商业银行管理Chap018课件.ppt

1、Chapter EighteenConsumer Loans,Credit Cards,and Real Estate LendingKey Topics Types of Loans for Individuals and Families Unique Characteristics of Consumer Loans Dodd-Frank,the Consumer Protection Bureau,and CARD Evaluating a Consumer Loan Request Credit Cards and Credit Scoring Disclosure Rules an

2、d Discrimination Consumer Loan Pricing and RefinancingIntroduction Consumer debt has become one of the fastest growing forms of borrowing money Nearly$14 trillion in volume(including both mortgage and nonmortgage consumer debt)in the U.S.The modern dominance of banks in lending to households stems f

3、rom their growing reliance on individuals and families for their chief source of funds checkable and savings deposits Consumer credit is often among the most profitable services a lender can offer However,services directed at consumers can also be among the most costly and risky financial productsTy

4、pes of Loans Granted to Individuals and Families Consumer loans are classified by Purpose what the borrowed funds will be used for Type whether the borrower must repay in installments or repay in one lump sum Residential Loans Credit to finance the purchase of a home or fund improvements on a privat

5、e residence Usually a long-term loan,typically bearing a term of 15 to 30 years Secured by the property itself May carry either a fixed interest rate or a variable(floating)interest rate Banks are the leading residential mortgage lenders todayTypes of Loans Granted to Individuals and Families(contin

6、ued)Nonresidential Loans Installment Loans Short-term to medium-term loans,repayable in two or more consecutive payments(usually monthly or quarterly)Used to buy big-ticket items(e.g.,automobiles,furniture,and home appliances)or to consolidate existing household debts Noninstallment Loans Short-term

7、 loans individuals and families draw upon for immediate cash needs that are repayable in a lump sum May be for relatively small amounts and include charge accounts that often require payment in 30 days or less May also be made for a short period(usually six months or less)to wealthier individuals an

8、d can be quite largeTypes of Loans Granted to Individuals and Families(continued)Credit Card Loans and Revolving Credit One of the most popular forms of consumer credit today is accessed via credit cards Credit cards offer their holders access to either installment or noninstallment credit Approxima

9、tely two-thirds of all credit cards have variable rates of interest Installment users of credit cards are far more profitable due to the interest income they generate Card providers also earn discount fees(usually 1 to 7 percent of credit card sales)from merchants who accept their cardsTypes of Loan

10、s Granted to Individuals and Families(continued)New Credit Card Regulations New credit card regulations appeared early in 2003 to slow the expansion of card offers to customers with low credit ratings There was evidence that some customers were charged high fees but encouraged to make only low minim

11、um payments Resulted in negative amortization Regulatory agencies warned lenders that federal examiners would begin looking for excessive use of fees and unreasonably liberal credit termsTypes of Loans Granted to Individuals and Families(continued)New Consumer Regulations:Dodd-Frank,CARD Act,and the

12、 New Consumer Protection Bureau Tricks and Traps The CARD Act and Revised Regulation Z Appear Despite the repeated efforts of credit card regulators to deal with problems in the credit card industry,consumer complaints continued Congress passed the Credit Card Accountability,Responsibility,and Discl

13、osure Act(“CARD Act”)in May 2009 The new legislation restricted card issuers from raising Annual Percentage Rates(APRs)unless adequate written notice of a rate change was givenTypes of Loans Granted to Individuals and Families(continued)New Consumer Regulations:Dodd-Frank,CARD Act,and the New Consum

14、er Protection Bureau Tricks and Traps The CARD Act and Revised Regulation Z Appear Customers must be told the reasons why credit terms were being changed Card companies are required to post their contracts on the Internet so customers can“shop around”Card holders must receive periodic billing statem

15、ents at least three weeks before monthly payments are due An expanded“box”must be included on each monthly billing statement,indicating the amount of interest paid and the consequences of paying the minimum amount Fall within the Federal Reserve Boards Regulation ZTypes of Loans Granted to Individua

16、ls and Families(continued)Dodd-Frank Reforms and Protections Push the Rules Farther Down the Road The Dodd-Frank Wall Street Reform and Consumer Protection Act Named after Senator Chris Dodd and Congressman Barney Frank Was signed into law by President Obama in July 2010 Creates the Consumer Financi

