Ch.15 Evaluating Consumer Loans

to purchase paper at predetermined rate that vary with default risk, quality of asset sold, and maturity

Dealers negotiate finance charges with their customers and banks agree to....

home equity lines of credit

Decline in housing values in 07-08 led to many ____ ____ ____ ___ ____ being eliminated or reduced

mortgage loans; delinquencies and foreclosures

During 07-10, banks were forced to charge-off historically high amounts of ___________ ______ as ________ and __________ skyrocketed

300;850;670

FICO scores range from ____ to ____ with a higher figure indicating a better credit history. The national average is ___

individuals making promised payments in timely manner

Higher FICO score, the more likely it is a lender will see the...

Subprime Loans

Higher risk loans labeled "B" "C" and "D" credits and popular in auto, home equity, and mortgage lending

Tax Reform Act; they are secured by equity in an individual's home

Home Equity Lonas meet tax deductibility requirements of ___ _____ ______, because...

Quality of financial data is lower Primary source of repayment is current income which can be highly volatile

How do consumer loans differ from commercial loans

40 months

In order to protect a home in bankruptcy it must have been owned for at least ___ ____

dealer paper

Indirect loans are collectively referred as ____ ____.

periodic payment of principal and interest

Installment loans require

1) Mortgage loans 2) Student loans overtaking auto loans

Largest and second largest category in installment loans

Mortgage Loan

Legal document through which borrower gives lender a lien on real property as collateral against a debt.

extended jointly to married couples in both spouses' names

Lenders must report credit if....

FICO Credit Score

Lenders often use this number when evaluating whether to approve a consumer loan or mortgage

accept/reject decision

Lenders periodically react to competitive pressures but it should not affect the ________ ________.

installment loans

Lenders treat these loans like commercial loans and evaluate them in similar manners

Non installment Loans

Limited number of consumer loans require a single principal and interest payment. Typicall borrower's need are temporary and bridge loans are representative of this loan

Equal Credit Opportunity

Makes it illegal for lenders to discriminate on the basis of race, religion, sex, marital status, age, or national orgin

limited credit and job history; large down payments

Many grounds for credit denial including _____ _____ and ________ ______. A positive factor can include ______ ______ ______

FICO Credit Score

Many insurance companies consider the score when determining whether to offer and how to price insurance coverage

conventional; FHA (Federal Housing Authority) or Veterans Administration

Mortgage loans can be _________ or insured by the ______________ __________ ____________ or ____________ __________

MasterCard; Visa

Most credit cards and other revolving credit banks operate as franchises of ________ or _________.

losses are among highest of all loan types because fraud is prevalent and defaults are high

Negative aspect of credit cards is that....

consumer credit anlaysis

Objective of ______ ____ ____ is to assess the risk associated with lending to individuals

loan commitments; commercial customers

Open credit lines are the functional equivalent of ____ ________ to _______ __________.

Applicants marital status, unless joint credit Alimony, child support, and public assistance are included in reported income Woman childbearing capability and plans Applicant has a telephone

Prohibited Information Request

Community Reinvestment Act

Prohibits redlining and encourages lenders to extend credit within their immediate trade area and the markets they collect on deposits

3% Fees, risky feature, 30yr, Consumer Financial Protection Bureau

Qualified mortgage charges less than __% _____, contains no _____ _____, has a maximum term of _________ and meets one of the three criteria established by the _______ ______ ______ _______.

Regulators

Rate banks in terms of their compliance with non discriminatory lending practices and publish rating to put pressure on baks that are not in compliance

Longer term and often carry fixed rate More likely to default Small and cost more to administrate

Reasons for large spreads in consumer loans

Indirect Lending

Retailer sells merchandise and takes credit application and sells the loans to banks and other financial institutions because of not having the capability.

from interest and associated fees

Revenues from consumer loans

housing value rise

Subprime loans attractive when ___ _____ ____.

FICO Credit Score

Summarizes in one number an individual's credit history

1) Reflect a debt-to-income of 43% or less 2) Eligible for purchase, guarantee, or insurance regardless of debt-to-income ratio 3) Made by a smaller financial institution and held on their books

Three Criteria by the Consumer Financial Protection Bureau

Equifax Experian Trans Union

Three primary credit reporting agencies

Fees Interest on outstanding balances Discounting charges that merchant accept on purhcasers

Three sources card issuers earn as income

Installment Loans Credit cards or revolving credit Non installment loans

Three types of consumer loans

individuals, attracting new business

Today, many banks target ______ as the primary source of growth in ________ ____ ______.

total finance charge and annual percentage rate (APR)

Truth in lending requires lenders disclose to potential borrowers both the _____ and ______

Grade "D"

Typically scores between 440 and 500 under FICO. Has-charge-offs and judgements that have not been repaid or had payments made. When extended credit, delinquencies are 10-20%, repossession are 16-40% and losses are 1--2-%

Grade "C"

Typically scores between 500-600 under FICO. Some write-offs and judgements. Borrower made subsequent payments on at least some of the loans. When extended credit, delinquencies are 5-10%, repossession are 5-10% and losses are 3-10%

make changes and notify all lenders of inaccurate data

Under Fair Credit Reporting Act, if information is incorrect, individuals can have bureau....

represents significant source of dealer profit, and it varies because of competitive conditions

What does the difference between the dealer and banker's rate indicate and why do they vary?

Character, Capital, Capacity, Conditions, Collateral

When evaluating loans, bankers cite Cs of credit.

notify applicants of denial within 30days and indicate why

Whenever lenders reject a loan, they must....

