIT BILLING ACT

Is an amendment of TILA (Truth in Lending Act )Specifies fair procedures for resolving billing

disputesPrevents creditors from taking adverse action

until the dispute is resolved

Slide 3030

FAIR CREDIT AND CHARGE CARD DISCLOSURE ACTFAIR CREDIT AND CHARGE CARD DISCLOSURE ACTFAIR CREDIT AND CHARGE CARD DISCLOSURE ACTFAIR CREDIT AND CHARGE CARD DISCLOSURE ACT

Is an amendment of TILARequires credit and charge card issuers to

provide information about open-end credit in direct mail or telephone solicitations

Slide 3131

HOME EQUITY LOAN CONSUMER PROTECTION ACTHOME EQUITY LOAN CONSUMER PROTECTION ACTHOME EQUITY LOAN CONSUMER PROTECTION ACTHOME EQUITY LOAN CONSUMER PROTECTION ACT

Is an amendment of TILARequires lenders to make appropriate

disclosures about open-end loans that are secured by homes

Places limitations on such plans

Slide 3232

CREDIT REPAIR ORGANIZATION ACTCREDIT REPAIR ORGANIZATION ACTCREDIT REPAIR ORGANIZATION ACTCREDIT REPAIR ORGANIZATION ACT

Prohibits credit repair companies from misleading consumers about their services and costs

Requires agreements to be in writing

Slide 3333

GRAMM-LEACH-BLILEY ACTGRAMM-LEACH-BLILEY ACTGRAMM-LEACH-BLILEY ACTGRAMM-LEACH-BLILEY ACT

Compels banks and other financial institutions to protect the privacy of consumers

Slide 3434

COMPLIANCECOMPLIANCECOMPLIANCECOMPLIANCE

Authority for enforcing consumer protection acts varies with the individual laws and the government agency associated with it.

Federal statutes are enforced byFederal ReserveFederal Deposit Insurance Corporation (FDIC) Federal Trade Commission (FTC)Courts

Examiners conduct audits to test compliance.