17、al Protection Bureau(CFPB)The new bureau is directed to write new rules applying to such financial services as:Making of consumer and credit card loans Warning consumers of possible damaging financial practices that could result in losses Promoting financial literacy among consumers Improving the cl

18、arity and transparency of financial-service contracts for the benefit of the publicTypes of Loans Granted to Individuals and Families(continued)Dodd-Frank Reforms and Protections Push the Rules Farther Down the Road The Dodd-Frank Wall Street Reform and Consumer Protection Act The new CFPB is to be

19、housed within the Federal Reserve but operate independently with its own budget The consumer protection bureau is expected to be controversial because it must write hundreds of rules that will likely impact the consumer services side of financial-service providersCharacteristics of Consumer Loans Le

20、nders regard consumer loans as profitable credits with“sticky”interest rates Contract interest rates often do not change readily with market conditions as do interest rates on most business loans As a result,many consumer loans are subject to significant interest rate risk Consumer loans are usually

21、 priced so high that market interest rates on borrowed funds and default rates on the loans themselves would have to rise substantially before consumer credits would become unprofitableCharacteristics of Consumer Loans(continued)Why are interest rates so high on most consumer loans?Consumer loans ar

22、e among the most costly and most risky to make per dollar of loanable funds committed to them Consumer loans tend to be cyclically sensitive Household borrowings appear to relatively interest inelastic They are more concerned about the size of the monthly payment rather than the interest rate that t

23、hey are charged Education and income levels materially influence consumers use of creditEvaluating a Consumer Loan Application Character and Purpose Key factors in analyzing any consumer loan application are the character of the borrower and the borrowers ability to pay Consumer lenders nearly alway

24、s check with one or more credit bureaus concerning the customers credit history In the case of a borrower without a credit record or with a poor track record of repaying loans,a cosigner may be requested to support repayment Many lenders regard a cosigner as primarily a psychological device to encou

25、rage repayment of the loanEvaluating a Consumer Loan Application(continued)Other Important Items For Lenders Income Levels Deposit Balances Employment and Residential Stability Pyramiding of Debt How to Qualify for a Consumer Loan Home ownership or ownership of any form of real property Maintain str

26、ong deposit balances The most important thing to do truthfully answer all of the loan officers questionsCredit Scoring Consumer Loan Application The basic theory of credit scoring is that lenders and statisticians can identify the financial,economic,and motivational factors that separate good loans

27、from bad loans Underlying assumption the same factors that separated good loans from bad loans in the past will separate good loans from bad ones in the future within an acceptable risk of error Such an automated credit determining system removes personal judgment from the lending process Credit Sco

28、ring Consumer Loan Application(continued)The FICO System Developed by the Fair Isaac Corporation Most famous of all credit-scoring systems currently in use Scores range from 300 to 850 with higher values denoting less credit risk to lenders FICO score are based on five different types of information

29、(most important to least important):1.The borrowers payment history2.The amount of money owed3.The length of a prospective borrowers credit history4.The nature of new credit being requested5.The types of credit that the borrower has already usedLaws and Regulations Applying to Consumer Loans Numerou

30、s laws and regulations limiting the activities of consumer lending institutions have been enacted These laws fall into two categories:1.Disclosure rules Mandate telling the consumer about the cost and other terms of a loan or lease agreement2.Antidiscrimination laws Prevent categorizing loan custome

31、rs according to their age,sex,race,or other irrelevant factors and denying credit to anyone solely because of membership in one or more of these groupsLaws and Regulations Applying to Consumer Loans(continued)Customer Disclosure Requirements Truth-in-Lending Act Fair Credit Reporting Act Fair Credit

32、 Billing Act Fair Debt Collection Practices Act Outlawing Credit Discrimination Equal Credit Opportunity Act Community Reinvestment ActLaws and Regulations Applying to Consumer Loans(continued)Predatory lending An abusive practice among some lenders where lenders may require excessive fees as well a

33、s unnecessary and excessive loan insurance Subprime Loans Granting loans to borrowers who have below-average credit scores The Home Ownership and Equity Protection Act was passed in 1994 to protect home buyers from loan agreements they could not afford Subprime lending is difficult to regulateReal E