Competition for commercial customers narrowed loan yields so that returns fell relative to potential risk Developing relationships with individuals represents a strategic response to deregulation

Why has traditional wholesale banks aggressively entered the consumer market

Judgement analysis

With ____ ______, loan officer subjectively interprets information in light of bank's lending guidelines and accepts or rejects the loan

credit scoring model

With a ____ ____ _____, loan officer grades request according to a statistically sound model that assigns points to characteristics of the prospective borrower. Acceptability is based on the score

Credit scoring systems

_______ ______ _______ are acceptable if they do not require prohibited information and are statistically justified

Credit card; overlines tied to checking accounts

________ ______ and _____ _____ ____ _____ _______ are the most popular forms of revolving credit agreements

Community reinvestment

__________ _________ has played an important role in the interstate banking movement

direct loan

a ____ _____ is negotiated between the bank and the ultimate user of the funds

indirect loan

a _____ _____ is funded by a bank through a retailer that sells merchandise to a customer

Credit card banks

a bank that administers its own credit card plan or serves as the primary regional agent of a major credit card operation such as Visa or MasterCard

past credit experience

a bank's prior relationship with a customer reveals information about _____ _____ experience

Reverse mortgage

allows a borrower to convert equity in their home to cash payments without selling the home

low processing costs and little risk of loss. banks gain when users lose prepaid cards

an advantage to banks for prepaid cards is...

Smart Card

an enhanced debit or credit card. Contains a memory chip which stores info and value. Programmable such that users can store info and add or transfer value to another same card

Debit cards, smart cards, and prepaid cards

an individual uses this card, funds immediately transferred from individual to retailer, with no float

Prepaid Cards

are a hybrid of a debit card

Debit Card

are widely available and the most used method of in-store payments in the U.S/

Fair Credit Reporting Act

enables individuals to examine their credit reports provided by credit bureaus

Mortgage Loan

generally the lowest risk consumer loan with low default

bankruptcy reform

in 2005, Congress passed _______ _______ legislation that made it more difficult for individuals to completely avoid repaying their debts

Bankruptcy Reform

individuals who cannot repay their debts can file for bankruptcy and receive court protection against creditors

Overdraft protection

is a type of revolving credit in which bank authorizes individuals to write checks in excess of actual balances held in a checking account up to a respecified limit

minimum payment; interest rate

many credit card customers are more concerned about _____ _____ than _____ _____.

Collateral

may be the asset financed, other assets owned by the individual or personal guarantee of a consigner

Open credit lines

provide customers with special checks that activate a loan when presented for payment

Financial Institutions Reform, Recover, and Enforcement Act of 1989

raised the profile of the CRA by mandating public disclosure of bank lending policies and regulatory rating s of bank compliance

Capital

refers to individual's weather position and is closely related to capacity which is the ability to meed loan payments in addition to normal living expenses

Truth in lending

regulations apply to individual loans up to $25,000 where borrower's primary residence does not serve as collateral

Grade "B"

scores 600+ under FICO. Some 90 days past due, but now current. When extended credit, delinquencies are 2-5%, repossessions are 2.5-6% and losses are 1.5-3%

Ch. 13

the individual's income exceeds the state median to file for ____ ____ and will repay at least a portion of his or her debts

character

the most important and difficult to assess in the bankers Cs of credit

Redlining

the practice of not extending credit within geographic areas that are believed to be deteriorating

Bankruptcy Ch.9

where an individual works out a repayment plan with court supervision

Credit card, credit scoring model

with ____ _____, no formal analysis of borrower characteristics is required unless lender uses a ______ ______ ______.

higher; determined

Dealer normally negotiates a _________ rate with the car buyer than the ___________ rate charged by the bank

92%

About ____ of households have credit cards

Payment History 35% Amounts owed 30% Length of Credit History 15% New Credit 10% Type of credit in use 10%

An individuals credit score is based on five broad factors

Bankruptcy Ch.7

Authorizes individuals liquidate qualified assets and distribute the proceeds to creditors

age, sex, and marital status; positively

Credit scoring systems can use information about ____ _____ and _____ if these factors contribute _________ to creditworthiness

Prepaid Card

Customers prepay for services to be rendered and receive a card against which purchasers are charged

automobile, mobile home, and furniture dealers

Banks aggressively compete for paper originated by well established _________, ____________, and _____________.

Policy guidelines

Banks have guidelines for acceptable and unacceptable loans that are used as part of lending guidelines

Credit cards; other consumer loans

Banks labeled credit card and consumer lenders have the heaviest concentration of loans in _____ ____ and _____ ______ _______.

debt cards have lower processing cost

Banks prefer debit cards over checks and ATMs because...

Home Equity Loans

Borrowers pay interest on amount borrowed, pay 1-2% of outstanding principal each month, and can repay the remaining principal at their discretion

difficult; expensive

Changes in bankruptcy reform has made it more ____ and ________ to file for bankruptcy

Add-on rates; principal

Consumer loan rates were quoted as _____ ____ ____ applied against the entire _________ of the loan

discount rates; principal amount

Consumer loan rates were quoted as _____ ______ where quoted rates is applied against principal and interest but borrower only gets use of _____ ______

Simple interest rates; principal

Consumer loans rates were quoted as _____ ______ _____ where interest is only paid on ___________

Cost of $100- $250 to originate loan and typically net spreads over 5% (loan income minus loan acquisition cost, collections cost and net charge-offs)

Cost and revenues of installment loan

personal assets; repayment of debts

Court protection exempts selected ______ _________ from creditor claims and provides for orderly ______ ________ _______.

One-time membership fee plus annual charge determined by number of its customers actively using card

Credit card and Other Revolving Credit banks operate a....

80%,20%

Credit card bank's interest income and annual fees constitute ____ of credit card revenues with merchant discount as the other ___

provide higher risk-adjusted returns than other loans

Credit cards are attractive because they provide...