34、state Loans Depository institutions and finance and insurance companies make real estate loans to fund the acquisition of real property Homes,apartment complexes,shopping centers,office buildings,and land One of the most rapidly growing areas of lending over the past decade Real estate lending is di

35、fferent from other loans Real estate loans can be among the riskiest forms of credit extended to customersReal Estate Loans(continued)Differences between Real Estate Loans and Other Loans The average size of a real estate loan is usually much larger than the average size of other loans Mortgage loan

36、s tend to have longer maturities versus other types of loans Maturities of 15 years to 30 years are typical for single-family homes With real estate lending,the condition and value of the subject property are nearly as important as the borrowers income Appraisals are critical to the loan decision an

37、d must meet industry standards and government regulationsReal Estate Loans(continued)Factors in Evaluating Applications for Real Estate Loans The amount of the down payment pledged by the borrower relative to the purchase price of mortgaged property The higher the ratio of loan amount to purchase pr

38、ice,the less incentive the borrower has to honor the terms of the loan Lenders may be willing to give a mortgage loan customer a lower loan rate for a pledge that the customer will use the lenders other financial servicesReal Estate Loans(continued)Factors in Evaluating Applications for Real Estate

39、Loans Other aspects of each credit application that require assessment:Amount and stability of the borrowers income The borrowers available savings and where the borrower will obtain the required down payment The borrowers track record in caring for and managing property The outlook for real estate

40、sales in the local market in case of repossession of the property The outlook for market interest ratesReal Estate Loans(continued)Home Equity Lending Homeowners can borrow the equity in their homes Equity is defined as the difference between a homes estimated market value and the amount of the mort

41、gage loans against it Two main types of home equity loans:1.Traditional Home Equity Loan2.Lines of Credit Against a Homes Borrowing BaseReal Estate Loans(continued)The Most Controversial of Home Mortgage Loans:Interest-Only and Adjustable Mortgages and the Recent Mortgage Crisis When housing prices

42、were soaring upward during the recent housing boom,how could lenders make extravagantly priced homes affordable?Make home mortgage loans more readily available to families of even modest means More families were encouraged to sign up for adjustable-rate loans(ARMs)during a period when market interes

43、t rates were at historic lowsReal Estate Loans(continued)The Most Controversial of Home Mortgage Loans:Interest-Only and Adjustable Mortgages and the Recent Mortgage Crisis When home prices continued to rise,clever mortgage lenders came up with yet another financial innovation the interest-only adju

44、stable home mortgage loan(option ARM)With this type of credit the home buyer is obligated to pay only the interest on his or her home loan for an initial period After that initial time interval passes,the home buyer would have to pay both principal and interest until the loan was finally paid off Lo

45、oked like predatory lending against lower-income families In an environment of rising market interest rates,many home buyers with adjustable-rate loans faced higher interest paymentsReal Estate Loans(continued)The Most Controversial of Home Mortgage Loans:Interest-Only and Adjustable Mortgages and t

46、he Recent Mortgage Crisis Now lenders must disclose more about the actual terms of a home mortgage loan and not represent a loans terms as“fixed”when those terms can be changed over time Dodd-Frank Wall Street Reform and Consumer Protection Act resulted in tough new rules Lenders who are pooling and

47、 securitizing mortgage loans they create and sell are responsible for at least 5 percent of the credit risk attached(qualified mortgages are exempt)Previously lenders“washed their hands”of any responsibilityA Revised Federal Bankruptcy Code as Bankruptcy Filings Soar Households in record numbers hav

48、e sought protection from their creditors under the U.S.bankruptcy code Bankruptcy Abuse Prevention and Consumer Protection Act Signed in April 2005 by President George W.Bush Made filing for bankruptcy more expensive and time-consuming Before filing for bankruptcy,applicants must complete a certifie

49、d credit counseling program Intended to discourage consumers from taking on too much debt and increasing their risk profileA Revised Federal Bankruptcy Code as Bankruptcy Filings Soar(continued)A means test determines whether an applicant must file under Chapter 7 or Chapter 13 of the bankruptcy cod

50、e Means Test-an average of a debtors past six months of gross income Test determines if the debtor has enough income to pay some of the debt Under the previous bankruptcy code,most individuals filed for Chapter 7 Wiped out all or most debts and generally allowed for a fresh start Makes it harder for